Second Chap

8/4/2019 Second Chap

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1.1 INTRODUCTION:

In the present day world, the information technologies have been successful

in building a super highway for communication knowledge is supposed to be the

power generating force. Communication Technologies is found to be contributing

substantially to the development process. The process of Socio-Economic emancipation

is now considerably governed by the quality of information technologies. Information

management is an integral part of the decision making process. The information

technologies will continue to play an important role in the decision making process, it is

found sophistication in the process of communication technologies getting an important

place on the development agenda of almost all the countries.

The death of distance as a determinant of the cost of communicating will

probably be the single most important force shaping society in the century.

Technological change has the power to revolutionize the way people live, and this one

will be no exception. In ways that are only dimly imaginable, decisions about where

people work and what kind of work they do, concepts of national borders and

sovereignty, are the patterns of international trade.

But the death of distance is only one of the astonishing changes taking place as

communication and computers are combined in new ways. Fiber - optic networks

and digital compression will allow many families, to receive a personalized

communication channels. Networks are being developed that are (a) like the

telephone, "switched" so that they can used by many subscribers, (b) like television,high capacity or "broad band" so that they can carry moving pictures and (c)

Interactive, so that, unlike with television, every user of the network can communicate

with every other part. Mobile telephones now account for almost half of all new

telephone connections world wide and few millions of people are just using electronic

mails.

The world will change as a result of the communication revolution. The

death of distance loosens the grip of geography companies will have more freedom to

locate a service where it can best be produce, rather than near its market.

1.2 THE ROOTS OF REVOLUTION:

It is easy to forget how recently the communications revolution began. All

three of i.e. Telephone, TV & Interactive today's fast changing communication

technologies have existed for more than half a century. The telephone was invented in

1876; the first television transmission was in 1926; and the electronic computer was

invented in the mid 1940's. For much of that time, change has been slow, but in each

case, a revolution has taken place since the late 1980's. the Telephone

Since the 1980's, the oldest of the three technologies has undergone two big

transformations - an astonishing increase in the carrying capacity of much of the


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long distance network and the development of mobility. They result, in the first case,

from the use of glass fibers to carry digital signals, and the second from the steep fall

in the cost of computing power. The telephone network has had the least capacity for

its most useful service long distance communication. Once a connection was made

people in the branch will stay on the phone reading books and news papers all day just

to keep the line open until it was needed.

The telephone lines at the heart of the communication revolution. In its existence

of a century and a bit, the telephone has already transformed social and economic

life beyond

anything that Alexander Graham Bell dream of back 1876. It has brought

companionship, employment and information to millions. This familiar instrument has

become the gate way to new world. The revolution now taking place has three aspects,

the collapse in the cost of providing a long distance calls; the increase in the number of

things a phone can do, and the wiring of the world. Because the telephone is so versatile

and so widely used, there changes will have profound effects.

The forces for changes are not just technological. In addition, privatization and

deregulation are bringing competition into the telephone industry in many countries, for

the first time. The richer countries of the European Union have pledged to open their

market to competition at the start of 1998 and world trade organizations (WTO)

agreement reached in early 1997, have number of other countries.

Competition will be good for customers new services emerge more often wherecompetition is lively. Business customers will benefit first and most, but individuals,

too; will eventually enjoy most of the concession that companies receive.

These changes will reshape the telephone business from being dominated by

monopolies a single state owned giant or a few big regional monopolies.

Telecommunication is becoming more like other fast-changing industries full of new

comers, including new comers from other countries and from other industries. It will

retain its tendency to concentration, but today's big telephone companies will find

them selves facing unprecedented commercial pressures.Wireless Telecommunication

Most striking change in telecommunications since the early 1980's has been the

development of wireless services. It has brought innovations of three kinds. The

mobile telephone, the wireless link to a fixed point, known as "wireless local loop", and

the tracking of moving objects.

Mobile telephones

More than one in seven of the world's telephone subscriptions are for mobile

telephones. As the use of mobile telephones continues to grow, there will be three

key trends. Mobile telephones will capture a growing share of voice traffic, the line


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between a mobile and a fixed telephone will blur; and mobile telephones will acquire

many of the attributes of portable computers.

The mobile telephone is now the competitor for the telephone companies core

business of voice conversations. Most voice conversations will be received on and sent

from wireless telephone.

The shift from fixed to mobile telephony will be hastened by the falling price of

actually making calls over mobile telephones. In 1992, mobile service tariffs were, on

average, three and a half times higher than fixed - link tariffs. That rate has now fallen

to a point where the overall cost of using some mobile services is becoming competitive

with that of fixed services. General, a mass market will reached, and voice calls from

mobile services will start to overtake those from fixed services.

The fusion of fixed and mobile telephone will take place on many fronts.

Mobile telephones will become available that are not tied to one service (and tariff).

"Personal Communication Services", a new generation of wireless telephone, will be

combined in all sorts of flexible ways with cord less and fixed-wire telephones.

Wireless Local Loop

A local telephone network is expensive, "wireless local loop" offers a cheap

alternative. A mobile telephone uses a great deal of spectrum to switch from one base

station to another, a fixed antenna can be permanently tuned precisely to the correct

base station.

The main cost is that of transmission spectrum must be allocated. But maintenancecosts are low. Most faults arise at one end or the other of the network, making them

easier to repair than those in the part between exchange and customer.

Tracking moving objects

Mobile communications have another set of applications just as radical as the

mobile telephone. Locating moving objects, with the help of global positioning satellites,

a position on the globe can be pin pointed with extra-ordinary precision and with land

based wireless, moving objects can be tracked. From such technologies, a huge range

of uses is developed. Including the following. Inventory control system: Systems used to monitor the position of

electronically agged containers, for instance or to check stock on super market

shelves.

Navigation System: Electronic maps that pin point the location of an

automobile, truck, or military targets or that help a hiker find atrack or a

farmer to work out which parts of a field to spray.

Altering System: Electronic tags that track stolen automobiles or roaming

elephants or probes that monitor that state of a patients heart to warm of animpending attack.


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Toll Payment System: Systems for automatically assessing tolls against

automobiles passing through an electronic check point.

Table No.1.1: Representative costs of local loop technologies.

Competent Cost per connection ($)

Copper 200 - 2000

Fixed wireless 500

Coaxial cable * 500

Fiber to Curb 1050 upward

Fiber to Home 2000 upward

* Does not include additional cost to upgrade for interactive capability.

Source: Information Infrastructure: Regulatory requirements OECD 1997.

In building telecommunications network, poor countries have two advantages;

many new technologies reduce the cost of installing new networks and newly installed

networks will be state-of-the art, unlike those in the rich countries which now require

upgrading.

Cost saving technologies can reduce the cost and increase the reliability of

services. .Developing countries can also move to mobile telephones more rapidly that

can rich countries. Mobile operators do not need to compete against a massive

installed based of fixed wire telephone which has long been amortized, and their

spectrum is frequently less heavily used than in the rich world.

Privatisation, competition and open markets assure more important in

developing countries than in rich ones. In Chile the first Latin American company to

privatize there proportion of people with access to a telephone doubled within three

years and waiting time fell from nearly ten years to just one. Peru sold a 35% stake in

its telephone system to telefonica de Espana in 1994, a rare instance of a country

ceding effective control of its system in exchange for a large investment in it. Several

developing countries have accepted bids from foreign firms to build parts of their

network, thus US west is building a network in Southern India, AT & T is building a

mobile network in Argentina, Deutsche Telecom is building a fixed link system in

Indonesia, and Australia Telstra is installing pay phones in Phnom Penh.

Such policies make sense not only because they will allow users access to in

expensive telephone services, but for an even more important reason. Good

telephone services are especially important for poor countries because they bind the

poorest, most distant regions into the rest of the country and they allow developing


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countries to compete on the same footing as richer rivals.

1.3 BENEFITS OF TELEPHONE SERVICE TO RURAL AREAS:

People who live in the country are less than half as likely to have access to

a telephone as people who have live in cities, a perennial problem in poor countries.

Some times the discrepancy in much worse. In India 74% of the population lives in

villages, but they have only 10% of the lines. This is partly because city dwellers

have more political clout than rural dwellers and partly be cause it cost up to five times

as much to install a fixed line in a rural area as in a town and obviously to install

wireless links -"mobile or even less expensive, fixed.

