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Enabling the next wave of telecom growth in India
Industry inputs for National Telecom Policy 2011

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Enabling the next wave of telecom growth in India

Foreword
The Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young have collaborated on this deep review of the telecoms sector in India. The National Telecom Policy 1999 (NTP 1999) has served the sector in India for well over a decade, in which time we have witnessed significant changes in the socioeconomic environment, technological advancements and business dynamics. The telecom industry in India is ready to take the next leap forward with new developments such as launch of third generation (3G) services by private operators, 3G and broadband wireless access (BWA) auctions, launch of mobile number portability (MNP), and the emergence of mobile commerce (m-commerce). In the future, rural and semi-rural markets are expected to drive growth, especially in the wireless segment. The Ministry of Communications & Information Technology has released the 100-day agenda for the Indian telecom sector, and announced formulation of a new and comprehensive National Telecom Policy 2011 (NTP’11). Therefore, the time is ripe for a comprehensive review to build a forward looking and transparent policy that will be the backbone to achieve the ”India telecom vision 2020.” This report focuses on specific areas where the Government of India (GoI) needs to intervene and move the policy to the next generation of reforms. It aims to capture developments witnessed in the telecom sector in the last decade and analyze historical performance to estimate growth over the next ten years. It includes inputs from stakeholders in the telecom industry, encompassing operators, telecom equipment manufacturers, infrastructure providers, industry associations and industry practitioners. We would like to extend our gratitude to the industry leaders who participated in the report and helped us to present the industry’s perspective.

Amit Mitra Secretary General FICCI, India

Virat Bhatia Chairman FICCI Committee on Communications and Digital Economy

Prashant Singhal Telecom Industry Leader Ernst & Young, India

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Executive summary
The liberalization of the domestic economy and increasing integration with the global economy has positioned India as the second fastest expanding economy of the world. After embracing a closed, centralized economic model for four decades, India shifted to a market-oriented model. Liberalization initiatives, especially in the 1990s, resulted in an improved business climate and in an increase in investment across the country, boosting the industrial growth over the past decade. Indian telecom is an economic miracle in the making. Connecting such a vibrant economy of more than a billion people together and with the rest of the globe is an extraordinary achievement in terms of a nation’s socioeconomic development. India has faced challenges in liberalizing its telecom industry from a monopoly to a decentralized competitive model. The announcement of the National Telecom Policy (NTP) in 1994 marked the first steps toward the new model. It aimed at making available “telephone on demand,” the provision of leading class services at reasonable prices, promoting India’s emergence as a major manufacturing and export base of telecom equipment and universal availability of basic telecom services to all villages. In 1999, Government, recognizing the need to overhaul its policy framework, issued the NTP 1999, which had played a key role in shaping the sector. India has reached the goals set in NTP 1999 far ahead of time, with the market evolving into the world’s second largest in terms of subscribers. Presently, there are more than 700 million subscribers in India, and the overall teledensity has reached more than 60%. With plenty of strong potential value remaining, the sector requires much attention and a robust policy framework to address the challenges that exist in the present scenario as well as help to capture the opportunities that the sector holds for the country.

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Enabling the next wave of telecom growth in India

The present challenges include the spectrum and licensing framework, Universal Service Obligation Fund (USOF) structure, broadband, equipment manufacturing, infrastructure segment, mergers and acquisitions scenario, taxation and aspects of foreign direct investment (FDI). The opportunities around which the policy initiatives need to be designed include financial inclusion, m-commerce and convergence. The major recommendations for the policy framework for the Indian telecom industry are as follows:

Focus areas
Licensing

Recommendations
Need to have a single universal license for all telecom services There should be a uniform fee structure across all telecom circles Pure internet service providers should continue to be allowed without payment of any license fees Provide a clear license renewal regime that includes legislation, renewal procedures, reasons for refusal to renew and appeals to regulatory decisions

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Focus areas
Spectrum

Recommendations
Need to re-farm available spectrum Spectrum up to contracted limit should be ensured as initial spectrum to the existing players Spectrum usage charge should be identified upfront at the time of spectrum allocation

USOF

The USOF should be utilized for the following in rural and remote areas: • Provision of public telecom and information services  • Provision of household telephones • Creation of infrastructure for provision of mobile services • Provision of broadband connectivity to villages in a phased manner • Creation of general infrastructure for development of telecommunication facilities • Induction of new technological developments in the telecom sector Subsidies should be distributed through transparent marketoriented allocation strategy

Broadband

Backhaul connectivity and optic fiber communication (OFC) should be provided to all telecom towers, base station controllers (BSCs) and base transceiver stations (BTS) from nearest block headquarters Make available more spectrum for wireless broadband Make broadband connectivity mandatory for all buildings to get completion certificate on the lines of water and power connectivity Create content and applications in regional languages to promote rural broadband

Mergers and acquisition

Merger should not result in less than six operators in a circle  The share of a merged entity should not be greater than 30% in terms of sub-base or adjusted gross revenue (AGR)

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Enabling the next wave of telecom growth in India

Focus areas
Taxation

Recommendations
The upcoming goods and service tax (GST) regime should aim to simplify the tax structure for the industry, with all services and goods being taxed at a standard rate Special consideration needs to be given on certain areas in the backdrop of the peculiarities of the telecom sector such as “place of supply rules” i.e., the state where GST will be paid for different kind of telecom services; ease in state-wise compliances

Equipment manufacturing

There is a need to set up hardware manufacturing cluster parks (HMCP) across the country and upgrade localized infrastructure to support large volume contract manufacturing R&D should be the key focus Need to lay down a National Telecom Critical Infrastructure Policy on the lines of NTP 1999 elaborating uniform procedures for land acquisition, a uniform system of taxation and subsidies and other incentives designed to create an environment that encourages the build-out of the national telecom infrastructure and the increased participation of all stakeholders There is a need for a national right of way (ROW) policy for the rollout of backhaul network

Telecom infrastructure

Enterprise data

Upgrading encryption levels in international long distance (ILD) and national long distance (NLD) licenses to allow strong encryption of up to 256 bits to protect confidential information in accordance with international best practices Telecom Regulatory Authority of India (TRAI) and Department of Telecommunications (DOT) should eliminate the cumulative assessment of licensing fees on the purchase of inputs, which imposes double taxation on ILD and NLD license holders

FDI

Given the importance of foreign investment, the policy should consider raising the upper limit on foreign investment to encourage more foreign players to invest in the capex-intensive telecom sector

Policies should also cover areas like financial inclusion, m-commerce, convergence, security concerns and consumer affordability. However, there is no unique, perfect model accepted globally which can be implemented in India and leading practices across the globe should be adopted for transforming the Indian telecom sector into the greatest possible success story.

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Methodology
In 2010, Ernst & Young conducted a research study on the Indian telecom sector in collaboration with one of the leading business organizations in India — FICCI. The study gives a detailed perspective on the telecom sector in India, outlining the phenomenal growth witnessed by the sector and recommendations for the existing policy framework that will enable the next level of growth. It examines the NTP 1999, which is used by the Government of India (GoI) as a decisionmaking guide for the Indian telecom sector. This report reflects the key conclusions of that wider study. The research program studies in detail all the key segments of the telecom landscape — wireless, wireline, broadband, infrastructure, NLD, ILD, value-added services (VAS), equipment manufacturing, infrastructure and convergence. It identifies and evaluates the critical success factors that are applicable across all telecom segments such as spectrum, USOF, licensing framework, FDI, security, consumer affordability and the role of the regulator. As a part of the research program, Ernst & Young conducted comprehensive interviews with senior executives in the Indian telecom sector. These interviews provided a firsthand perspective on the opportunities and challenges faced by various stakeholders in the sector. These findings have been combined with secondary research, analysis and insights provided by Ernst & Young.

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Syed Safawi President Reliance Communications Ltd.

List of participants
Virat Bhatia President, External Affairs, South Asia AT&T Communication Services India Pvt. Ltd.

P Balaji Head of Communications, Corporate Affairs & Business Development, India Ericsson India

Vsevolod Rozanov President and Chief Executive Officer Sistema Shyam TeleServices Ltd.

Mahendra Nahata Managing Director Himachal Futuristic Communication

Shamik Das Chief Executive Officer S Tel Pvt. Ltd.

TV Ramachandran Resident Director Vodafone Essar

Rajan S. Mathews Director General Cellular Operators Association of India

Rajat Mukarji Chief Corporate Affairs Officer Idea Cellular Ltd.

Anil Sardana Managing Director Tata Teleservices Ltd.

Sanjay Kapoor Chief Executive Officer Bharti Airtel (India & South Asia)

Mahesh Uppal Director Com First (India) Pvt. Ltd.

B S Shantharaju Chief Executive Officer Indus Towers Ltd.

Lt. Col. HS Bedi, VSM Chairman and Managing Director Tulip Telecom Ltd.

Ashok Sharma National Head — Regulatory Aircel Ltd.

Brijendra K Syngal Senior Principal Dua Consulting Pvt. Ltd.

Parag Kar Senior Director — Government Affairs Qualcomm India Pvt. Ltd.

Rajiv Mehrotra Chief Executive Officer Vihaan Networks Ltd.

SC Khanna Secretary General Association of Unified Telecom Service Providers of India

Himanshu Kapania Deputy Managing Director Idea Cellular

CS Rao Head of Corporate Affairs and Regulatory Division Reliance Communications

Naresh Ajwani Chief Regulatory & Corporate Affairs Viom Networks Ltd. ix

Industry associations
Federation of Indian Chambers of Commerce and Industry (FICCI): established in 1927, FICCI is one of the largest and oldest apex business organizations in India. It plays a leading role in policy debates that are at the forefront of Indian social, economic and political change. FICCI is active in 39 sectors of the economy, and its stand on policy issues is sought after by think tanks, governments and academia. The organizations’ publications are widely read for their in-depth research and policy prescriptions. Home to 400 professionals, it has joint business councils with 79 countries across the world. Cellular Operators Association of India (COAI): established in 1995, COAI is a registered, nonprofit, non-governmental society dedicated to the advancement of modern communication through the establishment of a world-class cellular infrastructure. Over the years, COAI has emerged as the official voice for the Indian GSM industry and interacts directly with ministries, policy-makers, regulators, financial institutions and technical bodies. It provides a forum for discussion and exchange of the ideas between these bodies and service providers, who share a common interest in the development of cellular mobile telephony. Association of Unified Telecom Service Providers of India (AUSPI): constituted in 1997, AUSPI is a registered society that works as a non-profit organization with the aim of delivering improved access, coverage and teledensity in India. AUSPI is the representative industry body of unified access service licensees providing CDMA and GSM mobile services, fixed–line services and VAS across the country.

