Indian Telecom Industry

MICROECONOMICS PROJECT

INDIAN TELECOMMUNICATIONS INDUSTRY

TEAM MEMBERS: Tarun Daga 1

Uma Balakrishnan

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CONTENTS TITLE Telecom In India

PAGE 4

Evolution of Indian Telecom Industry •

Timeline

5 6

Current Market Scenario

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•

Size, Players and Trends

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•

Tele-density

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•

Market Players

•

When the Prices Decline

11 15

Economic Indicators •

Concentration Ratio

•

H Index

•

Synopsis of Demand and Supply Situation

Conclusion Bibliography

16 16 17 18 24 26

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TELECOM IN INDIA The Indian telecommunications market has been displaying sustained high growth rates. Riding on expectations of overall high economic growth and consequent rising income levels, it offers an unprecedented opportunity for foreign investment. A combination of factors is driving growth in the telecom market, promising rich returns on investments. Over the past 10 years, India has registered the fastest growth among major democracies, having grown at over 7 per cent in four years during the 1990s. It represents the fourth largest economy in terms of Purchasing Power Parity. According to a recent Goldman Sachs report, over the next fifty years, Brazil, Russia, India and China - the BRIC economies- could become a much larger force in the world economy. It reports, “India could emerge as the world’s third largest economy and of these four countries; India has the potential to show the fastest growth over the next 30 to 50 years”. The report also states that, “Rising incomes may also see these economies move through the ‘sweet spot’ of growth for different kinds of products, as local spending patterns change. This could be an important determinant of demand and pricing patterns for a range of commodities”. The share of the services sector as a percentage of total GDP is also predicted to rise from the current 46 per cent to about 60 per cent by 2020. The boom in the services sector is slated to come from India, emerging as a chosen destination for software and other IT enabled services, tourism etc. According to a NasscomMcKinsey & Co. Study, by 2008, the Indian IT software and services sector will account for US$ 70-80 billion in revenues; it’ll employ 4 million people, and account for 7 per cent of India’s GDP and 30 per cent of India’s foreign exchange inflows. Population projections from the Planning Commission of India suggest that the share of the working age population (15-64 years) in total population will grow from the current 59 per cent to about 65 per cent, translating into 882 million by year 2020.According to the Vision 2020 document for the Planning Commission of India, the country will witness continued urbanisation. The urban population is expected to rise from 28 per cent to 40 per cent of total population by 2020.Future growth is likely 6

to be concentrated in and around 60 to 70 large cities, each having a population of one million or more. This profile of concentrated urban population will facilitate customised telecom offerings from operators. Over the years, spending power has steadily increased in India. Between 1995 and 2002, nearly 100 million people became part of the consuming and rich classes. Over the next five years, 180 million people are expected to move into the consuming and very rich classes. On an average, 30-40 million people are joining the middle class every year, representing huge consumption spending in terms of the demand for mobile phones, televisions, scooters, cars, credit goods and a consumption pattern associated with rising incomes.

EVOLUTION OF THE INDIAN TELECOM INDUSTRY Until the 1980s, the Department of Posts and Telegraphs (under the Ministry of the same name) had the mandate of regulating and offering telecommunications services. It was governed by the Indian Telegraph Act 1885 and the Wireless Act of 1933. In 1985, the Department of Posts and Telegraph was split up into the Department of Telecommunications (DoT) and the Department of Posts. The DoT was established as the state operator, regulator and licensor. It was only in October 1999 that the activities of the operator and licensor were somewhat separated, by the creation of the Department of Telecommunications Services (DTS). This separation, however, was a largely artificial one. Although the DoT had been charged with operating telecommunications services, its efforts were seen as insufficient. Initial steps towards corporatisation saw the creation of Mahanagar Telephone Nigam Limited (MTNL), which started offering basic fixed services in Mumbai and Delhi in 1987. MTNL still holds a monopoly in those cities, where DoT/DTS is not present at the local level. MTNL is wholly owned by the Government of India and the DoT. Videsh Sanchar Nigam Limited (VSNL) was set up in 1986 as the monopoly operator for international gateway services. On May 13, 1994, the government opened local basic and value-added telecommunications services to competition. Mobile services were introduced on a commercial basis in November 1994. India was thus divided into 21 "Telecom Circles". Circles correspond approximately to 7