In rural areas, good communication can bring news, education, medical and

agricultural advice. They also provide a disincentive to move to the city. Some of the

advantages of urban life are available to those who stay, the benefits of persuading

people to stay in the country are immense. Moreover rural telephone services

frequently, each much larger revenue than those in cities. Country dwellers make and

attract many more long distance calls than do city people. It is important to connect

cities to the rural areas and as it is to connect cities to the rest of the world.

Benefits of telephone services to competitiveness one of the powerful effects of

the enormous investment in telecommunications now under way will be to reduce some

of the gaps between developed and developing countries. Since around 1990,

international call charges in the two have been converging as developing countries cut

tariffs at a faster rate than rich countries (by roughly 3% year, to the rich countries2%). The fast growing developing countries, especially in Asia, are now on track to

become the telecommunications power houses of the next century. Today emerging

economics account for more than 25% of global telephone traffic in the year 2005, the

ITU predicts that will rise to more than 50%, by

then China will be one of the top three sources of international traffic and India will be

close behind. The benefits from plugging developing countries into the vast global

telephone network will be enormous. Developing countries may be a low-cost

location for telecommunications services, as they now provide a low cost, rich country

may find it less expensive to reverse the direction of a call to exploit low

telecommunications costs in the developing world.

The telephone brings access to information from other parts of the world,

technological information, which can allow developing countries to catch "up with the rest

of the world in industry, health care, education and a host of other services,

commercial information, raising aspirations and transforming patterns of consumption;

and political information which will faster the spread of democracy and open to public

affairs.

In expensive telecommunications services will narrow the advantage of the


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first world over the developing countries; Indeed, countries with good

communication will be indistinguishable. They will have access to services of first -

world quality; health care, education and technical information.

1.4 SIGNIFICANCE OF THE TELEPHONE SERVICE:

The way demand for a technology will evolve is a game with a high failure

rate. Even those close to an innovation may fail to spot its significance. In few years it is

likely to see the increasing integration of the internet with both the telephone and the

television. The most immediate effect of the communications revolution will be to allow

familiar objects and be used in new unfamiliar ways. The most powerful corporate role

will be played by the telephone companies, largely free from debt, with powerful

national brands; the telephone companies have the muscle and ubiquity to exert

enormous influence over the future of communication, at least in the short run. It

takes time for a new technology to find its true market. It takes time too for new

business models to emerge. People are paying directly for telephone services although,

with toll-free calls, a growing share of the cost is carried by companies. In the short and

medium term, the way people adopt new technologies will be influenced by culture,

convenience and cost. It will also vary enormously from one country to the other.

The following factors will be among those that determine how each technology

is used in the future.

Culture: People are doing things one way, they may be slow to change, especially, like

one-fifth of the rich world's population they are over 65. Some of the developingcountries with their young population and fewer pre conceptions, may thus be quicker

than older west to spot and take advantage of new possibilities.

Convenience: Some technologies can be readily used in one situation but not in

another. Cost: Demand will be boosted when new technologies cut costs. The services

whose costs will be mostly affected can be electronically distributed from computer

software and video's to financial services and information. The broadest impacts of

new communication have been the effect will be felt in four main areas. Commerce and

the shape of the company, the economy, society, culture, the government and the

political process.

Commerce, including many kinds of retailing, will become increasingly

international. The barriers, such as customs formalities, delivery costs and different

rules of consumer protection, will gradually decline. Such global retailing will allow

many niche markets to emerge.

Companies: Companies will be able to build new links not just with customers but with

employees in different parts of the country or around the world. Employees in

different countries or regions will be able to work in teams on the same project. All

kinds of services


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will be brought in communication improve it will become easier for companies to hunt

for spare capacity and low prices. A knowledge based company can buy in much more

of what it needs, design or marketing or packaging than a traditional company. There

will be new opportunities to integrate customers and suppliers using the corporate

communications network. Suppliers will tap into their customer electronic data base to

work out what the customer need and to supply it. Technologies such as electronic

mail and computerized billing will reduce the costs of dealing with suppliers at

arm's length. The result of intensified competition will be greater emphasis a

performance, productivity and waste reduction.

Economic will benefit from the vast increase in the diffusion of knowledge and

information, the basic building block of economic growth. This revolution is especially

important because of innovation. The introduction of new production methods, new

products and new kinds of industrial organization is the main force driving growth and

living standard. The communication revolution speeds up the diffusion of innovation. It

will thus allow new competitors to spring up companies to react quickly, and individuals

to spot opportunities. Information is also essential to make markets to work well.

Society: Society too will change with the disappearance of the old demarcation

between work and home. More people will work from their homes or from purpose -

built small offices. The office may become the place for the social aspects of work such

as networking, lunch, and catching up on gossip, thus inverting the familiar roles of

home and office. Political and government will be transformed by free communication,changing the balance of power between governments and their citizens. People will be

able to communicate their views to their government leaders and representatives more

easily. People who live under dictorial regimes will find it easier to communicative with

the rest of the world.

Growth of Indias Telecom Services(1991-2007)

The phenomenal growth of the information technology (IT) industry in India has

brought to the fore the growing importance of the country as a knowledge

powerhouse. But this competitiveness is restricted to the services sector. In fact, it is

the sector that is increasingly contributing to the high growth rate recorded in thecountry. Despite showing a goad growth performance over the last three years or


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four years, the manufacturing sector is still a relative non-performer although three

industries, namely, auto parts, cotton textiles and Pharmaceuticals are showing much

dynamism in terms of exports.

However India's exports have now diversified to encompass services. The

service sector in general has come to occupy preeminent position in India's economy in

terms of its contribution to overall GDP, exports and as a destination for foreign direct

investments (Table 1). Manufactured exports are still dominated by low and medium

technology products although, earlier some hi-tech products such as; pharmaceutical

and certain types of machine tools have crept into Indias export basket. But the growth

of IT exports and the evidence of moving up the value chain in IT, the emergence of

other high technology industries such as biotechnology, aerospace, etc, is enabling India

to be in the' league of high technology producers from the developing world.

The recent growth of research and development (R&D) outsourcing is

yet/another illustration of the country's prowess in high technology activities. An

interesting dimension, of high technology production in India is that this capability is

largely in the realm of services. However, there are indications that this capability is

slowly percolating into hi-tech manufacturing. And an industry where it is very clearly

visible is telecommunication where a revolution of sorts is taking place [Mani 2007].

In the context, the purpose of the present paper is understand the technological

implications of the phenomenal growth of this industry.

1. Introduction

2. Telecoms and India's Growth

Communications is the fastest growing sector in India's economy. The

average compound rate of growth of the economy works out to 24.02 per cent per

annum since the turn of this millennium (Table 2). No other sector of the economy has

clocked such a rate of growth. The sector accounts for about 4 per cent ofGDP and the

recent high rate of growth has contributed to about 11 per cent of the growth in

overall GDP of the country. In information and communications technology (ICT), it is

again communications that is more important. This is evident from a dataset on ICT

spending developed by World Information Technology and Services Alliance (2006), of

the total spending on ICT by India, about 63 per cent was in communications.

The communication sector comprises both services and equipment

manufacturing, although in the above characterisation the data refers only to the

services segment. The domestic production of telecom equipments has shown some

impressive increases during the period since 2001, but it accounts for only about 15 per

cent of the total telecoms industry. With some fluctuations, the equipment sector isslowly seeing a decrease in its share in the total revenues of the telecommunications


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industry (Figure 1).

Table 1: Relative share of the service sector in Indias Economy

(1990-91-2006-07, in %)

Real GDP Exports FDI

1990-91 40.6 20 Not available

2006-07 61.8 39 81

Table 2: Contribution of communication sector to Indias Growth Performance

(1990-91-2006-07, in %)

Share of communications inGDP

Growthsector

GDPGrowth

Contribution (%)

1999-

20001.6

2000-01 1.9 26.9 4.1 12.47

2001-02 2.2 19.5 5.6 7.66

2002-03 2.6 25.6 3.4 19.58

2003-04 3.1 25.4 8.6 9.16

2004-05 3.5 22.8 7.5 10.64

2005-06 4 23.9 9.1 10.51

2.1 Dimensions of Growth

In 1991, India had just five million telephone subscribers. As at the end

of July 2007, there were 233 million subscribers, an average annual growth rate of

over 27 per cent per annum. No other country in the world, other than China, has

shown such high rates of growth (see Table 3). Tele density too which was below one

telephone per 100 population has now risen sharply to about 20. Among theinfrastructure industries, telecommunications is the only one that has shown

significant improvements over the reform period. Consequently, it is generally opined

that a revolution of sorts is taking place in the Indian telecoms industry. There are at

least seven dimensions of this growth performance that merit our attention.