Association of Competitive Telecom Operators (ACTO): established in 2008, ACTO is an industry body that focuses on policies that enhance enterprise telecommunications in India. The association was formed by several leading non-integrated long-distance carriers that provide service to the enterprise market segment, which includes IT-enabled services, business process outsourcing and multinational company segments. Internet & Mobile Association of India (IAMAI): founded in January 2004, IAMAI is an industry body representing the interests of online and mobile VAS industry. The association’s activities include promoting the digital economy, evaluating and recommending industry standards and practices, conducting research, creating platforms for its members, communicating on behalf of the industry and helping to create a favorable business environment for the industry.

Telecom Equipment Manufacturers Association (TEMA): established in 1990, TEMA is an industry association for telecom equipment manufacturers as well as component and cable manufacturers. It plays an active role in the dissemination and exchange of information among the GoI, foreign agencies, embassies, trade missions, Indian missions abroad and leading national and international trade associations. Internet Service Providers Association of India (ISPAI): founded in 1998, ISPAI acts as a collective voice of the ISP community, with the mission of promoting internet for the benefit of all. It has helped in shaping telecom policies for ISPs and internet entrepreneurs to grow their services in a supportive and enabling environment. Other Service Providers Association of India (OSPAI): established in 2008, OSPAI is the representative industry body, functioning as an association of companies operating in areas such as domestic and international call centers, business process outsourcing, knowledge process outsourcing, information technology (IT), medical transcription, financial services, tele-medicine, tele-education, tele-trading, billing services and network operating centers. It acts as an interface with government bodies for the growth of all services covered under the registration of other service providers.

Contents
1. Indian telecom sector
1.1. Overview 1.2. Importance of telecom

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2. Evolution of the telecom sector in India
2.1. History of the Indian telecom industry 2.2. Regulatory framework 2.3. Overview of the Indian telecom industry 2.4. Wireless 2.5. Wireline 2.6. Internet and broadband subscribers 2.7. National long distance and international long distance 2.8. Telecom equipment manufacturing in India 2.9. Infrastructure 2.10. Value-added services 2.11. Outlook

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10 12 14 15 16 17 19 21 22 27 28

3. Achievements and setbacks of NTP 1999
3.1. Key achievements of NTP 1999 3.2. Key challenges of NTP 1999

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4 Key enablers
4.1. Connected India: telecom vision 2020 4.2. Connected Indian: telecom mission 2020 4.3. Key enablers under existing scenario 4.3.1 4.3.2 Licensing Spectrum

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Enabling the next wave of telecom growth in India

4.3.3 4.3.4 4.3.5 4.3.6 4.3.7 4.3.8 4.3.9

Universal Service Obligation Fund (USOF) Broadband Mergers and acquisition Taxation Foreign direct investment (FDI) Consumer affordability and rural penetration Human resource

53 55 57 58 60 61 63 64 66 69 70 71 72 72 73 73 73 74 74 74

4.3.10 Equipment manufacturing 4.3.11 Telecom infrastructure 4.3.12 Enterprise data 4.3.13 Convergence 4.3.14 Security 4.4. Key enablers for potential opportunities 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 4.4.6 4.4.7 m-commerce M2M communication Mobile money M-health M-education Financial inclusion MNREGA and UID

5. Global practices Conclusion Glossary

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Indian telecom sector
1.1. Overview
Over the past two decades, India has grown rapidly from a “command and control” economy to a market-based economy. India is now closely integrated with the global economy and is considered one of the pillars of global economic growth. The process of liberalization started in the mid-1980s and gathered momentum in the 1990s, with the further opening of the economy and the creation of regulatory institutions to march toward fully competitive markets. As a result of liberalization, India’s GDP has been rising by more than 7%1 annually in the past decade, compared with 3.5%2 annually from 1950 to 1980. The Indian economy maintained a growth rate of more than 5% even during the global recession. In FY10 (financial year ended 31 March 2010), India’s service sector was estimated to account for 56.9%3 of GDP, while the industrial sector and agriculture sector contributed 28.5% and 14.6%, respectively, to GDP. Within the services sector, the telecom sector has been the major contributor to India’s growth, accounting for nearly 3.6%4 of total GDP in FY10. In less than a decade, the mobile phone has been transformed from being a luxury that few could own into one of the essentials of an average Indian’s existence. The easy access to mobile services is the outcome of positive regulatory changes, intense competition among multiple operators, low-priced handsets, low tariffs and significant investments in telecom infrastructure and networks.

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India: Rising growth potential, DBS Group Research, 13 October 2010. “Redefining The Hindu Rate Of Growth,” The Financial Express,12 April 2004, http://www.financialexpress.com/news/redefining-the-hindu-rate-ofgrowth/104268/0, accessed 19 October 2010. “India’s Macroeconomic Indicators,” Export-Import Bank of India website, 26 August 2010, http://www.eximbankindia.com/ind-eco.pdf, accessed 10 October 2010. India 2012: telecom growth continues, Ernst & Young report, November 2008, page 8.

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Enabling the next wave of telecom growth in India

Indian telecom model

Outsourcing non-core activities like IT, network

Infrastructure sharing

Paradigm shift from average revenue per user (ARPU) to revenue per min

Focus on prepaid

Low cost distribution, e-Charge

Economies of scale

Low acquisition cost (no handset subsidy)

Source: “How can carriers make 40% EBIDTA margin at 2 cents/min tariff?,” http://www.telecomcircle.com/2009/02/carriers-ebidta/, accessed 25 October 2010.

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1.2. Importance of telecom
Telecommunication is pivotal to a country’s socioeconomic growth. It is one of the main architects of the accelerated growth and progress of different segments of the economy. Narrowing access gaps and removing barriers to information dissemination are prerequisites for promoting equitable and sustainable development as well as political and social cohesion. Increasing connectivity is highly instrumental in improving governance, business communication, security, response to emergencies and in the overall strengthening of the sociocultural ethos of the country. The advantages of the advent of telecommunications are manifold and explicitly verifiable from the phenomenal success of the sector.

1.2.1 Economic growth
Indian telecom has emerged as one of the greatest economic success stories, registering a consistent overall growth rate of more than 35% over the past decade in terms of subscribers. According to a World Bank study, a 10%5 increase in teledensity is known to boost GDP growth by 0.6% points. In other words, a 1% increase in mobile subscribers is estimated to increase per capita GDP by about US$200. According to a study by the Indian Council for Research on International Economic Relations (ICRIER), states with a higher teledensity have grown faster than those with lower teledensity. States with 10%6 higher teledensity have grown 1.2% faster; for instance, Bihar could have witnessed 4% faster growth if it had enjoyed the same teledensity as Punjab. The well-distributed network of telecommunication services results in widening markets, creates efficient information flows, lowers transaction costs and is an effective substitute for infeasible physical transport.

There is a substantial relationship between increase in teledensity and the economic development of a region. Mobile telephony had a profound impact on the fishing community in the southern state of Kerala. By virtue of being a carrier and disseminator of information, mobile telephony has made the rural and underdeveloped markets much more efficient. The MS Swaminathan Research Foundation (MSSRF), a government organization, has partnered with a leading telecom equipment and service provider to provide “Fisher friend,” through which fishermen are provided free mobile handsets, shared on a rotating basis, along with free access to information service. The usage of mobile phones has enabled fishermen to respond quickly to market demand and prevent wastage. Mobiles have helped to co–ordinate demand and supply, and have helped those who catch the fish communicate with merchants and transporters in an efficient and effective manner. It has helped to reduce the time spent by agents and owners waiting for boats, reduced business risk and made those involved with fishing feel much safer at sea.

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Unfinished Business: Mobilizing new efforts to achieve the 2015 millennium development goals, World Bank, September 2010, page 17. Samar Srivastava, “High-teledensity states grew faster, says study,” LiveMint, 19 January 2009,http://www.livemint.com/2009/01/19224316/ Highteledensity-states-grew-f.html, accessed 10 October 2010.

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Enabling the next wave of telecom growth in India

1.2.2 Job creation
Besides being one of the largest revenue generators, telecom is also a major creator of jobs. The telecom sector has led to the growth of a range of communication technology-enabled activities and services. Operations such as data entry, revenue accounting, processing of insurance claims, human resource services, call center operations, customer support centers, software development, systems engineering and systems design and integration are popular examples. Further, the spread of telecom and information services to rural areas is enabling the setup of rural business process outsourcing (BPO).

RuralShores: bringing jobs to rural India
Over the years, the lack of employment opportunities in rural India has forced people belonging to villages to move to the cities. However, RuralShores is an initiative that aims to reverse the trend. It aims to introduce rural youth to BPO and to provide employment in their village. In return, corporations benefit through cost-effectiveness due to the lower costs associated with a rural ecosystem, low employee attrition and the potential for scalability. Participation in the initiative is an act of corporate social responsibility. Moreover, it ensures complete information protection, guaranteed service levels, a committed workforce and business continuity.

1.2.3 Social development
Connectivity fosters social development, including improved education, health and increased citizen participation in civil society. Telecommunication helps provide access to health care and allied services. It helps combat epidemics such as HIV/AIDS and malaria by supplying information on treatment and control, generating awareness, improving access to and connectivity with health centers, and establishing the mobile testing of diseases. The current synergy between health reform initiatives and advantages in technologies has resulted in the proliferation of e-medicine projects. This represents an innovative approach in providing quality health care whenever and wherever needed.