states and are categorized as either "A", "B" or "C" according to size and importance. Category A includes the heaviest volume areas such as Delhi, Uttar Pradesh, Maharashtra, Gujarat, Andhra, Karnataka and Tamil Nadu. Licenses for mobile services were also issued for the four metros (Delhi, Mumbai, Chennai, Calcutta). As part of the license conditions, traffic could be routed to VSNL's international gateway only by passing through DoT/DTS's network. In 1986, the Telecom Commission was set up with the mandate to accelerate the deployment of telecommunications services and to implement new telecommunication policy. A bill passed in 1995 envisaged the creation of an independent and autonomous agency for the regulation of telecommunications, the Telecommunications Regulatory Authority of India (TRAI). Set up in 1997, the TRAI is responsible facilitating interconnection and technical interconnectivity between operators, regulating revenue sharing, ensuring compliance with license conditions, facilitating competition and settling disputes between service providers. The TRAI cannot grant or renew licenses and this remains the DoT's responsibility. The TRAI may also set the rates for telecommunications services. Its decisions can only be challenged by the High Courts or Supreme Courts of India.

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TIMELINE: Mid 1980s Department of Telecommunications set up Mar 1986

VSNL incorporated to provide international telecom services

Apr 1986

MTNL incorporated to provide fixed-line telephone services in Mumbai and New Delhi

Dec 1991

DoT invites bids from Indian companies for cellular licenses in the four metropolitan circles

May 1994

Government announces the National Telecom Policy, opening up the basic service sector to private players

Sep 1994

Entry guidelines for basic services announced

Nov 1994

Licenses were issued to cellular operators in the four metros

Mar 1995

Paging services by private operators commence

Oct 1996

Licenses for 20 cellular circles issued

Jan 1997 Telecom Regulatory Authority of India established by government Nov 1998

ISP business opened up to operators other than DoT and VSNL

Mar 1999

Government announces NTP 1999

Jul 1999

DoT announces Migration Package for existing operators' licensing costs, subject to compliance with certain conditions

Aug 2000

Government announces guidelines for opening up domestic long distance telephony for carrying both inter-circle and intra-circle traffic, with no restriction on the number of players TRAI issues the first tariff order and cuts domestic and international long distance telephony charges.

Jan 2001

The Department of Telecom opens up basic services to unlimited competition and allows basic operators to provide WLL services on a restricted basis.

Aug 2001

Opening of National Long Distance Service to competition

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Jan 2002 Bharti starts cellular to cellular long distance services with sharp cuts in tariffs Apr 2002

ILD sector opened to competition. End of VSNL monopoly.

May 2002

Bharti offers ILD services with sharp cuts in tariffs

Sep 2002

TRAI decides to 'forbear' from regulating cellular tariffs

Mar 2006 WPC set subscriber thresholds for GSM and CDMA operators for spectrum allocation Mar 2007

9 distinct operators had been allocated GSM spectrum. Out of these, only Bharti has a pan-India presence.

Aug 2007

Subscriber thresholds were revised by TRAI as operators could support more subscribers with lower spectrum as compared to WPC allocation

Jan 2008

Govt of India allocated start-up spectrum to all prior licensees awaiting spectrum (does not include LOIs issued in January 2008). These include Aircel (14 circles), Idea (2 circles), RComm (14 circles) and Vodafone (6 circles).

