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India is a big telecom success story

Published by The Straits Times, Singapore on 2004-06-22

FARIDABAD (India) - They are everywhere, these mobile phones, and everyone in this aging industrial community - as elsewhere in India - seems to have one. Everywhere, too, there are billboards advertising cheap mobile deals. A walk along the streets here elicits an almost comical impression of a choreographed dance number - perhaps out of India's popular Hindi films - where each member of local families out on a Sunday stroll or shopping spree is gaily talking into a handset.

But there's nothing comical about the growth in mobile telephony and telecommunications in this land of 1.1 billion people. It's a $14 billion market this year; it's growing by nearly 30 percent annually. "Nowhere is the market growing this rapidly," Mr Ramesh Venkataraman, a partner in the Mumbai office of McKinsey & Company, the leading global business consultancy, told The Straits Times. "India is one of the last grand stories in the telecommunications business. We are bullish on India."

That's because, surprisingly, India is one of the most deregulated telecom markets in the world. In a country that was long burdened with bureaucratic restrictions in the name of socialism - where licenses were required for everything from the manufacturing of pencils to pantaloons - the very word "deregulation" sounds discordant. But entry into any sector of telecommunications such as long-distance service, broadband, and mobile telephony now requires only a modest fee. There's a minimum of governmental oversight. No wonder the sector has become one of the most competitive in a country that has embraced free-market capitalism with a vengeance.

According to industry estimates, there are some 40 million mobile subscribers in India today, making it the world's 10th largest market. In just about four years, there will be more than 200 million subscribers. The demand for mobile phones in India will overtake China's in five years. That's when India is expected to become the world's biggest market in telephony.

What's happening in the telecom business here offers a simple lesson to other countries, especially in the Third World. This lesson is best summed up in the words of the late Dr Ludwig Ehrhard, one of post-war Germany's earliest chancellors, who abolished price controls, ended rationing, and reduced onerous regulations. "Let the men and the money loose, and prosperity will follow," Dr Ehrhard wrote in his acclaimed book, "Prosperity Through Competition."

Those who initiated economic liberalisation in India in 1991 may not necessarily have been Chancellor Ehrhard's disciples, but they clearly put in a lot of long-term thought into telephony. The policy-makers, who included then Finance Minister - and now Prime Minister - Manmohan Singh recognized that India had barely 1.2 telephones for every 100 of its people. This was well below international standards.

Indian officials reckoned that some 25 million direct exchange lines would be required by the year 2001, requiring an investment of US$22 billion. In addition, US$8 billion would be needed to meet the demand for cellular mobile phones, and US$1 billion for radio paging services. The government, traditional the major investor in big-ticket industries, simply did not have such money available. So it threw open the industry to the private sector, and also invited foreign companies to compete with domestic ones here.

As a result, scores of foreign companies rushed in, including AT&T, Motorola, Nynex, US West, Hughes, Harris, Qualcomm, Sprint, Telstra, NTT, Singapore Telecom, Philippine Telecom, Bezeq, Siemens, Ericsson, Nokia, Fujitsu, Alcatel, and Bell Canada.

They and indigenous companies such as Hutch, Air Tel, Reliance and Tata, were prepared not only to compete fiercely with another but also to accept that the kind of oligopoly profits obtainable in some Third World countries would be impossible in India. In the Philippines, for instance, telecom companies' annual profit margins are typically 50 percent. Even European companies show profit margins of around 40 percent. The figure in India is 30 percent.

But the phone providers are prepared to live with this not-unreasonable figure because of the growing demand for telephony. The competition also makes mobile phones more accessible for the masses; call rates in India are the cheapest in the world, averaging less than US1 cent a minute.

Here in Faridabad, for example, a young woman named Mrs Jyoti Bhagwandas, a mother of four, said her service cost her the equivalent of US$35 to set up, including the price of a tri-band hand phone. She pays around US$4 each month for her calls. Even in a country with a purchasing-power parity per capita income of just US$2,700, mobile phones are affordable indeed.

In India, however, business successes cannot be celebrated without caution. Politicians and bureaucrats of Leftist leanings are known to be displeased that the virtually open telecom industry offers few opportunities for graft and extortion, long the source of surreptitious income for officials.

Since the Congress-led 13-party coalition of the United Progressive Alliance is dependent on the support of the Left, the government of Prime Minister Singh needs to accommodate socialist views, however discredited. China may no longer hold Chairman Mao Xedong's beliefs sacrosanct, but India's Communists remain loyal to his spirit.

"One is always concerned about the macro-political climate," said Mr Venkataraman of McKinsey. "We just pray that regulators in India remain forward-looking."

India's politicians should keep in mind the old American saying, "If it ain't broke, don't fix it." How they deal with the telecom industry - whether new regulations are introduced or the business is allowed to flourish within the framework of minimal governmental intrusion - will also shape the general economic well-being of India. Had he come to Faridabad on this hot and humid Sunday, Ludwig Ehrhard would have been proud of India, and most certainly surprised.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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