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Helping to stem urban migration by generating greater income and employment potential in rural areas Facilitating emergency response and access to health care and allied services Facilitating m–commerce and e-commerce through trade along the agriculture supply chain, resulting in the organized aggregation of supply and demand Providing enhancement of microfinancing, technology transfer and entrepreneurship Facilitating national and regional integration, creating an atmosphere of economic diversification, employment and a strong socio-cultural ethos Open rural areas to foreign investment, leading to the inclusion of rural India in the global economic milieu and reducing the rural-urban divide. As a result, the quality of life in rural area improves, thus reducing the pressure of urban migration

1.2.4 Rural development
According to FICCI and Nielsen study, Indian villages account for 70%7 of the country’s total population, 56% of the country’s income, 64% of consumption expenditure and 33% of national savings. The provision of telecom services in rural areas and the obscure hinterland has made previously abandoned areas highly accessible. With more untapped territories being connected through telecom, the hitherto dormant economic potential is being increasingly tapped. Communication facilities in rural areas are critical for the development of rural India, providing the following advantages:

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Challenges Before An Integrated India: Bridging The Urban - Rural Divide, Nielsen, August 2010, page 13.

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1.2.5 E-governance
E-governance that helps exploit the power of information and communication technology to transform accessibility, quality and the cost-effectiveness of public services has been made possible by the telecom revolution. Since the advent of IT and communication technology, Indian ministries and government departments are working to computerize their operations to make them simpler and increasingly accessible for Indian citizens. Most relevant information about these entities is now available on their websites, making it easily accessible and increasing transparency. Significant progress has been made in the computerization of railway bookings, allocation of the Permanent Account Number (PAN) to income tax payers, processing of passport application, conduct of public examination and customs clearance, among others. The four main types of e-governance services provided are as follows:



Government to government (G2G): these services take place at two levels — the local or domestic level and the international level. G2G services are transactions between the central/national and local governments, and between the departments and their agencies and bureaus. On a global footing, G2G services are transactions between governments, and can be used as an instrument of international relations and diplomacy.

1.2.6 Strengthening investments
Attractive trade and investment policies have transformed the Indian telecom sector into one of the most investorfriendly markets. Between FY00 and FY10, the inflow of FDI into India’s telecom sector was approximately INR407.1 billion (US$8.9 billion),8 accounting for more than 8% of approved FDI.



Government to citizen (G2C): this comprises information dissemination to the public, as well as basic citizen services such as license renewals, ordering of birth/death/marriage certificates and filing of income taxes, as well as citizen assistance for basic services such as education, health care, hospital information and libraries. Government to business (G2B): this entails services between government and the business community, including the dissemination of policies, memos, rules and regulations. Business services offered include obtaining current business information, downloading application forms, renewing licenses, registering businesses, obtaining permits and the payment of taxes. The services offered through G2B transactions also assist in business development, specifically the development of small and medium enterprises (SMEs). Simplifying the application and approval procedures process for SME requests would encourage business development. Government to employee (G2E): this includes G2C services as well as specialized services that cover only government employees, such as the provision of human resource training and development that could improve the day-to-day functions of the bureaucracy and dealings with citizens.

1.2.7 Gender equality
The advent of communications technology has helped overcome institutional and social barriers of mobility, high illiteracy and negative social norms. It is facilitating women’s participation in the political and economic processes of the country. Achieving gender equality and empowering women is crucial because of its cross-cutting influence. It is an irreplaceable component for achieving most developmental goals, including the “Millennium Development Goals.” Mobile telephones and the internet can advance gender equality by:





Empowering women and surmounting gender inequality: this is being achieved by promoting the awareness among women about their social and political status, and creating new economic opportunities for women through digital empowerment. Delivering literacy and education to women wherever they live or work: this opens up new avenues and allows for flexible learning times. One prime success story of communication technology promoting women’s education is India’s “Distance education for women’s development and empowerment” jointly run by the Department of Women and Child Development





8 “Fact Sheet on Foreign Direct Investment (FDI) from August 1991 to March 2010,” Department of Industrial Policy & Promotion, http://dipp.nic.in/, accessed 10 October 2010.

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Enabling the next wave of telecom growth in India

and the Indira Gandhi National Open University. This program provides a multimedia training package to make women’s self-help groups sustainable by developing their decision-making ability and resource management skills in 150 low-literacy districts. This is one of the most befitting instances of the telecom and internet revolution, taking relevant education that is well aligned to the needs of the communities to their doorstep, thus overcoming cultural and language barriers.



Helping lower child mortality and improve maternal health: this is done by providing information on nutrition, strengthening health networks, monitoring health trends and provisioning primary health care.

(R&D). In pursuance of the NTP 1999’s objective toward R&D, organizations such as Telecom Centers of Excellence (TCOE), the Center of Excellence in Wireless Technology (CEWIT) and the Broadband Wireless Consortium of India (BWCI) have been established. These organizations have helped to create synergy among academia, the telecom industry and the Government for the creation of new services and applications, the generation of intellectual property right (IPR), the development of manufacturing capability, focus on global telecom standardization activities and the promotion of entrepreneurship. For instance, the TCOEs have focused on the technological and management challenges that Indian operators face in reaching all sections of society while offering affordable solutions, leading class services and a global presence.

1.2.8 m–commerce
This is the next revolution that is expected to emerge through the use of mobile phones, as these become a tool for commerce. Mobile phones provide consumers an opportunity to transact anytime and anywhere. m-commerce finds its applications across various end markets such as banking and financial institutions, paying bills for utilities such as power and gas, booking tickets for transportation services such as trains and taxis and online shopping. Mobile banking enables customers of banks and other financial institutions to access their account information, transfer funds, trade stocks and purchase financial products such as insurance. According to Cybermedia India Online Limited, the value of mobile payment transactions in India is expected to reach approximately US$1.3 billion by 2013.9

1.2.10 Provide impetus to initiatives such as MNREGA and Aadhaar
The GoI has undertaken programs such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and AadhaaR — Unique Identification Authority of India (UIDAI), which aim to provide inclusive growth. The challenges surrounding these programs include job cards for those demanding work, the elimination of ghost workers, the introduction of electronic muster rolls, wage payments and the authorization of wages electronically. Furthermore, the introduction of GPS-enabled biometric systems at the grass-roots level continues to remain a challenge. The integration of such programs with mobile telephony is expected to benefit such programs of national importance. For instance, an integrated system for taking biometric attendance through handheld devices and transmitting it through mobile phones for authentication is expected to solve the challenge of attendance. Once a worker has logged in, this data could be transmitted to MNREGA, making sure the worker is paid for the day.

1.2.9 Facilitating research and development
The growth in high-speed communication and advances in internet technology are making India a major R&D hub. Efforts are constantly being made to devise more affordable technology for the masses. In India, there is a significant focus on technology with the potential to improve rural connectivity. NTP 1999, formulated by the GoI, places great emphasis on research and development

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“Nokia to rollout mobile banking in India,” CyberMedia India Online Ltd., 14 April 2010, http://www.ciol.com/News/News/News-Reports/Nokia-to-rollout-mobile-banking-in-India/134910/0/, accessed 12 October 2010.

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Evolution of the telecom sector in India
Enabling the next wave of telecom growth in India

2.1. History of the Indian telecom industry
The Indian telecom sector has evolved from the bygone days of “telephone on demand” to the advent of 3G telephony. Its history begins with the laying down of the first experimental electric telegraph line in Kolkata. In 1881, telephone services were introduced, with exchanges being opened in Kolkata, Mumbai, Chennai, Karachi and Ahmedabad. Following independence, all foreign telecommunication companies in India were nationalized to constitute the Posts, Telephone and Telegraph (PTT), and were under government control. In the early 1980s, the sector underwent its first wave of change. DoT was established in 1985 to provide domestic and long-distance services in India. Further, in 1986, two wholly government-owned companies — Videsh Sanchar Nigam Limited (VSNL), which is now known as Tata Communications, and Mahanagar Telephone Nigam Limited (MTNL) were formed. VSNL and MTNL aimed at providing services to international and metropolitan areas, respectively. The introduction of the New Industrial Policy 1991 initiated the liberalization process in India. Telecom equipment manufacturing was also de–licensed in 1991, and the NTP was announced in 1994. The formulation of NTP 1994 was followed by the launch of mobile telephony in India in 1995. However, growth in the initial years was very slow due to high mobile handset prices as well as the high tariff structure of service providers. The introduction of NTP 1999 heralded pro-consumer policies. NTP 1999 enabled the telecom sector to reach an average subscriber growth rate of more than 35%, primarily due to initiatives taken by the regulator and service providers. The liberalization of the sector resulted in the need for a regulator, and the TRAI was established in 1997. In January 2000, the Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) was established to take over the adjudicatory and disputes functions from TRAI.

Brief history of the Indian telecom sector
• 2006: DoT announces criteria for additional spectrum • 2007: Cap on number of players in a circle removed • 2008: New licenses granted by DoT • 2010: 3G and BWA spectrum auction • 2011: MNP launched Pan-India

• 1947: Nationalization of all foreign telecommunication companies to constitute the posts and telegraph • 1950: Telephone exchanges taken over from the princely states

• 1981: Contracts with a French company to merge with the state-owned ITI, to set up 5 million lines per year • 1985: Establishment of DoT • 1986: Establishment of VSNL and MTNL

• 1991: Telecom equipment manufacturing completely deregulated • 1992: VAS opened to private sector participation • 1994: NTP 1994 • 1997: Establishment of TRAI • 1999: NTP 1999 • 2000: Establishment of TDSAT

• 2003: Unified Access Service License (UASL); Interconnect Usage Charges (IUC); and calling party pays (CPP) • 2004: Broadband policy; universal licensing regime; and guidelines for intra-circle M&A