Jun 2009

TRAI plans to introduce MNP (Mobile Number Portability) on a pan-India basis

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CURRENT MARKET SCENARIO SIZE, PLAYERS AND TRENDS: India boasts of 300 million telephone subscribers today and has become the second largest telecom network in the world, after China. Also, the number of new mobile subscribers is growing by 8.5 to 10 million every month, making it one of the fastest growing telecom markets of the world. In 2006-07, the telecom industry also saw an estimated $8.5 bn in investment flow, out of which 6% or $550 million was in the form of foreign direct investment (FDI). According to a report by RNCOS, a market research consulting Services Company, mobile phones account for 80.2% of the subscriber base in India, at the end of March 2007. The growth of telecom in India can be attributed to liberalization, reforms and competition. The telecom policy of 1999 envisaged a tele-density of 15 percent by the year 2010. The overall tele-density of the country is already over 26 percent now. Out of 300 million telephone subscribers today, 13% are wire-line subscribers. These developments in telecom sector have resulted in massive investments and explosion in supply, which are signs of a vigorous, competitive and fast-growing sector. The major players in the Indian telecom industry, excluding Reliance and Tata Teleservices, are operating in the GSM market. After the release of TRAI recommendations in September 2007, there was a flood of applications for UASL (Unified Access License Seekers). This was probably because of the hope of pan-India start-up GSM allocation at a very economical price (US$240m). The armed forces are expected to vacate 20MHz of GSM spectrum. This would be around 70% of average GSM allocation currently.

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All India GSM Cellular Subscriber Base-Circle Wise

One important development in the cellular industry in India would be the introduction of Mobile Number Portability by the end of March 2009. This MNP introduction is likely to coincide with the GSM rollouts of operators that have already been allocated spectrum in January 2008. Moreover, Aircel, Vodafone-Essar and Idea Cellular are looking to expand their footprint in new circles and even RCOM is launching GSM services in its CDMA-only circles. All-India GSM Cellular Subscriber Base

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GSM Industry Indicators for 2007

TELE-DENSITY IN INDIA: While the tele-density in the urban areas is over 50 percent, in rural areas it is around eight percent only. Clearly, the future lies in the rural areas. Telecommunication access to rural India is going to be the most important development since the Green Revolution. Research analysts feel that mobile voice is overwhelmingly the engine of growth followed by Next Generation Network (NGN), broadband and data.

MARKET PLAYERS: 13

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No.

Service Providers

Total sub figures

Market share (%)

Trends

1.

BHARTI AIRTEL

580379 20

25.40

Integrated Telco, with presence in all sectors - Cellular, Basic, National Long Distance (NLD) & International Long Distance (ILD). Currently offering only GSM based cellular services. No CDMA based cellular services being offered.

2.

RELIANCE 525400 COMMUNICATI 00 ONS

22.99

Operating GSM wireless services in 7 circles and subsequently acquired Madhya Pradesh circle from RPG. Reliance is currently focusing on rollout of CDMA based wireless services.

3.

VODAFONE ESSAR

441262 43

19.31

Pure play GSM mobility player offering cellular services in 16 circles. Has been working on a model of being associated with the high ARPU subscribers

4.

BSNL

342513 34

14.99

Incumbent operator, virtual monopoly in the basic services. Very strong NLD operator; and, has been able to quickly ramp up GSM subscribers due to nationwide network reach. Pan country presence in both basic (except Mumbai and Delhi) and cellular services.

5.

IDEA

240015 73

10.50

A 3 way GSM mobility joint venture between Tatas, Birlas and AT&T Wireless offering cellular services in 11 circles. 15

6.

AIRCEL

680506 6

2.98

Operates only in Metro(Chennai) and Circle A(Tamil Nadu)

7.

SPICE

421066 9

1.84

Pure play GSM based mobility player offering services in 2 circles – Punjab and Karnataka.

8.

MTNL

324185 1

1.42

Integrated incumbent operator also offering GSM based mobility in Delhi and Mumbai.

9.

BPL

129476 2

0.57

Pure play cellular operator along with Spice and Aircel.

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Total Future Projections (Mobile Subscribers)

As can be seen from the figure of demand graph, the demand in the telecom industry in year 2007 is around 230 million now we will see does the main players in the industry has the capacity to fulfil the appetite of the demand side. Here we are considering only the top 4 companies which almost consist 80% of the market shares. •

Bharti Airtel

•

BSNL

•

Vodafone Essar

•

Reliance communications

The key highlights for the Indian telecoms sector in 2006 were the emergence of India as the fastest growing region in the world - overtaking China - plus increased interest from the overseas telecom majors, together with a drop in tariffs across the various segments. The near 8% growth rate expected to be achieved by the Indian Economy for FY07 augurs well for the telecom sector. The wireless segment performed well again, with the subscriber base reaching 228.5 million (GSM, CDMA and WLL-F) as of December 2007. Given the outlook for the 17

Economy, another year of high growth is expected, led by a greater focus in the 'B' and 'C' circles. Even the overall tele-density reached 22.5% in December 2007, from 16.6% in November 2006.