Table 3: Trends in Number of Telecom Subscribers and Tele density

(1991-2007)

Number of Telecom Subscribers


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FixedMobile

(inmillion)Total

Growth

(%)

Tele-

density

Ratio of mobile

to fixed

1991 5.07 5.07 0.6

1992 5.81 5.81 14.60 0.67

1993 6.8 6.8 17.04 0.771994 8.03 8.03 18.09 0.89

1995 9.8 9.8 22.04 1.07

1996 11.98 11.98 22.24 1.26

1997 14.54 0.34 14.88 24.21 1.56 0.02

1998 17.8 0.88 18.68 25.54 1.94 0.05

1999 21.59 1.2 22.79 22.00 2.33 0.06

2000 26.51 1.88 28.39 24.57 2.86 0.07

2001 32.44 3.58 36.02 26.88 3.58 0.11

2002 41.48 13 54.48 51.25 4.3 0.31

2003 42.58 33.58 76.16 39.79 5.1 0.79

2004 45 50 95 24.74 7.04 1.11

2005 49 76 125 31.58 10.66 1.55

2006 40.43 149.5 189.9 51.94 17.16 3.70

2007(as on October

31,2007)39.41 217.14

256.5

522.52 5.28

Dominated by wireless technologies, which include cellular mobile and fixed wireless

technologies. In fact, almost the entire increase in the availability of telephones has

been contributed by wireless technologies. India has one of the highest ratios of

wireless to wireline services, which is now almost five (Table 3). In fact what is

interesting is that since 2005, the wireline services have started falling. A number of

factors explain this decrease in the popularity of fixed telephones, which has now

become a worldwide trend. This heavy reliance of wireless technologies, while

extremely positive from the availability point of view, has some implications for the

diffusion of the internet in the country. This will be analysed in some detail in one of

the subsequent sections.

(ii)Growing Market for TelecomHandsets: As a corollary of the above, it is seen

that there has been a steady increase in the average number of mobile subscribers

per month since 2003 (Table 4). In 2003, on an average 1.5 million new subscribers

were added to the existing stock. This increased to 6.4 million until September

2007. These large increases in the number of mobile handsets have strong positive

implications for the telecom equipment industry and specifically the mobile handsets

industry, which means that close to six million handsets are being sold every month.

Consequently, a huge domestic market for telecom equipment has suddenly

emerged in the country spawning the creation of a significant manufacturing base.

Chennai has become a thriving cluster for mobile handsets manufacturing and this

has important implications for the downstream industries such as the semiconductor


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industry. This point will be discussed at some depth in the fourth section.

Table 4: Monthly Additions to Mobile Subscribers (2002-07, in million)

2002 2003 2004 2005 2006 2007January 0.64 1.58 1.76 4.69 6.81

February 0.6 1.6 1.67 4.27 6.22

March 0.96 1.93 0.78 5.03 3.53

April 0.28 0.64 1.37 1.46 3.88 6.11

May 0.29 2.26 1.33 1.72 4.25 6.57

June 0.35 1.42 1.43 1.97 4.78 7.34

July 0.36 2.32 1.74 2.46 5.39 8.06

August 0.49 1.79 1.67 2.74 5.9 8.31

September 0.37 1.61 1.84 2.48 6.07 7.8

October 0.53 1.67 1.51 2.9 6.71 8.05

November 0.72 1.9 1.56 3.51 6.8December 0.8 1.69 1.95 4.46 6.4

Average 0.46 1.46 1.63 2.33 5.35 6.88

(iii) Increasing Privatisation: The share of the private sector in the overall telecoms

industry has been rising (Figure 2) and the ratio of private to public actually crossed

unity in 2006. This again is due to the fact that the public sector is more dominant in

wireline (or fixed) and the private sector is dominant in the wireless (mobile) seg-

ment (Table 5).This sort of a structure is largely the product of historical reasons. The two

public sector service providers (BSNL and MTNL) dominated the wireline sector, while

the private sector was able to dominate the new wireless technology. In fact it was

only in the late 1990s, early 2000s that the government allowed the public sector

entities to provide wireless communication services.

Table 5: Telecommunications Services according to ownership

(Percentage shares as on May 31, 2007)

Wireline Wireless

Public 91 19

Private 9 81

Total 100 100

(iv) Competition - Fixed vs Mobile and GSM vs CDMA: An interesting feature of

the industry is that after a very long time, it has suddenly become very competitive.

There are three dimensions to this competition. First, it is competition between twostandards or technologies, namely, the Global System for Mobile Communications


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(GSM) VS Code Division Multiple Access (CDMA) standards. Second, it is competition

between various service providers, although this competition was restricted to public

policy designed spaces or markets known as telecom circles. A yet another dimension is

the type of market. There are essentially three types of markets based on the

geographic coverage of the service. They are: (i) the local telephone market; (2) long

distance or national telecom services; and (3) foreign or the overseas market. We

focus here on all the three dimensions of competition between the service providers.

Competition in Fixed and Mobile Technologies: The markets for mobile services

are much more competitive than the one for fixed line services. In the latter, the

incumbent service provider, BSNL continues to have the lion's share of the market.

However, the existence of mobile communication services

has made the market for fixed line services contestable and as a result despite

high concentration, the prices of fixed telecom services kept falling or kept under

check over the last five years or so.

(a) Competition in Fixed Telephone Services: If one goes by overall summary

measures of domestic competition, the market for fixed telephone services is much

more concentrated than the one for mobile services. For instance (as on May 31,

2007), the Herfindhal Index (H-Index) for fixed services for the nation as a whole

works out to 0.6899 while the one for mobile services work out to 0.1592. This

national level picture hides the level of competition that exists at the sub-national level.

The market for fixed telecom services is highly concentrated in all the telecom circles,

although in seven of them, namely, Delhi-NCR, Chennai, Madhya Pradesh, Mumbai,

Punjab and Karnataka, the H-Index has a value less than 0.8. Of course, this does

not mean that the market for fixed telecom services is not competitive. There are two

dimensions to this level of competition for fixed services. First, the consumers are

increasingly substituting mobile for fixed services, so the fixed service providers face

intense competition from mobile services. Second, the existence of the telecom

regulator too has acted as a check on the dominant service provider, Bharat Sanchar

Nigam (BSNL), from charging high prices. Instead what one sees is a significant

improvement in the performance ofBSNL during this period.1 First of all, BSNL is one of the

leading profit-making central public sector enterprises in the country: in 2005-06 it

made a net profit of Rs 8,940 crore - one of the few non-oil public sector enterprises

(PSES) in the top 10 profit-making PSES in the country. Three areas where the firm has

made performance improvements are: (i) considerable reductions in the number of

consumers on the waiting list for a connection; (ii) reductions in the number of faultsper subscriber; and (iii) number of personnel per 1,000 subscribers. On all the three


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indicators BSNL has made substantial progress [Department of Telecommunications

2007] and I argue that this is entirely due to the force of competition leading to

efficiency gains for this rather monopolistic firm which has had a previous history of

being completely impervious to the demands of consumers.

(b) Competition in Mobile Services Industry: Compared to the fixed services,

the mobile services industry has a number of distinguishing features. First, the

industry started as one dominated by private sector enterprises and the government

religiously followed a policy of "managed competition" by licensing more than one

service provider in a telecom circle. In fact majority of the 28 circles have at least

four services providers and in a number of cases there are six service providers well.

In short, right through inception the government envisaged an oligopolistic form of

competition.

Second, most of these private sector enterprises had some of foreign

equity holding of sorts. Third all of them are based on new technologies that were

state-of-the art. Fourth, the conduct of the industry was, relatively speaking, more

regulated by the newly created independent regulatory agency, the Telecom Reg-

ulatory Authority of India (TRAI). Fifth, it is the rapid growth of this industry that has

catapulted the communications sector into one of the major growth-contributing

sector of India's economy. Sixth, the mobile communications industry, especially the

equipment part of the industry is the second largest in the world (next to China) and

therefore has attracted considerable FDI in the manufacture of handsets leading to

the employment of skilled manpower. Seventh, India is supposed to be having the

cheapest mobile telecom tariffs in the world. The early part of the industry was of

course riddled with much controversy pertaining to the terms and conditions under

which the licenses were issued and the spectrum allocated between various kinds of

service providers [Desai 2006]. Since all the services providers were new and had the

same vintage of technology, their competition was more in terms of price and

conditions of sale and of late these two aspects are much in public scrutiny thanks to

the timely intervention, on various occasions, by the regulator.