2005–11

2000–05 1990–2000

1980–90 1947–80

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In 2002, the Universal Service Support Policy came into effect, providing statutory status to the USOF in December 2003. The fund was introduced to provide access to telegraph services to people in rural and remote areas at affordable prices. In May 2003, the calling party pays (CPP) regime was introduced, through which all local incoming calls were made free. During the same year, the GoI introduced the Unified Access Service (UAS) licensing regime, which permitted an access service provider to offer both fixed and/or mobile services under the same license, using any technology. The GoI subsequently issued licenses in November 2003, January 2004, December 2006, March 2007 and January 2008. The GoI also introduced the Broadband Policy 2004, which recognized the ubiquitous potential of broadband services and their contribution toward the GDP growth and improved quality of life through e–governance, e–commerce, entertainment, education and medicine, among others. The Broadband Policy 2004 specified targets in terms of subscribers. In 2004, mobile services had outpaced fixed-line services with nearly 45 million mobile subscribers. Further, in February 2004, the DoT issued guidelines for the intra-circle merger of cellular mobile telephone service (CMTS)/UAS licenses. In November 2005, new UASL guidelines were issued. The licenses were to be issued on continuous basis without any restriction on the number of entrants in a circle and applications were to be processed within 30 days of submission. Allocation of spectrum and grant of wireless license was subject to availability and, in case UASL was not allocated spectrum due to non-availability, the licensee was required to endeavor to rollout services using wireline technology. FDI limit in the telecom sector was increased from 49% to 74%. In February 2008, the DoT approved

the sharing of infrastructure among mobile operators. Operators were allowed to share infrastructure in their tower installations. In March 2008, the TRAI abolished the access deficit charge (ADC), which covered the levy paid by mobile operators to the state–run operator, BSNL. ADC was the fee paid by private mobile operators to the state-owned BSNL, which mainly used the proceeds of ADC to develop rural telephony services. In July 2010, telecom towers were accorded “Infrastructure Status” by the Reserve Bank of India (RBI), as these constitute an essential and possibly the most expensive component in the entire telecom service delivery infrastructure. The GoI commenced the auction for 2x5MHz in the 2100MHz band for 3G services in April 2010, which witnessed fierce bidding for spectrum. The reserve price for 3G services was categorized on the basis of circles — INR3.2 billion for the more populated A and Metro circles; INR1.2 billion for the B circles; and INR300 million for the rural C circles. The auction aimed at allotting three to four 3G licenses for each of the 22 regional circles. The bidding process continued for 34 days, reaching the final stage in May 2010. The seven winners were required to pay INR509.7 billion to the GoI. Additionally, the amount payable by BSNL and MTNL for 3G services pushed the total auction revenue to INR677.2 billion (US$14.6 billion). Following the auction of 3G mobile services, the Government concluded the auction of BWA services across India. The GoI offered two 20MHz blocks in the 2.3GHz range in each of the country’s 22 circles. The bidding process continued for a period of 16 days, raising INR385.4 billion (US$8.2 billion) in auction revenues. Thus, the GoI raised in excess of INR1 trillion from the auction of 3G and BWA services.

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Enabling the next wave of telecom growth in India

2.2. Regulatory framework
A number of positive regulatory changes have driven growth in the sector. The key feature of India’s regulatory regime is transparency in industry information, an open approach and encouragement of consultation with stakeholders. The key stakeholders as a part of the regulatory environment in the telecom ecosystem include the Ministry of Communications & Information Technology (MICT), Department of Telecommunications (DoT), the Telecom Commission, the Telecom Regulatory Authority of India (TRAI) and the Telecom Dispute Settlement & Appellate Tribunal (TDSAT).

MICT

• • •

The MICT is part of the Indian Government. The key departments of the ministry include the Department of Telecommunications, the Department of Information Technology, and the Department of Posts The MICT formulates policies with respect to telecom, post, telegraph and other means of communication The laws governing the telecom sector include the Indian Telegraph Act, 1885; the Indian Wireless Telegraphy Act, 1933; and the Telecom Regulatory Authority of India Act, 1997

DoT



The DoT is a part of the MICT. Its key responsibilities include:

• • • •

Policy, licensing and coordination matters relating to telegraphs, telephones, wireless, data, facsimile and telematic services and other like forms of communications International cooperation Promotion of standardization and R&D Promotion of private investment

Telecom Commission

• • •

The Telecom Commission was set up in 1989 by the GoI to deal with various aspects of telecommunications The commission consist of four full-time members that are ex-officio Secretary to the GoI in the DoT, and four part-time members that are secretaries to the GoI of the concerned departments The Telecom Commission is responsible for policy formulation, licensing, wireless spectrum management, administrative monitoring of public sector undertakings (PSUs), R&D and standardization and validation of equipment, among other matters

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TRAI



TRAI was established as an independent statutory regulatory authority under the TRAI Act in 1997. The key powers and functions of the authority include:

• • • • • • • • • • • •

Recommending the need for a new service provider, and the terms and conditions of license to a service provider Ensuring technical compatibility and effective inter-connection between different service providers Regulating revenue-sharing arrangements among service providers Ensuring compliance with the terms and conditions of license Setting and enforcing the time frames for providing local and long-distance telecommunication circuits Recommending revocation of licenses for non-compliance of their terms and conditions Facilitating competition and promoting efficiency in the operation of telecommunication services Protecting the interests of the consumers Monitoring the quality of service and conducting periodical surveys Inspecting the equipment used in the network and recommending the type of equipment to be used by service providers Settling disputes between service providers Advising the central government in matters related to the development of telecommunication technology and the telecom industry

• Levying fees and other charges • Ensuring compliance with universal service obligations • Performing other functions, such as administrative and financial functions, that may be entrusted to TRAI by the central government, or as may be necessary to carry out the provisions of the TRAI act

TDSAT

• • •

In April 2000, the GoI established the Telecom Dispute Settlement & Appellate Tribunal (TDSAT), as an authority separate from the TRAI to handle disputes in the telecom sector The functions of TDSAT are to adjudicate any dispute between a licensor and licensee, between two or more service providers, and between a service provider and a group of consumers; and to hear and dispose of appeals against any decision or order of TRAI The appellate tribunal consists of a chairperson and two other members

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Enabling the next wave of telecom growth in India

2.3. Overview of the Indian telecom industry
India is the world’s second-largest telecom market. The total subscriber base (including wireline and wireless) reached 723.3 million10 in September 2010. The wireless segment has been registering monthly mobile additions of about 15 to 2011 million subscribers.

Subscriber base and teledensity (wireless and wireline)
800 Total subscribers (million) 700 600 500 400 300 200 100 0 2.9%
28.5 FY00

61.0% 52.7% 37.0% 26.2% 12.9% 140.3
FY06

70% 60%

723.3 621.3

40% 30% 20% 10%

18.2% 205.9
FY07

3.6% 36.3%
FY01

4.3% 45.0
FY02

5.1% 54.6
FY03

7.0% 76.5
FY04

9.0% 98.4
FY05

300.5

429.7

FY08

FY09

FY10 Sep-10

0%

Total subscribers
Source: TRAI

Teledensity

According to TRAI, the total subscriber base grew from FY00 through FY10 at a compound annual growth rate (CAGR) of 36.1% to reach 621.3 million subscribers. In the past decade, the total teledensity has risen above 50%, with the mobile segment leading this growth. Such phenomenal growth can be attributed primarily to the country’s large population, high economic growth, hypercompetition in the sector, affordable handsets, reduced tariffs, infrastructure sharing and the introduction of positive and enabling regulatory reforms. The telecom revolution in the country has impacted both the urban and rural population. However, urban subscribers account for more than 65% of the overall subscriber base, leading toward a huge urban–rural digital divide. As of September 2010, wireless subscribers constitute the majority of the total subscriber base, accounting for 95.1%,12 whereas wireline subscribers account for 4.9%. The capital cost to provide mobile service varies in the range of US$50–US$90 per subscriber,13 in comparison

with US$200–US$350 per subscriber for wireline. Lower costs and the additional benefit of mobility that is associated with wireless subscribers have led to the stagnation of the wireline subscriber base.
Urban and rural subscriber base, September 2010 100%= 723.3 million

Teledensity (%)

50%

Rural 32.3% Urban

67.7%

Source: TRAI

10 “TRAI Press Release No. 63 /2010,”TRAI website, http://www.trai.gov.in/Default.asp, accessed 10 December 2010. 11 Shauvik Ghosh, “Telcos to recoup 3G bid money in 5-6 years: Analysys Mason,” LiveMint, 30 May 2010, http://www.livemint. com/2010/05/30230743/Telcos-to-recoup-3G-bid-money.html, accessed 12 October 2010. 12 Ernst & Young analysis. 13 “Position paper on the Telecom sector in India,” Department of Economic Affairs – Ministry of Finance, December 2009, page 4, http://pppinindia.com/ pdf/ppp_position_paper_telecom_122k9.pdf, accessed 10 October 2010.

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2.4. Wireless
India has emerged as one of the world’s fastest-growing telecom markets, and this growth is primarily attributed to the growth in wireless services. India’s mobile market is the second largest in terms of subscribers in the world after China. The wireless subscriber base in India grew from FY00 through FY10 at a compound annual growth rate (CAGR) of 77.5%14 to reach 584.3 million15 subscribers in Wireless subscribers in India
800 700 Wireless subscribers (millions) 600 500 400 300 200 100 0 1.9 0.4% 3.6 0.6% 1.2% 3.2% 6.5 13.0 33.7 4.8% 52.2 14.6% 9.0% 98.8 165.1 261.1 22.8% 391.8 33.7% 687.7 584.3 49.6% 58.0% 70% 60% 50% Teledensity (%) 40% 30% 20% 10% 0%

FY10. Mobile services were commercially launched in India in 1995. In the initial years of mobile telephony, the growth in the number of subscribers was very low, with average monthly subscriber additions in the range of 0.05–0.1 million16 subscribers. The advent of NTP 1999 paved the way for aggressive growth in the wireless subscriber base.

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Sep-10 Wireless subscribers Teledensity

Source: TRAI

Wireless subscribers: GSM vs. CDMA, September 2010 100% = 687.7 million
CDMA 15.9% GSM

GSM subscribers constitute about 84.1% of the total wireless subscriber base. Over an extended period, the gap between GSM and CDMA has widened as the GSM subscriber base has grown more rapidly. The road ahead for the Indian telecom sector is expected to be more eventful, primarily due to the advent of new services such as 3G, VAS, mobile number portability (MNP) and the growth of manufacturing.

84.1%

Source: TRAI

14 Ernst & Young analysis. 15 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 16 “Penetration of Mobile Telephony in India & Value added services in Indian Mobile Telephony market,” Zinnov Research and Consulting, October 2006, http://www.zinnov.com/presentation/Mobile_VAS.pdf, page 2, accessed 15 October 2010.