Wireless Penetration The Indian market remains one of the few telecom Markets to exhibit continued growth, and the industry is expected to achieve the government's target of 330 million telecom subscribers by end 2008. Further impetus is expected from the introduction of Mobile Number Portability (MNP) and the possible 3G rollout in the end of year 2008, coupled with expansion in value-added services (VAS). Industry operators have substantial investments ahead of them, owing to the sustained high growth phase of the industry. For the next financial year, all major operators have significantly increased their capex plans. FY08 industry capex is likely to exceed USD18bn, approximately twice the level for FY07. On account of their heavy capex, most operators would continue to be free cash flow negative (FCFN) during FY08, notwithstanding strong growth in operating cash flow. While debt would remain the primary source for funding these investments, equity through IPOs for some of the unlisted entities could also emerge as an option. BSNL has already announced its IPO, to be commenced during late 2008. Hutchison International has also sold its stake to Vodafone which used the existing subscriber base of Hutchison Essar to gain a strong foothold in the already vibrant Indian telecommunications market. GSM players in India added 101 million new subscribers in FY08. The public sector BSNL has registered negative growth in five of the 21 telecom circles where it offers services. Overall, the PSU has added just 29.86 mn new subscribers in FY08 compared to 50.69 mn by Bharti Airtel and 38.53 million by Vodafone-Essar. This also implies that the PSU, which had lost its position as the second largest GSM player in the country to Vodafone Essar in May 2007, has slipped further down. Vodafone Essar now has a total of over 44.13 million subscribers and a market share of 19.31% when compared to 29.86 mn and 16.41% for the PSU. As per the latest data compiled by the Cellular Operators Association of India (COAI), the industry association representing all GSM operators, the GSM subscriber base has touched 188.72 mn as of March, 2008. The growth witnessed was lead by Bharti Airtel, which took its subscriber base to 58.03 mn. The PSU BSNL/MTNL has not undertaken any major 18

expansion contract since October 2005. This has witnessed even regional players like Idea Cellular and Aircel Cellular have overtaken the PSU in terms of subscriber addition over the last year. As the Indian market is growing at an accelerated rate, the economy is witnessing new players entering the market, with more trying to get a leg in. The market has turned from a monopolistic market held by BSNL and MTNL, to a market close to perfect competition where the customer is King and prices and other factors are decided by competitive forces acting in the market. Even though the growth of the Telecom industry is exponential, the growing number of players, their size and consolidation among existing players show that they can in fact satisfy the evergrowing demand of Indian consumers, providing not just competitive prices, but more value for money and value-added services to the customer.

WHEN THE PRICES DECLINE: With a capacity constraint, the decline in price would take place without any change in the level of existing demand. On the other hand, if there is no capacity constraint, then the fall in price would take place along the demand curve. In this case, the short-term effect on revenue would depend on the elasticity of demand. However, if the price decline increases demand to such an extent that the capacity constraint becomes binding again, then the elasticity of demand becomes irrelevant in calculating the change in revenue. This is shown in the diagram below. The starting point is price P1, and two different demand curves are considered, with different elasticities of demand. At price P2, the supply constraint becomes binding for demand curve D1D1, and at price P3 it becomes binding for demand curve D2D2. At prices lower than P3, the comparison of the old and the new levels of revenue does not depend on the elasticities of the demand curves.

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ECONOMIC INDICATORS CONCENTRATION RATIO: In Economics the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry. Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are: •

Perfect competition, with a very low concentration ratio,

•

Monopolistic competition, below 40% for the four-firm measurement,

•

Oligopoly, above 40% for the four-firm measurement, (Example automobile manufacturers)

•

Monopoly, with a near-100% four-firm measurement. Number

Name of the company

% Market share

1.