If one computes the H-Index for the industry, at the national level (which is not

exactly a meaningful as some of the providers are only at specific telecom circles), it

shows a mild increase: the H-Index for the industry increases from 0.1370 in 2002 to

0.1593 in 2007.

However, this increase hides considerable variations at the circle level

(Table 6). Most of the service providers have focused on specific regional markets, with

the exception of Bharti (the largest mobile service provider). In fact, there are only four

service providers who have a presence in at least 20 of the 29 circles. It is also

interesting to see that the circles where BSNL has a monopoly position are also those


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with very low revenue potential. In other words, the private sector providers have

positioned themselves in the most revenue earning circles. Also it is seen that it is the

circles with high revenue earning potential where there has been an increase in the

intensity of competition - in the metros of Delhi, Mumbai and Chennai for instance.

Telecom circle Number

of

Herfindha

l index

Dominent Suplier (with

Market) share in %)

1 Andaman and Nicobar 3 0.49 Bharti (42)

2 Andhra Pradesh 4 0.29 Reliance (59)

3 Assam 4 0.28 Aircel(31)

4 Bihar 5 0.30 Bharti (38)

5 Chennai 6 0.19 Aircel (26)

6 Chhattisgarh 1 1 BSNL(IOO)

7 Delhi-NCR 6 0.19 Hutchison Essar (21)

8 Gujarat 6 0.22 Hutchison Essar (38)

9 Haryana 6 0.23 Reliance (27)

10 Himachal Pradesh 6 0.24 B5NL(30)

11 JandK 4 0.45 BSNL(55)

12Jharkhand 1 1 BSNL(IOO)

13Karnataka 6 0.23 Bharti 329)

14 Kerala 6 0.20 B5NL(29)

15 Kolkata 5 0.21 Hutchison Essar (25)

16MP 5 .0.24 Reliance (32)

17 Maharashtra 6 0.18 Idea (23)

18Mumbai 6 0.18 Hutchison Essar (25)

19 North-east-1 4 0.28 BSNL(35)

20 North-east-ll 1 1 BSNL(IOO)

21 Orissa 5 0.25 Bharti (31)

22 Punjab 7 0.20 Bharti (30)

23 Rajasthan 7 0.20 BSNLC7)

24Tamil Nadu 6 0.20 Aircel (28)

25 UP (east) 6 0.22 Hutchison Essar (22)26 UP (west) 6 0.18 'Hutchison Essar (22)

27 Uttaranchal 1 1 BSNL(IOO)

28 West Bengal 6 0.21 Hutchison Essar (29)

India as a whole 12 0.16 Bharti (23)

Competition between Mobile Standards: It was seen above that mobile phones

were introduced in the country towards the latter half of the 1990s and specifically in

1997. Ever since that year and until the end of 2002, the market was dominated by

just one technology, namely, GSM. But in December 2002, a Reliance Info-comm launched

CDMA services across 17 circles on a countrywide basis, CDMA has since been growing


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faster than GSM, although there are some year-to-year variations (see Figure 3).

Most Indian consumers are unaware of the nitty-gritty of the two technologies. So

the deciding factor between the two technologies is often based on price and other

conditions of offer such as the coverage of the service, ease of obtaining a new

connection and whether a handset is available at a reduced price as part of the deal.

Given this sort of a possibility of perfect substitution between the two types of

technologies, the existence of the two standards has made both the markets for GSM

and CDMA services very competitive. This is especially so when the market for CDMA

services is highly concentrated with just two service providers accounting for almost

the entire output. This is further indicated by the higher Herfindhal Index for CDMA

services. What is being argued here is that despite being highly concentrated, CDMA

service providers have to compete with GSM service providers and this has prevented

the CDMA service providers from wielding any excessive market power.

One of the most important institutional requirements for competition to emerge

and sustain is the introduction of number portability. Number portability allows a

customer to move from one mobile service to another within GSM, and also between

GSM and CDMA, while retaining the same number, TRAI had recommended in March 2006

to the Department of Telecommunications (DOT) that mobile number portability be

introduced by April 2007.

But it was only in October 2007 that the DOT finally announced the introduction of

number portability from April 2008, but this was strongly opposed by the GSM players.

(v) Price of Telecom Services: One of the more direct effects of this competition is

lower prices. Before the deregulation of the telecom services industry and indeed the

entry of mobile service providers, telecom consumers were periodically subjected to

increases in the tariff. This has now been effectively checked. The price of telecom

services basically follows a two-part tariff, both in the case of fixed and mobile

services: first an activation charge followed by a charge for each type of calls. For

mobile communication consumers then there is the additional cost of calls

according to whether it is post or prepaid. Based on estimates made by TRAI (2006), I

have obtained the minimum effective charge derived out of an outgoing usage of 250

minutes per month per quarter during 2003 through 2005. This is plotted for both

fixed and mobile services as well. Although charges for both the calls have come

down, a higher reduction is noticed in the case of mobile services. In fact, India now

has one of the cheapest mobile tariffs in the world (Table 7) and this can give an

additional fillip to the growth of ICT industry in the country. If one were to plot the

price of telecom services and the number of subscribers, one can see an inverse

relationship in the case of mobile services although in the case of fixed services such an


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inverse relationship is not visible. This is because of the relative advantages which

mobile technology can bestow on its user.

Table 7: Cost of mobile calls in India compared to other countries

(As of June 2004)

Country Callcharges

per minute

Minutes of

usage per

subscriber

Average

revenue

per user($)

Termination rates

per minute mobile

($)

Australia 0.24 159 43 0.152(.O16)"

Brazil 0.11 92 11 0.080(0.020)

China 0.04 261 10 0.025(0.010)

Switzerland 0.45 119 59 0.163(0.017)

Japan 0.33 156 63 0.130(0.022)

India 0.03* 309 11 0.007(0.007)

(vi) Institutional Support: An interesting feature of the growth of

telecommunications industry in the 1990s and beyond, compared to the earlier

period is the strong public policy support that the industry has received. It was

manifested in the form of the following policies: (i) National Telecom Policy of 1994,

(ii) Telecom Regulatory Authority Act of 1997, (iii) New Telecom Policy of 1999, and (iv)

Broadband Policy of 2004.

Of these four main policies, in my view, the most important piece of legislation that

is determining the growth performance of the industry is the establishment of the

regulatory agency TRAI.

The 10-year history of telecommunications regulation in India can be divided into two

phases: the first covering the period 1997-2000, when TRAI had just been established

and the second covering the period 2000 onward, when considerable amendments

were made to the original TRAI Act. On the whole, TRAI'S functioning has been marred by

a number of bitter disputes between it, the DO'T and the service providers, although in

more recent times (especially since 2001) it has been rather effective in shaping the

conduct of the industry in terms of pricing behaviour and indeed in quality of service.

(In late 2007, TRAI found itself once more in controversy over spectrum allocation and

pricing.) I do not attempt here to provide a detailed review of TRAI'S operations since its

inception, but a quick survey of its place in telecom regulation in India. The purpose is

essentially to illustrate the need for a more independent regulator that can effectively

oversee the functioning of an almost completely deregulated industry. The actualbenefits that the consumers have received from this regulation have been discussed in


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detail elsewhere in the paper in terms of increased easy access to telecom services,

considerable improvements in both the price and quality of services and the existence

of a watchdog of the industry.

TRAI'S functions can be broadly categorised into two: recommendatory

and mandatory. It is seen that in most of the important conduct variables such as the

promotion of competition, pricing, technology and quality of service and in the effi-

cient use of spectrum, etc, the pronouncements of TRAI are merely recommendatory

and the final decision is to be taken by the government. The mandatory powers of

TRAI are restricted to a number of technical issues such as fixing the terms and

conditions of inter-connectivity between the service providers, laying down the

standards of quality of service and to ensuring that these conditions are actually

met by the service providers and ensuring the effective compliance of the Universal

Service Obligation. This shows that the effective space that is available for the TRAI in

terms of asserting its real power is very limited. This fact has to be borne in mind

while one assess the contribution of this regulatory agency towards improving the

conduct of the industry even post 2000 than that actually prevailed in the previous

period.