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Enabling the next wave of telecom growth in India

2.5. Wireline
The Indian wireline market grew at a CAGR of 3.3%17 during the period between FY00 and FY10. In the recent past, the wireline subscriber base has declined due to lower mobile tariffs, cheaper handsets, improved mobile coverage, the advantage of mobility among wireless networks and inadequate infrastructure of the wireline network. Furthermore, the major wireline operators in India also operate mobile networks, where they see higher revenue growth and continue to invest extensively. Although wireline infrastructure in India is not as extensive as wireless infrastructure, there is a significant opportunity for future growth, driven by the immense potential for data growth. In FY10, the wireline subscriber base was 37 million,18 with a teledensity of 3.1%. Over the years, the urban market has dominated the wireline subscriber base, accounting for 73.1% of the subscribers in FY10. As of September 2010, there were 3.5 million19 public call offices (PCOs) and 0.6 million village public telephones (VPTs) in India.

Wireline subscribers
50 45 Wire line subscribers (million) 40 35 30 25 20 15 10 5 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Sep-10 -3.0% 26.7 18.9% 32.7 17.1% 22.7% 38.3% 41.3 7.9% 3.3% 0.3% -1.9% -3.3% -3.7% -2.6% 40.1 41.4 41.5 40.8 39.4 38.0 37.0 25% 20% 35.6 Growth rate (%) 15% 10% 5% 0% -5% -10%

Wire line subscribers
Source: TRAI

Growth rate

Change in the composition of subscribers
100% 80% 60% 40% 20% 0% 6.6% FY00 Wireless FY10 Wireline 93.4% 5.9%

94.1%

Source: TRAI; DoT

In FY00, the wireline market accounted for 93.4% of the subscribers; in FY10, it accounted for 5.9%. The wireline market is dominated by the governmentcontrolled incumbent players. Apart from these two players, additional private players have also ventured into the fixed-line market. Although fixed-line operators are trying to offer VAS such as high-speed internet access, video on demand and videoconferencing, besides other new technologies, wireline service continues to face stiff competition from wireless services. In the future, the emergence of new technologies such as fiber to the home is expected to drive the growth of the wireline market in India.

17 Ernst & Young analysis. 18 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 19 “TRAI: The Indian Telecom Services Performance Indicators (July - September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011.

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2.6. Internet and broadband
The internet has revolutionized the lifestyle of many Indians by creating a new means of communication, knowledge sharing, governance, employment and the delivery of services. Although the internet is a function of various factors such as literacy, access to personal computers and electricity, it has made significant inroads in the urban market. Further, the evolution of technology and increase in bandwidth has given rise to internet connections at speeds faster than traditional dial–up connections. The minimum threshold speed for a broadband connection is 256 kilobits per second (kbps) or more, whereas traditional internet connections have a speed of less than 256 kbps. The DoT formulated the Broadband Policy 2004, which envisions the creation of a framework through various access technologies such as optical fiber, digital subscriber lines (DSL) on copper loop, cable television networks, satellite media, terrestrial wireless and future technologies. From FY05 through FY10, the number of internet and Internet and broadband subscribers (million)
20 15 10 5.6 5 0 0.2 FY05 9.3 6.9 1.4 2.3 3.9 11.1 8.8 6.3 13.5 10.3 17.9 16.2

broadband subscribers has increased at a CAGR of 23.9%20 and 117.5% to reach 16.2 million and 8.8 million, respectively in FY10. This falls short of a Broadband Policy’s goals of 40 million internet subscribers and 20 million broadband subscribers by the end of 2010. Broadband infrastructure plays a vital role in a country’s achievement across domains such as social progress and economic development. According to Booz & Company, it is estimated that a 10%21 increase in broadband penetration translates to a 1.5% increase in labor productivity in a country. Also, a 10%22 increase in broadband penetration leads to a 1.3% increase in GDP. Broadband brings a number of benefits, such as opportunities for education, governance, entrepreneurship and services. The opportunities hold a much larger promise for India’s large low-income population and a growing economy.

FY06 FY07 Internet subscribers

FY08 FY09 Broadband subscribers

FY10

Sep 10

Source: TRAI

20 Ernst &Young analysis. 21 Bringing Mass Broadband to India: Roles for Government and Industry, Booz & Company, June 2010. 22 “Broadband Commission Presents Report to United Nations,” International Telecommunications Users Group website, September 2010, http://intug. org/2010/10/09/international-insights-%E2%80%93-september/, accessed 25 October 2010.

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Market share by subscribers of technologies in internet access, September 2010
3.6% 4.0% 10.3% 0.5% DSL Dial-up Wireless Cable modem Ethernet Others 50.5% 31.0%

Market share by subscribers of technologies in broadband, September 2010
1.6% 0.8% 4.5% 6.5% DSL Cable modem Ethernet Wireless Others

86.6%

Source: TRAI

Source: TRAI

Digital subscriber line (DSL) is the preferred technology among service providers for both internet access and broadband services. As of September 2010, DSL constituted 50.5% of the market share in internet access, and 86.9% of the market share in broadband access. The share of wireless technology continues to be negligible and remains to be fully exploited, especially in the case of broadband services. Broadband penetration continues to be very low in India, despite a structured framework that included ambitious goals to be met in 2010. Currently, broadband users are concentrated in urban areas, primarily in business districts or high–end residential areas of the larger cities. The key factors responsible for the widespread adoption of broadband include affordability and availability.

2.7. National long distance and international long distance
The Indian enterprise data connectivity market is growing at 10% annually and annual revenue is expected to near the US$10 billion mark in the next five years. The growing demand for connectivity is coming primarily from the IT and IT-enabled services sectors (ITeS), the financial services sector and the government. Most large global players have set up operations in India to cater to the connectivity needs of their customers. With telecom and IT converging, managed services and network security services are provided by global operators in partnership with Indian IT companies. Voice over Internet Protocol (VoIP) is considered a key enterprise application for lowering operating costs. It has spurred the demand for IP-based virtual private network (IP-VPN) services in India. The other services relevant to this segment are international private leased circuits, internet connectivity, multiprotocol label switching (MPLS) based IP-VPN services, and national and international data connectivity. A majority of global operators in this space are also offering VAS such as network security, network integration, network management, network storage and enterprise voice solutions.

Enterprise segment revenues23
Activity Private line VPN Ethernet Managed business VoIP Managed IP telephony Hosting services Application services Security Continuity and recovery Managed storage Outsource task Contact center Total (US$ million) FY08 829 423 40 92 51 161 170 110 20 40 1,600 20 3,556 FY09 930 480 70 110 65 210 250 130 30 56 1,900 31 4,262 FY10 1,064 495 92 125 75 260 370 150 45 61 2,251 39 5,027 FY11E 1,200 510 130 150 80 350 600 180 52 72 2,800 45 6,169

23 Industry estimates.

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Enabling the next wave of telecom growth in India

NTP 1999 opened up the NLD service for private operators, without any restriction on the number of operators. As of December 2009, the GoI had issued 29 NLD24 service licenses. In FY10, the Indian market for NLD grew by 13.7% to reach total revenues of INR164 billion.25 However, the market slowed in FY10, primarily due to a decline in ARPU across all operators. Market size of NLD
180 160 140 120 100 80 60 40 20 0 60% 50% 164.0 144.3 97.3 13.7% FY08 FY09 FY10 Growth (%)
Growth (%)

Market size (INR billion)

48.3% 35.3% 25.0%

40% 30% 20% 10% 0%

71.9 FY07

Market size (INR billion) Source: Voice and Data

Growth (%)

In 2002, India’s ILD services were opened up for private players, with the sale of the strategic stake in VSNL to the Tata Group. ILD has witnessed steady growth, with its revenues reaching INR176 billion26 in FY10. As of December 2009, the GoI had issued 24 ILD27 service licenses, with the annual license fee being reduced to 6% of the AGR.
Market size of ILD
200 Market size (INR billion) 150 100 50 0 115.1 1.0% 115.3 0.2% 150.0 17.3% 176.0 30.0% 35% 30% 25% 20% 15% 10% 10% 0%

FY07 FY08 FY09 Market size (INR billion)

FY10 Growth (%)

Source: Voice and Data

24 DoT Annual Report 2009–10,Department of Telecommunications, FY10. 25 “India’s NLD market has grown by 13.6% in FY 2009-10,” Voice & Data, http://voicendata.ciol.com/content/vnd100_2010vol-II/110070520.asp, accessed 18 October 2010. 26 “India among the Top Few Fastest Growing Telecom Markets,” Voice & Data, http://voicendata.ciol.com/content/vnd100_2010vol-II/110070519.asp, accessed 18 October 2010. 27 DoT Annual Report 2009–10,Department of Telecommunications, FY10.

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2.8. Telecom equipment manufacturing
The telecom equipment industry comprises products such as cell phones, chipsets, wireless and landline infrastructure equipment, DSL and cable modems and networking devices, including routers and switches. India is a strong market for global telecom equipment vendors.
Telecom equipment manufacturing and exports
Production (INR billion) 600 500 400 300 178.3 200 140.0 160.9 15.0 100 4.0 2.5 0 FY04 FY05 FY06 Production 236.6 19.0 412.7 81.3 518.0 140 Exports (INR billion) 110.0 120 100 80 60 40 20 FY08 FY09 Exports 0

Value of telecom equipment imports to India
10 Imports (US$ billion) 8 6 4 2 0 1.3 2005 1.7 2006 2007 3.7 1.2 2008 2009 8.9

Source: International Trade Centre

Share of imports by country of origin, 2009 100%=US$8.9 billion

FY07

Note: Includes both indigenous and offshore production Source: DoT; “Indian telecom firms may get DoT boost,” LiveMint, http://www.livemint.com/2010/04/01215017/Indian-telecomfirms-may-get-D.html, accessed 02 August 2010; “Policy recommendations to increase domestic telecom growth and exports of telecom equipment and service,” “Telecom Equipment & Services Export Promotion Council (TEPC), Ministry of Communications and IT, GOI.”