BHARTI AIRTEL

25.4

2.

RELIANCE COMMUNICATION

22.99

3.

VODAFONE ESSAR

19.31

4.

BSNL

14.99 Total = 82.69%

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The top four companies constitute almost 83% of the market, thus showing a high concentration ratio; this implies the industry is dominated by top 4 players thus it shows a oligopolistic market.

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H INDEX: H Index (The Herfindahl-Hirschman Index): H index stands for HerfindahlHirschman index, which is a way of measuring the concentration of market share held by particular suppliers in a market. The H index is the sum of squares of the percentages of the market shares held by the firms in a market.

VALUE

IMPLICATION

1

Absolute monopoly

0

Absolute competition

0-0.5

Monopolistic

0.5-0.75

Oligopoly

0.75-1.0

Monopoly

Number

Name of the company

Market share(Si)

1.

BHARTI AIRTEL

0.254

0.064516

2.

BSNL

0.1499

0.02247

3.

VODAFON E ESSAR

0.1931

0.037288

4.

RELIANCE COM.

0.2299

0.052854

5.

BPL

0.0057

0.00003249

6.

SPICE

0.0184

0.000339

7.

AIRCEL

0.0298

0.000888

8.

IDEA

0.105

0.011025

Si^2

22

9.

MTNL

0.0142

0.000202 Total = 0.18961336

Since H Index is 0.19, it shows that the industry has moderate competition i.e. it is a monopolistic economy. There are three to four players which are dominant in the industry, thus confirming the concentration ratio. Here, from our H Index we can conclude that Bharti Airtel, Vodafone Essar, Reliance Communication and to some extent, BSNL are the major players which constitutes around 83 percent of the total market share. The remaining five players constitute just 17 percent of the total market share. Out of these five, IDEA has 10 percent share of the Indian telecom market. Therefore, we can clearly conclude that the Indian telecom industry is dominated by the 4-5 major players mentioned above.

SYNOPSIS OF THE DEMAND AND SUPPLY SITUATION: This part provides a simple picture of the demand and supply situation in India to illustrate some of the conditions prevailing in the market. The main points that emerge here are: Excess demand in the form of network congestion implies that the customers are not on the aggregate demand curve for the telecom service in question. Also, it is not clear which price will bring the customers to the desired demand curve. Hence, it would not be appropriate or easy to rely on pricing or mark-up based on demand. •

• The fluctuations in prices are unlikely to affect overall demand, except in areas where the supply constraint does not apply. • Since supply rather than demand is the main constraint, it would be useful to focus on increasing the supply of the network. This can now be feasible due to increased deregulation and increased FDI in the industry. • Such a focus on investment is even more meaningful in a situation with excess demand in the form of a waiting list for connections, and where considerable additional demand is anticipated to arise in the future. For instance, in the next five years, the anticipated demand will be more than double the current network size. This could be met with the allocation of further 2G and 3G spectrum. This revolution has already 23

taken place with the introduction of I-Phone in the Indian market. Also Google has announced the launch of its 3G mobile phone. • Since there is likely to be such a major increase in demand, and it is not yet clear when the supply will increase enough to meet this demand, determining the demand curve is not an easy task. • Even if supply increases enough to cater to the additional demand, the fact that demand is increasing at a rapid pace implies that the determination of the extent and nature of demand will not be an easy task. This will be further complicated by the new products that are emerging in the market. The Figure below shows a simplified picture of the demand and cost situation relevant to telecom pricing. DD is the demand curve for a basic telecom service, MC is the marginal cost curve, and AC is the average cost curve. For simplification, marginal costs are shown to be the same for each unit of output. Since fixed costs do not change with a change in the output level, the average total costs (comprising average fixed and marginal costs) will be above marginal costs, but declining.