After a detailed review of its functioning during the earlier period

(1997-2000), Mani (2002) referred to the TRAI as a "muddled regulator". This is

because during this phase, TRAI'S functions were poorly articulated, and it wasgenerally viewed as driven by the well-organised and vociferous lobby of private

phone service operators, TRAI did little to hide its pronounced contempt for the DOT and

the state-owned providers, BSNL and MTNL. At the same time, it failed to ensure that

private operators adhered to their license conditions. Its authority and credibility were

undermined by court rulings that clearly exposed its lack of power. Its reputation

suffered even more when it allowed the private operators to fight its court battles. In

short, it would not be incorrect to state that there was "regulatory capture" during

this first and initial phase of its operations.The governmental admission of the ineffectiveness ofTRAI resulted in the reinvention

of the regulator and a redefinition of its functions. This takes us to the second phase in

TRAI'S history and this thinking manifested itself in the form of the issuance of an

ordinance to replace TRAI with an appellate tribunal with judicial powers and a

reconstituted regulator that lacked one of the most important functions of any telecom

regulator, namely the power to settle disputes between the various stakeholders. This

function was vested in a newly created Telecom Dispute Settlement and Appellate

Tribunal (TDSAT). However, this was followed up with a strengthening ofTRAI'S role in a

number of other areas. But it can be shown that although the amendment clarified the


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precise role of the regulator by considerably reducing the grey areas, it effectively

reduced the power of the regulator.

TRAI'S recommendations to the government are binding only with respect to the non-

compliance and efficient use of the spectrum. On the crucial issues of timing and licensing

of new service providers, TRAI'S recommendations are not binding. In sum, the TRAI has

been reduced to a tariff-setting body empowered only to fix tariffs and inter-connection

charges and to set norms on quality of service. And on these two and especially on the

tariff issue, TRAI'S role is generally considered to be very satisfactory

Table 8: patents issued to Indian inventors in the US

(2001-05, number of patients)

Multiplexing Pulse or

Digital

Telephonic Telecommunications Total

2001 0 1 0 0 1

2002 2 1 0 1 4

2003 3 1 0 1 5

2004 6 2 1 0 9

2005 7 2 1 3 13

(vii) Growing R&D Outsourcing: It is generally held that India has emerged as a

major R&D hub. The Technology Information and Forecasting Assessment Council (TIFAC)

(2007) study confirmed this commonly held proposition: R&D investment worth of $

1.13 billion has flowed into India during the five-year period 1998-2003. The total

receipts ofR&D services have doubled from $ 221 million in 2004-05 to $ 519 million

in 2005-06 [Reserve Bank of India 2006, p 1355]. Telecom along with the

pharmaceutical industry is a major recipient of these investments. The innovative

performance of this segment can be gauged from the fact the number of the us

patents issued to Inventors from India (including MNCS having operations in India) in the

area of telecom technologies has increased from just one in 2001 to 13 in 2005 (Table 8).

3 Three Disquieting Features

In the previous section I have outlined several dimensions of the growth of the


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industry. All these were positive features -the phenomenal growth of the industry,

significant reductions in the waiting time to get a telephone connection and indeed

in the price of telecom services. However, this growth has also been with some

disquieting features. Three such disquieting features of the growth of the industry have

been identified. They are: (1) the growing digital divide; (2) increased dependence

on imports as far as the equipment are considered; and (3) the relatively low

penetration of the internet in India.

(i) The Growing Digital Divide: Several commentators, notably Desai (2006),

had referred to the growing inequalities in the availability of telephones especially

between states and indeed between the rural and urban areas within a state. This is

so severe that the national picture that I presented above is only representative of

the urban areas of some of the states. This growing digital divide, as it is usually

referred to, is of course a reflection of the growing divides within the country as far

as income and wealth is considered. The ratio of urban to rural tele-density, which

was falling until 2002 has started rising again since 2003 and in 2005 was much

higher than what was in 1996, when the mobile revolution was just about to begin.

To illustrate, the ratio of urban to rural tele density increased from 14 in 1996 to

nearly 20 by the end of 2005 [Department of Telecommunications 2006].

A yet another dimension of the digital divide is the variation in tele density across the

various telecom circles (Table 9). Tele density (in 2005) ranged from as high as 60 per

100 people in the national capital region to just two in the backward state of

Chhattisgarh. The urban divide within each of the telecom circles is presented in Table

9. It shows that Kerala, Tamil Nadu (excluding Chennai) and Punjab have one of the

lowest urban-rural divides, while Uttar Pradesh, Bihar and Assam have the highest

digital divides. The table also shows that rural tele density is significantly below the

urban one across all the circles and even for the nation as whole it has remained at a

very low level. This confirms the oft-expressed view that the telecom revolution

spearheaded by the mobile phones has remained largely an urban phenomenon.

The government has put in place an institutional arrangement for

bridging the digital divide. Specifically, the National Telecom Policy of 1999

envisaged implementation of the Universal Service Obligation (USO) Fund to

provide telecom services in rural, remote areas and non-remunerative areas. This

fund is raised through an "universal access levy", which is 5 per cent of the adjusted

gross revenue earned by the service providers under various licenses. The Universal

Service Support Policy for Implementation ofUSO took effect from April 1, 2002. It is

administered by the DOT and it has three major components: (1) providing public

shared access; (2) providing individual access; and (3) infrastructure support for


20/60

mobile service providers. The latter policy is on the anvil and is yet to take shape. The

overall performance of the uso fund is far from satisfactory, as cumulatively speaking

only about a third of the funds accumulated have actually been disbursed (DOT,

http://www.dot.gov.in/uso/implementationstatus.htm).

The service providers, excepting for the state-owned BSNL, are rather reluctant to

provide shared access. However, the private providers are keen to participate in the

provision of individual access in rural areas as it is more profitable than providing

shared access [Department of Telecommunications 2007].

Hitherto, the uso funds have been utilised only for provision of fixed line connections.

Given the fact that the future is in mobile communications, it is prudent to involve

mobile service providers too. Some amendments made to the utilisation of uso funds

have expanded the scope of the funds to include more items.3 The following additional

four items were included: (i) Creation of infrastructure for provision of mobile services

in rural and remote areas; (ii) provision of broadband connectivity to villages in a

phased manner; (iii) creation of general infrastructure in rural and remote areas for

development of telecommunication facilities; and (iv) induction of new technological

developments in the telecom sector in rural and remote areas.

Only the first of four are in the form of some implementation. However, it makes a lot

of sense to extend the uso funds to provide mobile services in rural areas as

increasingly much of the growth in mobile communications have emerged from 'B' and

'c' circles. In fact, the four metros have ceased to be the major force behind the growthof the mobile connections in the country. Encouraging the growth of mobile

communications in the other circles and the rural areas within the circles can increase

tele-density in the country. Such increases in tele-density through mobile phones

also have some negative consequences, which is discussed below.

Table 9: Digital Divide within Telecom Circle

(as on March 31, 2006)

Urban Ru r a l Ratio of LJ to R

Andaman and Nicobar 22.49 9.15 2.46

Kerala 47.61 9.74 4.89Tamil Nadu (-) Chennai 23.1 2.86 8.08Punjab 51.57 5.34 9.66Haryana 29.21 2.9 10.07Uttaranchal 17.05 1.68 10.15Maharashtra (-)Mumbai 27.71 2.59 10.70Gujarat 30.12 2.63 11.45Himachal Pradesh 78.11 6.82 11.45North-East-ll 14.21 1.21 11.74Karnataka 31.26 2.49 12.55Andhra Pradesh 30.19 2.37 12.74


21/60

North-East-I 15.93 1.24 12.85Chhattisgarh 7.18 0.46 15.61Rajasthan 22.94 1.45 15.82Kolkata 25.09

Mumbai 45.81Chennai 48,03

Delhi 52.09National Average 28.25 1.74 16.24West Bengal (-) Kolkata 17.14 1.05 16.32Jharkhand 8.56 0.51 16.78Orisa 21.35 1.05 20.33Jammu and Kashmir 19.87 0.78 25.47Madhya Pradesh 17.15 0.67 25.60Assam 18.22 0.67 27.19Bihar 19.71 0.57 34.58Uttar Pradesh 18.89 0.52 36.33

(ii) Import Dependence for Telecom Equipment: The country had earlier

assiduously built up a domestic telecom equipment manufacturing industry in all the

three segments of the industry, namely in switching, transmission and terminal equip-

ment. Until 1985 or so, the manufacture of telecom equipment was exclusively

reserved for the public sector, when in that year certain customer premises

equipments like the Electronic Private Automatic Branch Exchanges (EPABX) were thrown

open to the private sector.