19.4% 3.3% 3.4% 3.9% 4.5% 6.4%

China South Korea 59.1% Sweden US Singapore Hong Kong Others

According to industry estimates, the demand for telecom equipment is expected to be worth US$70–100 billion28 in 2015. From 2005-09, the manufacturing and exports of telecom equipment grew at a CAGR of 33.9% and 112.1%,29 respectively. Furthermore, according to a leading telecom equipment manufacturer, the market for wireless infrastructure equipment is estimated to be US$8–10 billion,30 and equipment worth INR190 billion was imported in 2009. Despite the growth of a localized manufacturing environment in India, only 40% of the requirement for equipment is met through local sourcing, with the remainder coming from global companies manufacturing in India. The majority of telecom segments are highly dependent on imports, with the exception of telecom towers and cables.

Source: International Trade Centre

Although a few Indian mobile operators have a significant presence globally, companies in the manufacturing segment are yet to feature in the global telecom landscape. Manufacturers in India face challenges such as high logistics costs, an unreliable power supply, inadequate tax benefits and competition from low-cost Chinese equipment.

28 “Telecom equipment manufacturing in India needs help urgently,” India Climate Portal, 21 July 2010, http://www.climatechallengeindia.org/telecomequipment-manufacturing-in-india-needs-help-urgently-21-july-2010-t, accessed 12 October 2010. 29 Ernst & Young analysis. 30 “Time to go local in telecom equipment purchase,” CyberMedia India Online, 02 September 2010, http://www.ciol.com/News/News/News-Reports/ Time-to-go-local-in-telecom-equipment-purchase/140758/0/, accessed 10 October 2020.

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2.9. Infrastructure
The Indian telecom success story is built around the wireless segment. The wireless sector has charted an impressive growth trajectory, growing at a CAGR of more than 75%31 in the past decade in terms of the number of subscribers. Infrastructure development plays a crucial role in the development of the wireless sector. The high level of growth in the Indian wireless telecommunications market will continue to drive huge investment in infrastructure as well as a speedy rollout of networks into new areas. As of March 2010, there were 425,45532 telecom towers in the country. The development of the telecom infrastructure depends on four key factors: rollout, competition, price, and safety and aesthetic concerns. The rollout of services by operators takes place only on the back of robust telecom infrastructure. Competition will give further impetus to the development of infrastructure. Falling prices of telecom services will help to increase their affordability, and the demand for more services will translate into the development of more telecom infrastructure. Finally, as the safety and aesthetic issues related to the setup of towers are addressed, the rollout of infrastructure will become easier. The National Telecom Critical Infrastructure Policy is expected to address these concerns as well as the issues affecting telecom providers on the state level, including ROW related issues, hurdles to the erection of cellular towers and value added tax (VAT) levies on broadband services delivered through fiber media. The policy should clearly define the role of the Central Government and the states to help catalyze telecom sector growth. availability. The components of mobile networks include the electronic infrastructure, the civil infrastructure and backhaul. Typically, civil infrastructure forms about 60% of the cost of setting up a network, while electronic infrastructure forms the remaining 40%.34 Electronic infrastructure consists of the electronics needed to run a wireless network such as a BTS or cell site, radio antennas, feeders, radio access network, cables, node B, core network and other transmission equipment. Civil infrastructure includes the complementary elements of a cellular network that ensure that the electronic components are operational. However, it does not play any role in carrying wireless signals. Civil infrastructure includes components such as tower site, steel tower, shelter room, power regulation equipment, battery backup, air conditioner, fire extinguisher, diesel generator set  and security cabin. It is not influenced by the type of the communication technology being used, whether it is GSM, CDMA, 3G or BWA. However, the number of operators providing their services from a particular site influences the extent of civil infrastructure installed at the site. Backhaul consists of the intermediate links between the core of the network and the various sub-networks. It connects the electronic infrastructure at the tower site with the BSC and MSC. Infrastructure Provider-I (IP-I) can provide assets such as dark fiber, ROW, duct space and tower through simple registration without paying any license fee. It can also create active infrastructure, on behalf of the licensee.

2.9.1 Mobile network
Typically, a mobile network in a circle consists of mobile switching centers (MSCs), each of which is connected to base station controllers (BSCs), with each BSC being connected to a base transceiver station (BTS). The BTSs are installed in a contiguous manner, so as to facilitate the handing over of signals from one BTS to another like a chain. The radius of each BTS varies from 500 meters to as much as 8-10 km,33 depending upon subscriber usage, topography, frequency band of operation and spectrum
31 32 33 34 35

2.9.2 Towers and in-building solutions
Telecom towers are broadly classified as ground-based and rooftop towers. Ground-based towers (GBT) are 200 to 40035 feet high and are mostly used in rural and semi-urban areas because of the easy availability of real estate. GBTs involve a capital expenditure in the range of INR2.4 to 2.8 million, depending on the height of the tower. GBTs can accommodate up to six tenants. Rooftop towers (RTTs) are placed on the roofs of high-rise buildings,

Ernst & Young analysis. “Growth of Telecom Sector,” Lok Sabha, http://loksabha.nic.in/, accessed 28 October 2010. Telecom towers and allied infrastructure, Crisil Research, December 2008, page 9. Telecom infrastructure industry in India, ICRA Rating Feature, March 2009, page 5. Telecom infrastructure industry in India, ICRA Rating Feature, March 2009, page 6.

Enabling the next wave of telecom growth in India

22

are shorter than GBTs and are common in urban and highly populated areas, where there is paucity of real-estate space. Typically, these involve a capital expenditure of INR1.5-2 million. RTTs can accommodate two to three tenants. Over the past couple of years, telecom operators have hived off their telecom towers into separate entities. As a result, there are three types of tower companies — pure-play tower companies, operators with towers and operator-owned tower companies. In recent years, the growth of mobile communications has made the provision of radio coverage within airports, mass transit systems, shopping malls, stadiums and office buildings an essential requirement. Coverage is required to meet the needs of both the general public, which expects its mobile phones to work at all times, and emergency services, which need reliable communications for efficient incident management and personal safety. In-building solutions are designed to improve the reception of radio frequency signals indoors to meet the increasing demand for high-quality mobile services.

2.9.3 Telecom infrastructure in India
Initially, operators used their tower infrastructure for competitive advantage. However, over the past few years, the leading operators have opted to share their infrastructure. Today, there are an estimated 425,455 telecom towers in India, implying a subscriber-per-tower ratio of 1,460. Currently, tenancy level for the industry stands at 1.55.36 In July 2010, telecom towers were accorded Infrastructure Status37 by the RBI. This constitutes an essential and possibly the most expensive component in the entire telecom service delivery infrastructure. The GoI provides certain benefits specifically to infrastructure companies. The tax benefit encourages the participation of private sector through investment. Extending Infrastructure Status to telecom towers and the resultant income tax benefits should certainly encourage tower companies to expeditiously set up more towers in underserved areas.

State-wise number of towers
States Rajasthan Gujarat, Daman and Diu Maharashtra and Goa Karnataka Madhya Pradesh and Chhattisgarh West Bengal, Orissa, Sikkim, Andaman and Nicobar Assam and Arunachal Pradesh Delhi, Haryana and Chandigarh Uttar Pradesh and Uttarakhand Andhra Pradesh Punjab and Himachal Pradesh Jammu and Kashmir Tamil Nadu and Pondicherry Bihar and Jharkhand Nagaland, Meghalaya, Manipur, Mizoram and Tripura Kerala and Lakshadweep Total Public sector 2,028 2,271 3,608 2,154 1,854 3,337 720 2,008 4,577 2,752 1,512 488 3,071 1,794 369 1,494 34,037 Private sector 23,322 26,121 41,494 24,766 21,323 38,371 8,275 23,090 52,630 31,644 17,387 5,614 35,321 20,634 4,242 17,184 391,418 Towers 25,350 28,392 45,102 26,920 23,177 41,708 8,995 25,098 57,207 34,396 18,899 6,102 38,392 22,428 4,611 18,678 425,455

Source: “Growth of Telecom Sector,” Lok Sabha, http://loksabha.nic.in/, accessed 28 October 2010.

36 “TRAI: Consultaion paper on issues related to telecommunication infrastructure policy,” TRAI website January 2011, http://www.trai.gov.in/Default. asp, accessed 01 February 2011. 37 “Master Circular - Exposure norms,” Reserve Bank of India, http://www.rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx, accessed 20 September 2010.

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Enabling the next wave of telecom growth in India

2.9.4 Energy requirements
Currently, telecom towers consume an average of about 5-6 kilo watt of energy coupled with an average of 8 hours of diesel generator running time due to power outages. On average, 27 million units of electricity are consumed per day. Average diesel consumption per site per hour is about 2.5 liters, translating to 6 million liters of diesel per day. This translates to consumption of more than 2 billion liters of diesel per year for cell sites, which is subsidized by GoI. The dependence on diesel could be reduced if the Government utilized that subsidy to support a move toward renewable energy options such as solar, fuel cells or wind power by treating these toward renewal effort as a part of the overall effort to reduce greenhouse gases and the country’s carbon footprint.

Spectrum constraints and network quality: for operators in urban areas, superior network quality is a sustainable differentiating factor that helps to reduce customer churn and command premium prices. Tower sharing could help operators maintain quality network coverage throughout the city. Capital expenditure (capex) and operating expenditure (opex) savings: the setting up of a countrywide cellular network requires substantial capex. A significant part of the network rollout is likely to come in the untapped rural areas, where mobile teledensity is barely in the double digits. Since many rural areas are far-flung, more groundbased towers will be needed, further increasing capex requirements. With sharing, massive amounts of funds can be saved, and newer operators can build an assetlight model. It is estimated that infrastructure sharing in its current form has helped achieve savings of INR557.6 billion resulting from savings in infrastructure provisioning fee (IPF), energy, capital and interest costs.