In the Figure above, the level of output Q0 is the level at which price is equal to marginal cost (i.e., the point of intersection of the demand curve and the marginal cost curve). It is evident that the price does not cover costs at that level because the average cost is above the price level. The Ramsey rule suggests the extent to which the price should be increased to obtain the revenue that would cover costs and provide an adequate return. The Ramsey rule requires that the prices be those given by the demand curve, i.e. there should not be any constraint for the customer to be operating on the demand curve. In the Indian situation, however, there is likely to be a capacity constraint and thus the customers are unlikely to be on the demand curve. The capacity constraint in India arises for two reasons. One, the subscribers linked up to the network face congestion and are thus not able to make as many completed calls as they desire. Second, the existing network 24

does not satisfy the demand of all those wanting to be linked up to the network. The first type of constraint (i.e. congestion) implies that the supply constraint shown by SS is the operating schedule for the subscribers. Some tentative conclusions could be drawn from this discussion. Due to the prevailing excess demand, a change in price will not alter overall demand as long as there is excess demand. In such a situation, the price could be increased till the price is high enough to reach the demand schedule, i.e. till the point where the supply equals demand. This does not mean that certain subscribers will not reduce their demand, but that the reduction in demand will be compensated by the prevailing excess demand filling the gap till the price becomes so high that excess demand itself becomes zero. Excess demand also implies that a high price could be charged for those telecom services for which subscribers are willing to pay a high price, i.e. service for which the price shown by the demand curve is high at a given level of the supply constraint. However, it is not clear what this price level should be, because the demand curve is not easy to determine.

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EXCESS DEMAND AND CONGESTION:

MC is the marginal cost curve and DD is the demand curve. The congestion in the network due to a capacity constraint is reflected by the vertical line SS. The output Q1 corresponding to the vertical line shows the supply beyond which the volume of traffic cannot be increased (Technically, with increasing congestion, the vertical line could move to the left, thus showing decreasing capability of the network with a rise in congestion). The fact that there is congestion is diagrammatically illustrated by the fact that the actual demand for the product is more than the capacity. With congestion, the customer is somewhere on the vertical line SS and not on the demand curve. The excess demand is shown by the horizontal distance between the vertical line SS and the demand curve. Therefore, the actual price is somewhere lower than P1. For a proper implementation of the Ramsey rule, the point of reference from where the movement for mark-up has to occur is the point where the demand curve intersects the marginal cost curve, i.e. point R in the diagram above. In a situation with congestion, the starting point itself is away from the Ramsey reference point, and the position of this starting point is dictated by the available capacity. Furthermore, the position of this capacity constraint for different types of services (or demand) might be different, and it is highly unlikely that these constraints are positioned

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in such a way that the Ramsey rule for mark-up could be satisfied for different services. The fact that the price is above marginal cost means that some mark-up already exists. Any change in the mark-up (due to a change in price) will not affect the level of demand as long as the customers face a capacity constraint, i.e. as long as they are on the vertical line SS above. Thus, in effect, the elasticity of demand for each service with a capacity constraint is the same, i.e. it is equal to zero on SS.

OVERALL EXCESS DEMAND:

The fact that there is overall excess demand due to congestion does not mean that such congestion operates everywhere. Thus, the situation would comprise those who do not face any supply constraints and others who face a supply constraint in certain parts of the country. This is shown by the two demand curves above, D1D1 and D2D2. Only D2D2 is subject to a supply constraint, and thus a change in price will affect the overall 27

level of demand of those in situations D1D1 and not of those in situation D2D2. However, the presence of a supply constraint does reduce the elasticity (or responsiveness) of the overall demand for the telecom service.

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EXCESS DEMAND FOR TELEPHONE CONNECTIONS: There is considerable excess demand for telephone connections in India, and this demand is expected to rise sharply in the near future. The Department of Telecommunications has estimated that in the next five years, demand for telephones is likely to more than double. While capacity extension will continue to try to cater to this demand, this situation adds to the difficulty created by the abovementioned capacity constraint in using the demand situation in India to assess the telecom price or the mark-up.

In the Figure above, an expansion of capacity is shown by a rightward shift of the vertical line S1S1 to SS. This capacity expansion results in meeting the excess demand of those who were on the waiting list. The waiting list is shown by the difference between the demand curves D1D1 to D2D2. To this must be added the increase in demand over time. Adding these would give us the new demand curve as D4D4. The effect of these changes on the excess demand situation (or on congestion) would depend on the extent of the change in capacity and the extent of prevailing excess demand and the increase in demand over time. If those demanding a link-up with the network are not provided the link-up, then the actual demand at D3D3 will be to the left of D4D4. The difference between D3D3 and D4D4 shows the demand in waiting. Moreover, if there continues to be congestion for those linked up to the network, we are again in the same situation as the one discussed earlier, i.e. the consumer is likely to be on the supply constraint and not on the demand curve.