In fact, the very first public sector enterprise established in independent India,

Indian Telephone Industries (ITI) was devoted to the manufacture of telephone

switching and terminal equipment. In 1985, the government established the stand-

alone laboratory, Centre for Development of Telematics (c-DOT) to develop a family of

digital switching technologies, which it licensed to both government and private sector

enterprises. In fact, Mani (2005) had argued that the C-DOT is credited with the

establishment of a modern telecom equipment industry in the country. The govern-

ment's policy of public technology procurement practiced through its DOT, which was

the only telecom service provider for a very long time until the late 1980s also

contributed to the emergence and sustenance of

a domestic manufacturing industry in telecom equipment which fitted very well with

the overall policy of import substitution that was being followed.

The deregulation of both the equipment and services industries, the liberalisation

of the economy, the virtual abandoning of the public technology procurement policy

and above all the growth of the mobile communications industry put a leash on the

growth of a domestic manufacturing industry. This is because both the research and

production components of the industry focused only on fixed telephone

technologies and with the mobile communications becoming very important, thedemand for such equipment had to be increasingly met through imports.


22/60

A self-sufficiency rate (SSR) is defined as the ratio of domestic production to total

availability, where total availability is the sum of domestic production and net imports.

Two variants of the rate, SSRI and SSR2 have been computed (Figure 4): SSRI is based on

net availability data from the World Telecom Indicators 2006 of the International

Telecommunications Union and SSR2 is based on data on net availability of telecom

equipment developed by us on the basis of data on exports and imports of telecom

equipment from India contained in the online database, UN Commodity Trade Statistics

(UN Comtrade, http://comtrade.un.org/db/ ).

Although the level of SSR as indicated by the two series is slightly at variance with

each other, the direction of movement is roughly the same although SSRI shows a

much steeper fall in the self-sufficiency rate. Suffice to say that the industry, which

was more or less self-sufficient, is now increasingly dependent on equipment imports.

In other words, the phenomenal increase in the growth of services has not really

benefited the local Indian manufacturers as most of them do not have the technological

capability to service the new technology based equipment demanded by the service

industry.

The new telecom policy of 1999 had envisaged making the country a leading centre

for the manufacture of telecom equipment. But as to be discussed below, this is being

achieved by opening up the market to domestic investments by MNCS. Even for IT

solutions such as for software requirement, the domestic mobile service providers aredepending on foreign vendors. Although India is a leading exporter of computer

software and indeed telecom software, its own telecom service providers are

depending on foreign sources.

(iii) Low Penetration of the Internet: Internet services in India were launched in

1995 by Videsh Sanchar Nigam (VSNL). By the end of March 1998, the number of

subscribers had barely reached 1,40,000. In November 1998, the government

recognised the need for encouraging the spread of the internet in the country and

opened the sector for provisioning of services by private operators. To date there are

389 ISP licensees, but only 135 are operational. Public sector providers dominate with

56 per cent of the market (2006). Five ISPS account for 83 per cent of the market with

the leading provider alone accounting for 42 per cent. Approximately 60 per cent of

the users still use dial-up internet access. Broadband access was introduced in

October 2004, but its diffusion remains low. According to TRAI estimates (Table 10, P

43), there were 9.27 million internet subscribers as of end March 2007 and 2.34

million broadband subscribers.

Only about a quarter of the internet subscribers have changed over to broadband

access technologies. Majority of the subscribers use the older dial-up technologies for
http://comtrade.un.org/db/http://comtrade.un.org/db/


23/60

accessing the internet. According to a recent study on internet in the country by the

internet and Mobile Association of India (2006), almost 76 per cent ofPC users have

taken internet connections. This means that the two technical reasons militating

against the higher internet diffusion in the country is the lack of ownership ofPCS and

not having a fixed telephone for accessing the internet. Although it is possible to access

internet over a mobile phone, the current generation of mobile technology that is

common in the country is 2 G and 2.5 G. Of course, it is generally held that whenever

the country moves over to 3G phones, accessing the internet over mobile phones is

easier. But given the much higher prices of 3G handsets, it is not very likely that its

diffusion will be high in the initial years. So the low internet diffusion in the country is a

direct consequence of the country becoming too reliant on mobile phones.

Table 10: Diffusion of Internet in India

(1995-2007, numbers in millions)

Number of internet

subscribers

Numbers of

Broadband

August 1995 0.01

March 1996 0.05

March 1997 0.09

March 1998 0.14

March 1999 0.28

March 2000 0.95

March 2001 3.04

March 2002 3.42

March 2003 3.64

March 2004 4.55 0.04

March 2005 5.55 0.18

March 2006 6.95 1.35

March 2007 9.27 2.34

4 The Silver Lining

The silver lining is that India is becoming a major manufacturing hub

especially for mobile handsets. This has the potential of increased demand for

semiconductor devices, like for instance Digital Signal Processors (DSP), and this

increased demand can catalyse the domestic manufacturing of semiconductor devices.

However, all the players are expected to be MNCS as no local companies are available

as of now. The government responded to this prospect by announcing a semiconductor


24/60

policy in 2007.

(i) India emerging as a Manufacturing Hub:

The New Telecom Policy of 1999 had envisaged the country becoming a

major manufacturing and export hub for telecom equipment.5

But for a long time thissounded more like an empty statement not backed by reality where, as noted above,

the country was depending heavily on imports. This was reflected in the rates of self-

sufficiency presented earlier showing a declining trend. However, this situation has

been changing very rapidly, specifically since 2006. The more proximate cause of this

change is the large size of the domestic market for mobile communication. With a

monthly sale of over five million pieces since July 2006, India has now become the

second largest market for mobile handsets in the world, which all the major mobile

handsets and other equipment manufacturers have begun manufacturing locally since

2006 (Table 13).

Domestic output of telecom equipment, although fluctuating, has shown

some significant increases over the last two years (Figure 5). Also, although the

numbers of data points are few, one can see an almost perfect positive correlation

between the growth of the services sector and the equipment sector (Table 11,). My

argument is that this correlation is bound to become more significant in the future,

given the present trends.

However, the industry is going to be dominated by affiliates of MNCS. In

fact, the telecom industry has been one of the major recipients of FDI in the country

since 1991 (Table 12). Although much of these investments (over 50 per cent) are in

the services segment, increasingly (since 2001), the equipment sector has ' received

about a quarter of the total investment. In short the domestic manufacturing industry

will be dominated by foreign enterprises (Table 13).

Further, the import dependence of the industry will in all probability

continue to be high for a few more years as the local manufacturing of mobile

equipment is at present based largely on fully knocked down (FKD) and semi-knocked

down (SKD) kits. But as the domestic manufacturing of electronic components and

semiconductor devices increase, the import dependence is sure to come down. In this

way the experience on this count will be similar to the Indian automotive industry.

This growth of the manufacturing sector has several spillover effects

besides direct employment. One of the more important of these is the demand for

electronic components and specifically semiconductor devices, which are used in the

manufacture of these equipment. According to estimates by the Indian

Semiconductor Association (formed in 2004), the total available market (after taking

into account imports) is bound to increase from $ 0.91 billion to over $ 16 billion by

2015. Mobile handsets and equipment will be one of the larger markets. Consequent


25/60

to this thinking, a number of proposals and projects for the semiconductor

manufacturing industry have been announced.6

If all the projects announced materialize, India will soon be safely in the

"bus" that it had missed several years ago as far as electronic hardware is concerned.

The government has responded to these private initiatives by announcing on March

21, 2007 a special financial incentive package to attract investments for setting up

semiconductor fabrication and other micro and nanotechnology manufacturing

industries in the country. The incentives are in the form of capital subsidies to the tune

of 20 per cent of the total investment expenditure incurred by a fab or eco-systems

units during the first 10 years, provided that these units are located within a special

economic zone (SEZ) and 25 per cent if they are located outside a SEZ. In addition the

units are also exempted from countervailing duties. Further they will have to be

established before March 31, 2010.