2.9.5 Future growth potential, investments required and emerging trends
The industry faces low profitability, and has a pre-tax margin of 7%–8%. Overall, the industry has pumped in INR1 trillion and another INR400–500 billion is expected to be invested in the next two years. It is estimated that tenancy levels will rise to between 2–2.5x in the course of this decade.38

Estimated cost savings resulting from infrastructure sharing39
Component Capex (including interest) Opex saving as a result of infrastructure provisioning fee savings Opex saving as a result of shared energy costs Total opex savings Total savings (capex and opex) 71.4 Savings (INR billion) 476.0

2.9.6 Goals of infrastructure sharing
The key beneficiary of infrastructure sharing is the subscriber. Infrastructure sharing serves the following goals: Optimal use of scarce resources: infrastructure sharing in its simpler forms will lead to better use of scarce national resources, such as land and energy. In its more complex forms, it will allow a better use of spectrum. Rollouts in rural and semi-urban areas: as wireless service providers penetrate rural and semi-urban areas, significant investments will be required, and infrastructure sharing will act as an important tool to achieve faster rollouts and save operating and capital expenditure in these areas. Due to higher costs of land development, additional security, insurance costs, power shortages, a higher proportion of ground-based towers, unclear land ownership and expensive backhaul connectivity costs in the rural areas, service providers have strong incentives to share infrastructure.
38 Industry estimates. 39 Industry estimates.

10.2 81.6 557.6

Reduction in execution risks: erecting towers carries with it significant execution risks and requires as many as 40 clearances from separate authorities such as the Standing Advisory Committee on Radio Frequency Allocation (SACFA), state electricity boards, land owners and so on before the tower and electronic infrastructure can be completed. Against this background, the concept of infrastructure sharing assumes special importance. Such an arrangement works well for both partners, as the tenant paying a higher rent to the tower company accelerates the time-to-market process, while the tower company earns revenues.

Enabling the next wave of telecom growth in India

24

Revenue stream for incumbents: sharing enables incumbents to earn revenues from a new source, apart from improving capex and opex efficiencies, freeing up significant resources and management time to focus on their core business. The tower business can become a profit center by itself, rather than just leading to cost savings. Expeditious time-to-market for new players: sharing significantly speeds up the time-to-market, as operators can dramatically reduce site acquisition times and load their electronics and electronic network elements onto the civil infrastructure of incumbent operators in a civil sharing model. Government initiatives on infrastructure sharing: regulators favor faster deployment and investment optimization in the telecom sector. Infrastructure sharing limits duplication and gears investment toward underserved areas, product innovation and improved customer service. There are many government initiatives that support infrastructure sharing. These provide incentives for companies to participate in infrastructure sharing, thus contributing to the growth of the industry as a whole. Local restrictions and environmental benefits: as local authorities become more concerned about the environmental and aesthetic effects of the number and location of antennas in an area, zoning regulations may start to play an important role in driving service providers to share civil infrastructure. Less negative environmental impact: although environmentalists show limited support for telecom network deployment, infrastructure sharing typically receives the backing of many conservation groups because less network buildup means fewer negative environmental impacts. Thus, infrastructure sharing reduces operating costs and provides additional capacity in congested areas where space for sites and towers is limited. It also provides an additional source of revenue but may be limited by differing strategic objectives. It helps to expand coverage into previously unserved geographic areas. For operators who have been awarded 3G licenses and will be launching 3G operations, it provides an opportunity to reduce capital and operational expenditure by sharing infrastructure from the start of the build-out.

2.9.7 Models of infrastructure sharing
As India’s mobile networks have expanded over the past few years, coverage is no longer a source of competitive advantage. Operators have realized that the industry needs significant capital expenditure, which can be reduced by sharing their networks. What started off as arrangements between two telecom operators has evolved into the creation of tower companies. Commercial considerations appear to be driving the increasing trend to adopt a variety of infrastructure models. The level of sharing among wireless service providers varies depending on the complexity of the arrangements and the interdependence of the wireless service providers. Infrastructure sharing can take the following forms40: Civil infrastructure sharing: this refers to the sharing of physical sites, buildings, shelters, towers, masts, power supply and battery backup. This is by far the most common form of infrastructure sharing in India now. Electronic infrastructure sharing: this refers to the sharing of electronic elements such as antennas, feeders, radio access network (RAN), cables, node B and transmission equipment. RAN sharing: this is the simplest type of electronic infrastructure sharing. It involves all the access network elements to the point of connection with the core network, including radio equipment, mast and site. An extended version of RAN can be in the form of intra-circle roaming. Service providers can agree to provide mobile services to each other’s subscribers to ensure converage wherever their own network signal is not available or weak. This can increase the coverage area and improve the quality of service. Usually, operators either establish a joint venture company to operate the shared network or establish an agreement on the use of each other’s networks. Node B sharing: in the Node B sharing model, one physical unit is shared by two distinct nodes B. The radio network controller (RNC) and core network are not shared in this model, so that each service provider can maintain control of its equipment and spectrum use. The separation of the core network also allows each service provider to offer differentiated services to its subscribers.

40 “Mobile infrastructure sharing,” GSMA, page 12.

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Enabling the next wave of telecom growth in India

Core network: the most complex form of network sharing involves both radio and core network elements, permitting one or more partner service providers to access some or all of the mobile network, including electronic components such as optic and feeder fiber cables, radio links, network elements, backhaul, antenna and transmission equipment. This can be implemented to various levels depending on which platforms operators wish to share. Radio and core sharing: all electronic components in the access and core network as well as civil infrastructure are shared. In Sweden, there are five operators, four of whom have formed two consortiums of two operators each. Each consortium has built out a joint network. The regulator permitted this level of sharing, but required each operator to maintain 30% of its network separately. Backhaul sharing: common backhaul sharing will be very useful in rural environments where traffic from BTS to BSC is very low. A common RF or optical fiber medium can be utilized, reducing cost and maintenance efforts. Exits from such sharing arrangements can easily be provided if warranted due to an increase of traffic or other reasons. Mobile virtual network operators (MVNOs): these typically do not have their own network and have no rights to spectrum. They typically rely on operator network sharing to get access to subscribers and offer services.

National roaming: mandatory national roaming is a form of infrastructure sharing that allows new operators, who have yet to complete their network deployment to provide national service coverage through sharing incumbents’ networks in specific areas. National roaming accelerates competition by allowing new players to launch their services within a shorter time frame. Distributed antennae sharing (DAS): over the past few years, DAS has emerged as a powerful tool for wireless carriers to bolster their coverage and boost their capacity, especially with the advent of smartphones and 3G. Essentially, DAS is a collection of small antennas spread over a specific geographic area and connected by fiber to a central location or power source, usually a base station, to provide wireless service within a geographic area or structure. DAS technology can be used to boost signal coverage in large buildings, stadiums and shopping malls as well as for outdoor purposes. The benefits of DAS are twofold — the technology allows carriers to fill in coverage gaps and dead spots in their macro network and, by breaking down the macro cell site into smaller pieces, it helps add much-needed capacity to operators’ networks.

Enabling the next wave of telecom growth in India

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2.10. Value-added services (VAS)
According to the Internet and Mobile Association of India (IAMAI), the mobile VAS in India was estimated to be worth INR145.0 billion41 in 2010, growing at a CAGR of more than 50% during 2006–10. The rollout of 3G services is expected to drive the mobile VAS market in the future, creating opportunities for both telecom operators and companies engaged in VAS. Entertainment mobile VAS constitutes 57% of the overall revenues followed by information mobile VAS (39%) and m-commerce (4%).42 The key mobile VAS include person-to-person (P2P) SMS, monotones, polytones and truetones as well as caller ring-back tones (CRBT), person-to-application (P2A) SMS, application-to-person (A2P) SMS, games and services such as m–commerce and m–radio. The key participants in the mobile VAS market include content owners, content aggregators or developers, media companies, technology enablers, short-code providers, handset manufacturers and content converters. In terms of revenue distribution among various market participants, out of the total amount paid by end users (excluding P2P SMS), approximately 60%–80%43 is captured by mobile operators, followed by technology enablers (10%–20%) and content aggregators (10%–15%). Content owners end up getting approximately 5%–10% of the overall revenues. The demand for mobile VAS is driven by the increase in the mobile subscriber base, which has exceeded the 700 million44 mark, as well as aggressive marketing efforts by telecom operators to spread awareness about their services such as updates and alerts. Moreover, the decline in ARPU has compelled mobile operators to focus on mobile VAS to generate additional revenues. The rollout of 3G services in the near future is expected to provide consumers with new and improved services such as highspeed data transfer. The demand for mobile VAS is mostly driven by the youth, with India being one of the leading mobile markets for the young. The mobile VAS revenues in the country are driven by the P2P SMS service, followed by music. The growth of m–commerce, which provides services such as mobile banking, mobile payments and money transfer, is also expected to drive the market for mobile VAS.

Market size of VAS
160 Market size (INR billion) 140 120 Growth (%) 100 80 60 40 20 0 28.5 45.6 75.1 93.0 145.0

Revenue distribution of VAS services (%)
100 15 15 60 10

2006

2007

2008

2009

2010F

Operator revenue

Technology enabler

Content aggregator

Content owner

Total

Source: Mobile VAS in India: 2010, IAMAI, July 2010

Source: Mobile VAS in India: 2010, IAMAI, July 2010

41 42 43 44

Mobile VAS in India: 2010, IAMAI, July 2010. Mobile VAS in India: 2010, IAMAI, July 2010. Mobile VAS in India: 2010, IAMAI, July 2010. “TRAI Press Release No. 63 /2010,” TRAI website, http://www.trai.gov.in/Default.asp, accessed 10 October 2010.