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Even if the customer is not subject to the supply constraint, it may not be feasible to apply the Ramsey rule as long as the desired price is to the right side of the supply constraint. Moreover, when the link to the network is increasing as rapidly as 20 per cent per annum, and excess demand still continues to prevail, it is very difficult to estimate demand characteristics accurately or to use the demand curve for pricing telecom. WHEN THE PRICE DECLINES: With a capacity constraint, the decline in price would take place without any change in the level of existing demand. On the other hand, if there is no capacity constraint, then the fall in price would take place along the demand curve. In this case, the short-term effect on revenue would depend on the elasticity of demand. However, if the price decline increases demand to such an extent that the capacity constraint becomes binding again, then the elasticity of demand becomes irrelevant in calculating the change in revenue. This is shown in the diagram below. The staring point is price P1, and two different demand curves are considered, with different elasticities of demand. At price P2, the supply constraint becomes binding for demand curve D1D1, and at price P3 it becomes binding for demand curve D2D2. At prices lower than P3, the comparison of the old and the new levels of revenue does not depend on the elasticities of the demand curves.

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CONCLUSION In our opinion, instead of taking a short-term view of paying capacity, the telecom companies should focus on a long-term game. There is one word that telecom companies are hearing a lot these days-“Volumes”. They need volumes to sustain the network and the large employee base they have enrolled. In this regard, companies like Reliance and Tata’s have been aggressive over the final rollout of connections to PCO owners. Reliance is giving upto 30% commission on each call. How they market and distribute these connections is a tough battle indeed. If and when the carrier access codes are introduced, there could be a tough fight among these outlets, as far as prices are concerned. Yet, prices can go down further by almost 40% of the present structure. Part of the price cuts could be because of tax exemptions, if and when these companies can lobby for the same. The other part could be earning through volumes. New players like Virgin Mobile, which already has an international presence in close to 17 countries are entering India. It is doing so in collaboration with Tata Teleservices. The target market for Virgin Mobile is the youth, which in India is around 54% of its population. Mobile Number Portability (MNP) is to be introduced by June 2009. A neutral third-party operator is likely to be licensed to provide an end-toend MNP solution. MNP could well be a catalyst in the realignment of subscriber market share in favour of strong players with better service quality. There are challenges like porting time, allocation of capital and operational porting costs among participants, and other interconnect issues. Yet, the atmosphere around the MNP issue looks positive and will be set once the committee submits its final report on the same. The telecom sector is attracting significant domestic and global investment. The capital investment made by the telecom service industry during 2006-07 was around $8.5 billion, out of which $550 million was foreign direct investment. The margins and profits of almost all the telecom companies have been increasing. In fact there are cases where a significant portion of profit of international telecom companies have been from their operations in India. India is well prepared for the introduction of NGN (Next-Generation Networking). Being a late starter in the telecom scenario, India has the advantage of using the latest technology and so it is in a better position when compared to many other countries as far as introduction of NGN is

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concerned. Besides, the TRAI has identified introduction of NGN as a priority area. As of today, the trend seems favourable toward the continued growth of the telecom industry. The target of 500 million telephone connections by the year 2010 is very much achievable. Even with 300 million telephone connections, the tele-density of the country is only about 26 percent. It has been noted that mobile telephony is growing at an annual rate of over 90 percent. Also, on an average over eight million subscribers are being added every month. Besides the basic telephone service, there is a huge potential for different Value Added Services (VAS). In fact, the real potential for telecom service growth is still lying untapped.

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BIBLIOGRAPHY •

www.trai.gov.in

•

www.coai.com

•

www.dot.gov.in

•

Google search engine

•

PriceWaterHOuse Coopers

•

Motilal Oswal Securities Ltd.

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