In response to this incentive package, the government is expecting $

10 billion worth of investment. It remains to be seen whether or not such an

investment will fructify. Such an incentive-induced investment strategy is sometimes

criticised as the government is essentially taxing the citizens of a country and

passing on the benefits to a few private sector individuals.

Overall, the growth of the telecom services industry seems to be leading

to the emergence of not just the telecom equipment industry, but also the electronic

components and semiconductor devices that are required for the manufacture ofthese equipments. Thus, the Indian telecom industry is an excellent example of the

growth of the services leading to the emergence of an attendant manufacturing

industry as well.

Table 11: Growth of services and Equipment Segments

(2002-03 to 2005-06, in Rs billion)

Telecom Equipment Telecom services

2002-03 144 480

2003-04 140 610

2004-05 160.9 800

2005-06 178.33 1,000

Table 12: FDI Inflows into Indias Telecom Industry

(1991-2007, in Rs million)

Total

FDI

Inflow

FDI

Inflow in

Telecom

Share

of FDI

in

Cumulative

FDI

Cumulative

FDI for

Telecom

Share of

Telecom

FDI in


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Industry Total

FDI

Industry Total FDI

2003-

04

1,21,170 5,320 4.39 11,96,600 107,250 8.96

2004-

05

1,71,380 5,880 3.43 13,67,980 1,13,130 8.27

2005-

06

2,46,130 30,230 12.28 16,14,110 1,43,360 8.88

2006-

07

7,06,300 23,550 3033 23,20,410 16,6,910 7.19

Table 13: India as a Manufacturing Hub for Mobile Telecom Equipment (2007)

Name of manufacturer Facility and location

1 Ericsson

GSM Radio base station facility-Jaipur R&D

centre in Chennai

2 Elcoteq Contract manufacturer-Bangalore

3 Nokia Mobile handsets-Chennai

4 LG Electronics Mobile handsets-Pune

5 Flextronics Contract manufacturer-Chennai

6 Foxconn Contract manufacturer-Chennai

7 Motorola Mobile handsets R&D centres

8 Sony EricssonMobile handsets through Flextronics and

Foxconn

9 ITI

GSM facility with Alcatel at Nainital and

Manakapuri UP CDMA with ZTE, China atBangalore

NOTES

BSNL's sales revenue emanate from two major segments: basic services

and cellular services. Of the two, although the share of basic services has gone down

even in 2005-06, its share was over 80 per cent of the total. So the performance of

BSNL depends to a large extent the way it manages fixed telephone services although

with the growth of mobile services the relative importance of fixed telephone

services is likely to come down over time. See the Annual Report 2005-06 of BSNLat http://www.bsnl.co.in/company/results2oo5-o6/resultcomplete_o6.pdf

(accessed on August 25 2007)

In working out the ideas contained in this subsection, I have relied on

my own writings on the topic in Mani (2002) and also Desai (2006) and TRAI (2007c).

An Ordinance was promulgated on October 30, 2006 as the Indian Telegraph

(Amendment) Ordinance 2006 to amend the Indian Telegraph Act, 1885 in order to

enable support for mobile services and broadband connectivity in rural and

remote areas of the country. Subsequently, an Act has been passed on December

29, 2006 as the Indian Telegraph (Amendment) Act 2006 to amend the IndianTelegraph Act, 1885. It may be pointed out that there is no consensus on the


27/60

number of internet and indeed broadband subscribers in the country. There are a

plethora of estimates widely diverging from each other. For a detailed account of

these various estimates, see Chandrasekhar (2006).

The policy had stated, "With a view to promoting indigenous telecom

equipment manufacture for both domestic use and export, the government wouldprovide the necessary support and encouragement to the sector, including suitable

incentives to the service providers utilising indigenous equipment". See the New

Telecom Policy of 1999 at the DoT web site: http://www.dot.gov.in/ntp/

ntp1999.htm (accessed on August 27, 2007) These proposals are: Semlndia promoted

by Vinod Agarwal - $ 3 billion (12" fab) at Hyderabad; (ii) NANO-TECH Silicon

India (NSTI) promoted by Jun Min - $ 0.6 billion (8 fab) at Hyderabad; (iii)

Hindustan Semiconductor Manufacturing Co.

(HSMC) promoted by Deven Mehta - $ 4.5 billion (8 fab) - location to be

confirmed; (iv) India Electronics Manufacturing Corp IEMC promoted by Rajendra

Agarwal - $ 3.0 billion (12 fab) - location to be confirmed; (v) A number of chip compa-

nies from around the world have established research centres in India. Qualcomm

Inc, the largest chip design house by revenue and a major US mobile chip company,

has also opened a software and chip development lab in India. The company uses it as

a base for research and development as well as a place from which to promote its CDMA

according to its web site; (vi) The state-owned semiconductor complex at Chandigarh

(which has been taken over by the the department of space), is drawing up a road

map for a new project. It expects to rejuvenate SCL and put India on the 0.35-micron

map in the foreseeable future; (vii) The Indian Semiconductor Association has close to100 members (2007).

REFERENCES: -

Central Statistical Organisation (2007): National Accounts Statistics 2007, Ministry of

Statistics and Programme Implementation, New Delhi.

Chandrasekhar, C P (2006): 'India Is Online but Most Indians Are Not',

Macroscan, September 25, http://www.macroscan.com/cur/sepo6/cur

26o9o6India_Online.htm.

Department of Telecommunications (2006): Annual Report 2005-06, Government of

India, New Delhi. - (2007): Annual Report 2006-07, Government of India, New

Delhi.

Desai, Ashok (2006): India's Telecommunications Industry, History, Analysis, Diagnosis,

Sage Publications, New Delhi.

Indian Semiconductor Association (2006): Summary of the Frost and Sullivan Report

on Indian Semiconductor Industry and Its Eco System, Indian Semiconductor

Association, Bangalore.

Internet and Mobile Association of India (2006): Internet in India 2006, Mapping

the Indian Internet Space, IMRB International and IAMAI, New Delhi.

International Telecommunications Union (2006): World Telecom Indicators 2006 on


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CD-ROM, International Telecommunications Union, Geneva. Mani, Sunil (2002):

'Private Financing Initiatives in India's Telecom Sector' in Sanford V Berg, M G

Pollitt and Masatsugu Tsuji (eds), Private Initiatives in Infrastructure, Edward Elgar,

Cheltenham, UK, Northampton, US, pp 118-39.

- (2005): Innovation Capability in India's Telecommunications Equipment Industry'

in A Saith and M Vijayabaskar (eds), ICT's and Indian Economic Development,

Sage Publications, New Delhi, pp 265-322.

- (2007): 'Revolution in India's Telecommunications Industry, Economic &

Political Weekly, VolXLII, No 7, pp 578-80. Reserve Bank of India (2006):

'Invisibles in India's Balance of Payments, Reserve Bank of India Bulletin,

November, pp 1339-74.

- (2007): Annual Report 2006-07, Reserve Bank of India, Mumbai. Technology

Information and Forecasting Assessment Council (TIFAC 2007): FDI in the R&D

Sector, Study of Its Pattern 1998-2003, TIFAC, New Delhi. Telecom Regulatory

Authority of India (TRAI) (2005): 'Study Paper on Indicators for Telecom Growth',

Study Paper No 2/2005, Telecom Regulatory Authority of India, New Delhi.

- (2006): 'Consultation Paper on the Review of Internet Services',

Consultation Paper No: 19/2006', Telecom Regulatory Authority of India,

New Delhi.

- (2007a): Annual Report 2005-06, Telecom Regulatory Authority of India, New

Delhi.- (2007b): 'Draft Recommendations on Growth of Broadband', Telecom

Regulatory Authority of India, New Delhi.

- (2007c): A Journey towards Excellence in Telecommunications', Telecom

Regulatory Authority of India, New Delhi.

- (Various issues): Press releases dealing with monthly additions to subscriber

base, Telecom Regulatory Authority of India, New Delhi. World Information

Technology and Services Alliance (2006): Digital Planet 2006, The Global Informa-

tion Economy, Arlington, VA. World Markets Research Centre (2006): WMC CountryReports: India (Telecoms).

1.5 SERVICES MARKETING - AN OVER VIEW:

Services dominate the development of any economy. The history of developed

economies show that services played major role in their economic development.

Approximately 70% of the GNP is from the services. Services act as catalyst in the

generation of income and employment, thus in then leads to expansion of market for

special products & services. Services are no longer an industrial by product. But has

become a powerful economic engine where the jobs are created and the energy for

gaining acceleration for economic growth is provided. Marketing orientation for services


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is a need of present day business, service marketing plays a critical role in the

creation and delivery of customer focused services. Organizations which are engaged

in any line of business including specialized services have to lay major emphasizes on

services marketing. In the present day context no organization can think of surviving

without emphasizes on services.

A major shift from product orientation to customer orientation compiled

organization to set into customer relationship management (CRM), supply chain

management (SCM), pre-sales services, post sales services and a set of interactive

customer care services. Also a major shift in the life styles necessitated the business to

offer specialized services. Such as financial services, money management services,

Insurance product services, personal care services and a whole gamout of services

which are not linked to the product but to the customer needs. As such marketing of

services, play a strategic role in the survival and success of business entities.

Concepts of Services: The American Marketing Association defines services as

"activities, benefits or satisfaction which are offered for sale or provided in connection

with the sales of goods. In 1963 proposed by Regan suggested that services

represent either intangibles yielding satisfactions directly or intangibles yielding

satisfactions jointly when purchased either with commodities or other services.

Lehtinen in 1983 defined services as "an activity or a service of activities which

takes place in interaction with a contact person or a physical machine and which

provides consumer satisfaction".Kotler and bloom in 1984 defined services as "Any activity or benefit that one

party can offer to another that is essentially intangible and does not result in the

ownership of anything. Its production may or may not be tied to a physical product".

Gummension defined "services as something which can be bought and sold

which you can't drop on your foot".

In 1990 Gronross proposed working definitions: According to him " A service is an

activity or services of activities of more or less intangible that normally, not necessarily,

take place in the interactions between the customer and service employees and / orphysical resources or goods and / or system of the service provider, which are provided

as solution to customer problems".

Customer Services: The modern marketing concept mainly emphasizes on

customer services. According to this concept, all business decision in organizations are

to be based on consumer orientation. It is only by satisfying the customer needs that an

organization can survive and prosper in this competitive world, much more so, in the

growing dominance of consumer movement. Customer services assume vital important

in the marketing programs of all modern organization including service organizations.

Service marketing requires that service organizations should devote much of their


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attention on offering efficient services to the customer. As the services are hidden and

invisible, they can gain confidence and good will through economic, efficient and

prompt customer services only. Customer is the most important person under modern

marketing. He is the central figure and axis around which all business activities revolve.

The main philosophy of any business organization is the treatment to be given to

customer is rightly described by Mahatma Gandhi as " A customer is the most important

visitor on our premises. He is not dependent on us, we are not doing him a favour by

serving him. He is doing us a favour by giving us an opportunity to do so".

Customer services means, satisfying the needs of a customer at the right time

and in the right manner. The customer service broadly includes giving expeditions

assistance, explaining various policies and systems answering each and every query

with balancing judgments and opinions giving due importance and respect to him. The

very objective of the service marketing requires that the service organization should

devote more attention offering efficient service to the customer. As services are

invisible they can gain confidence and goodwill through efficient and prompt customer

service only. Among the services organizations, telecommunications services are

largest with the widest network. Telecommunication services are more a public and

private utility service and a commercial organization. Therefore service orientation is an

imperative of its policies and operations.

The general trends in business organization in India consider customer relation

as an additional attempt to keep customer in good humour. And possibly this thinkingcomes in the way of development of true and professional relationship with customers.

Customer relationship is necessity, not a luxury for business success. The Indian

Telecommunication is under going significant transformation with regard to its network

and technological up gradation. With the introduction of improved technologies

and high degree of competitiveness, it has become more important for any

organization to take competitive advantage by providing better services to customers.

With proliferation of organization involved in the same line of business, more and more

customers are becoming alert about the competitive quality of the product and services

marketed by organizations. In the west, particularly in United States of America, the

management expects are constantly engaged in finding ways and means for maximizing

customer satisfaction. Seminars research has been initiated to find how an organization

can render. Telecom services taken an edge over its competitive organizations in

achieving higher growth rates.

Service Marketing: In modern times service marketing is gaining vital importance

particularly in view of the role of tertiary sector in economic development of a

country. Though same marketing principles and concepts are to be followed for

marketing of tangible goods and services, the practices and strategies vary to a


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significant extent. This is mainly due to the unique nature and characteristics of

services as compared to the products which are tangible and verifiable.

1.6 NATURE AND CHARACTERISTICS OF SERVICES:

A service is any act or performance that one party can offer to another that

is essentially intangible and does not result in the ownership of any thing. Its

production may or may not be tied to a physical product1. Attending a play, calling the

police for assistance, traveling on public transportation, seeing a mental health

counselor and attending any place for recreation - all of them involve receiving a

service. Services have a number of unique characteristics that make them so different

from products some of the most commonly accepted characteristics are2

(i) In tangibility: Services are intangible, unlike physical products they cannot be

seen, tasted, felt, heard of smelled before they are brought. Thus, a patient getting

plastic surgery cannot seen the result before the purchase and prosper cannot

experience the service before he bought the life insurance under these

circumstances, purchase requires having a confidence in the service provider.

(ii) Inseparability: A service is inseparable from the source that provides it. Its

very act of being created requires the source, whether a person or machine, to be

present. In other words, production and consumption occur simultaneously with

services. This is in contrast to a product which exists whether or not its source is

present.

(iii) Variability: A service can be highly variable, depending on who is providing it,and even when it is being provided. Purchasers of services are aware of their high

variability and engage in normal risk reducing behaviour by talking to others and

trying to learn who the best provider is. Service firms should make an effort to deliver

high and consistent quality in their service offers. The major step is to develop a good

personal selection and training program. Another step for the service providers is to

develop adequate customer satisfaction monitoring system. The main tools for this are

suggestion and complaint systems, customer surveys and comparison shopping.

(iv) Perish ability: Services cannot be stored. While a car can be kept in inventory

until it is sold the revenue on an un occupied theater seat is lost for ever. The perish-

ability of services is not a problem when demand is steady, because it is easy to staff

the services in advance. When demand fluctuates heavily, service firms have difficult

problems. (v) Ownership: When one buy a product one becomes the owner be it a

pencil, book, shirt, refrigerator or car. In case of service, one may pay for its use but

one never own it. By buying a ticket, a customer can see the evening film show in the

local cinema theatre; but paying wages one can hire the services of a chauffeur who will

drive his car. In the care of a service, the payment is not for purchase, but only for the

use or access to or for hire of items or facilities.


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Offer of Services: The service component can be minor or a major part of the total

offer. In fact, the offer can range from a pure "good" on the one hand to a pure

service on the other hand. Four categories of offer can be distinguished.

i) A Pure tangible good: Here the offer consists primarily of a tangible good such as

Soap, tooth paste or salt. No services accompany the product.

ii) A tangible good with accompanying services:

Here the offer consists of a tangible good accompanied by one or more services

to enhance its consumer appeal. For example an automobile manufacturer sells an

automobile with a warrant, services and maintenance instructions, and so on. Levitt

observes that "the more technically sophisticated the generic product (Ex: Cars and

computers), the more dependent are its sales on the quality and availability of its

accompanying customer services (Ex. Display rooms, delivery, repairs and maintenance,

application aids, operator training, installation advice, warrants fulfillment)4

iii) A major service with accompanying minor goods and services: Here the

offer consists or a major service along with some additional services and / or

supporting goods. For example, air line passengers are buying transportation services.

They arrive at their destinations with out anything tangible to show for their

expenditure, however the trip includes some tangibles such as food and drinks, a ticket

stub, and an air line magazine. The service requires a capital intensive goods called an

aero plane for its realization. But the primary item is a service.

iv) A pure service: Here the offer consists primarily of a service examples includepsychotherapy and messages. The psychoanalyst gives a pure service, with any

tangible elements consisting of an office and couch. As a consequence of this

varying goods to service mix, it is difficult, to generalize about services unless some

further destinations are made. First, services vary as to whether they are people -

based or equipment - based. Equipment - based services vary in turn depending on

whether they are automated or monitored by unskilled or skilled operators. People

based services also vary by whether they are provided by unskilled, skilled or

professional workers. Some of the services required the client's presence. Thus brainsurgery involves the client's presence, but a car repair does not. If the client must be

present, the service provider has to consider his or her needs. Thus beauty shop

operators will invest in their shop's decor, play background

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