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Enabling the next wave of telecom growth in India

2.11. Outlook
2.11.1 Wireless
At the end of December 2010, there were 752.2 million45 mobile subscribers, with a significant number of multiple and inactive Subscriber Identity Module (SIM) owners. According to Ovum, during the period 2010–15, the number of wireless subscribers in India is expected to increase at a CAGR of 10.1%,46 to reach 1,217.1 million47 subscribers in 2015. Further, the country’s wireless teledensity is expected reach 97.2% and 110% in 2015 and 2020, respectively. Future subscriber growth is likely to hinge upon rural and low-income users. Although the telecom sector is witnessing strong customer additions every month, the ARPU continues to shrink, leading to falling profit margins of mobile operators. The presence of as many as 14 mobile operators in certain parts of the country and rising financial pressures are expected to drive consolidation in the sector.
Wireless subscribers in India
Wireless subscribers (million) 1,600 1,400 1,200 1,000 800 600 400 200
0

77.7% 63.2% 44.7%
752.2 923.8

80%
1,134.5 1,185.3 1,217.1 1,516.8

60% 40% 20% 0%

1,049.1

525.1

2009

2010

2011F

2012F

2013F

2014F

2015F

2020F

Wireless subscribers
Source: TRAI; DoT; Ovum; Ernst & Young analysis

Teledensity

2.11.2 3G subscribers
3G subscribers as a percentage of wirless subscribers (%)

3G subscribers (million)

3G is the next generation mobile technology which is capable of delivering broadband content, including a host of rich multimedia services such as video calling, video on demand, location based services and remote access/ VPN applications. 3G services will drive the expansion of wireless services in future. 3G subscribers are expected to reach 142 million by 2015, accounting for 12% of the total wireless subscriber base. Further, 3G subscribers are expected to be more than 300 million by 2020, accounting for 20% of the total wireless subscriber base.

3G subscribers forecast
350 300 250 200 150 100 50 0 3.8% 35.0 72.0 6.9% 8.9% 10.0% 11.7% 25% 20% 15% 303.4 10% 142.0 5% 0%

20.0%

101.0

118.0

2011F 2012F 2013F 2014F 2015F 2020F 3G subscribers 3G subscribers as a % of wireless subscribers

Source: Ovum; Ernst & Young analysis 45 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 46 Ernst & Young analysis. 47 Ovum: Mobile regional and country forecast pack: 2010–15, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010.

Teledensity (%)

87.1%

92.9%

95.9%

97.2%

109.9%

120% 100%

Enabling the next wave of telecom growth in India

28

2.11.3 Wireline
There were 35.1 million48 wireline subscribers at the end of December 2010. The wireline market is in decline, a trend that is expected to continue. According to Ovum, during the period 2010–15, the number of wireline subscribers in India is expected to decrease at a CAGR of nearly 4%,49 to reach 29.1 million50 by 2015. Further, the wireline subscribers are forecasted to reach 26.3 million in 2020. The growth in the mobile market is seen as the cause of the decline.
Wireline subscribers in India
Wire line subscribers (million) 40 35 30 25 20 15 10 5 0 2009 2010 2011F 2012F 2013F 2014F 2015F 2020F
Source: TRAI; DoT; Ovum; Ernst & Young analysis

37.1

35.1

34.9

33.5

32.1

30.5

29.1

26.3

2.11.4 Broadband
As of September 2010, there were 10.3 million broadband subscribers in India. The growth of broadband is expected to increase with uptake of 3G and BWA services. Considering increasing broadband demand, the broadband connections are estimated to reach 150 million by 2020.

Broadband subscribers forecastc
Year 2010 2012 2014 2020 Number of households 236 241 250 275 % of households to be covered for broadband 5% 20% 40% 55% Number of broadband connections (million) 11.5 48 100 150

Source: “TRAI: Consultation Paper on National Broadband Plan,” TRAI website, June 2010, http://www.trai.gov.in/Default.asp, page 16, accessed 10 October 2010; Ernst & Young analysis

48 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 49 Ernst & Young analysis. 50 Ovum: Fixed voice connections forecast pack: 2008–15, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010.

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Enabling the next wave of telecom growth in India

2.11.5 Revenue and capex
Over the years, the Indian telecom sector has witnessed an increase in revenues and contribution toward GDP. The growth in revenues is driven by cheaper mobile handsets, lower tariffs, the increase in mobile penetration in both urban and rural areas, and the adoption of VAS. According to Ovum, during the period 2009–15, industry revenues and capital expenditure are expected to increase at CAGR of 8.1%51and 7.0%, respectively, to reach US$51.0452 billion and US$14.97 billion by 2015. Further, industry revenues and capex are expected to increase to US$57.2 billion and US$ 13.9 billion, respectively by 2020. The future revenue growth and increase in capex is expected to be driven by the rollout of 3G services and the increase in broadband penetration across the country, including BWA penetration. Other services such as ILD, NLD and VAS are also expected to drive revenue growth.
Revenue and capex forecast
Revenue and capex (US$ billion) 70 60 50 40 30 20 10 0 32.0 10.0 34.5 7.3 38.7 11.8 43.1 13.8 45.9 15.1 48.4 14.8 51.0 57.2 15.0 13.9

2009

2010F

2011F Revenues

2012F

2013F

2014F Capex

2015F

2020F

Source: Ovum; Ernst & Young analysis

Over the years, with the introduction of 3G and BWA services, the contribution of non-voice services towards the industry revenues is expected to reach 38% by 2020.
Revenue break-up: voice and non-voice
10% 17% 22% 27%

32%

38%

90%

83%

78%

73%

68%

62%

2011F

2012F

2013F Voice

2014F 2015F Non-voice

2020F

Source: Pyramid Research; Ernst & Young analysis

51 Ernst & Young analysis. 52 Ovum: Forecast of service provider revenue and capex, 2009-2014, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010.

Enabling the next wave of telecom growth in India

30

3
31

Achievements and setbacks of NTP 1999
Enabling the next wave of telecom growth in India

The NTP 1999 aims at making India competitive in the global telecom market through growth in exports, FDI and domestic investment. The key objectives of the policy include telecommunication for all and within the reach of all, achieving universal service across all villages, global standards in the quality of service, the emergence of India as a major manufacturing base and a major exporter of telecom equipment, and protection of the country’s security interests. The policy includes specific targets:

• •

Make available telephone on demand by 2002 and sustain it thereafter so as to achieve a teledensity of 7% by 2005 and 15% by 2010 Encourage the development of telecom in rural areas, making it more affordable by fixing a suitable tariff structure and making rural communication mandatory for all fixed service providers Increase rural teledensity from 0.4% to 4% by 2010, and provide reliable transmission media in all rural areas Achieve telecom coverage of all villages in the country and provide reliable media to all exchanges by 2002 Provide internet access to all district headquarters by 2000 Provide high-speed data and multimedia capability, using technologies including international services digital network (ISDN), for all cities with a population greater than 200,000 by 2002

• • • •

Enabling the next wave of telecom growth in India

32

NTP 1999 has been a catalyst for the telecom sector: • Growth in the subscriber base (723.3 million) and in teledensity (61.0%) • Contribution of telecom to overall GDP of almost 3%, up from 1.5% in 2000 • Creation of jobs across sales and marketing, technology, R&D and customer care, among others • Among the lowest tariffs in the world, and the adoption of per-second billing by various operators • Robust growth in revenues — industry revenues recorded at US$35 billion • Increased FDI in the telecom sector — accounts for more than 8% of cumulative FDI inflows in the past decade • The promotion of manufacturing of telecom equipment in India and the growth of telecom exports • Growth of the telecom industry has led to the development of new business ecosystems, e.g., mobile value-added services (MVAS) encompass mobile operators, content creators, providers, aggregators and technology enablers

Sector still faces challenges for growth: • Spectrum re-farming and effective management of spectrum in a transparent manner • Creation of an effective licensing framework where amendments are carried out in consultation with service providers • “Critical” Infrastructure Status along with uniform policy and single window clearance • Energy requirements, especially reliability, resulting in huge operating expenditure • Effective utilization of USOF to increase rural penetration • Increasing broadband penetration and rural connectivity • Overcoming security concerns over the use of mobile handsets and telecom equipment • Limited availability of talent, especially telecom specialists • Fixed mobile convergence (FMC)

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Enabling the next wave of telecom growth in India

3.1. Key achievements of NTP 1999
3.1.1 Teledensity
Reforms in the telecom sector have been encouraged by the active participation of the public and private sector. Following independence, the teledensity level in the country was 0.02%53; by 1998, the level had increased to only 1.9%. NTP 1999 has been instrumental in the growth of telecom in both urban and rural areas, and its targets have been achieved well in advance. The overall teledensity target of 15% by 2010 was achieved in FY07. Furthermore, the overall teledensity as of September 2010 stood at 61.0%.54 Urban teledensity and rural teledensity at the end of September 2010 were 137.3%55 and 28.4%, respectively, with rural teledensity being far ahead of the NTP 1999 target, which was set at 4% by 2010. Although India has witnessed a steep rise in teledensity over the past few years, the disparity between urban and rural areas in terms of mobile penetration has increased significantly. The improvement in rural teledensity
Urban and rural teledensity
140% 120% 100% Teledensity (%) 80% 60% 40% 20% 0% 8.2% 2.3% 0.7% FY00 10.4% 2.9% 0.9% FY01 14.3% 4.3% 3.6% 1.2% 1.5% 12.2% FY02 FY03 20.8% 5.1% 1.6% FY04 38.0% 26.2% 9.1% 1.8% FY05 12.9% 4.0% FY06 18.2% 5.8% FY07 89.4% 65.9% 47.3% 26.2% 9.2% FY08 14.9% 52.7% 37.0% 24.3% 28.4% 61.0% 119.7% 137.3%

poses a critical challenge due to low population density, geographical spread, low per capita income and the cost of maintaining phones in rural areas. As a result, there is an uneven distribution of teledensity among Indian states resulting in slow economic development of the states and their surrounding regions. Currently, about 70% of the population in India lives in rural areas, and mobile penetration stands at a meager 28.4% in rural India. There is a significant opportunity for service providers to increase penetration in rural areas and generate revenues. The impact of mobile telephony on rural areas has been profound. It has helped reduce the cost and time of transactions and has visibly compensated for the poor infrastructure. According to a study by Robert Jensen, a Harvard University economist, the introduction of mobile telephony in Kerala increased the fishing community’s profits by 8%,56 decreased fish prices by 4% and consumption of fish increased by 6%.

FY09

FY10 Sept 10

Urban teledensity
Source: TRAI

Rural teledensity

Total teledensity

53 “Rural Telecom and IT,” Indian Institute of Kanpur website, http://www.iitk.ac.in/3inetwork/html/reports/IIR2007/04-Rural Telecom.pdf, page 76. 54 “TRAI Press Release No. 63 /2010,” TRAI website, http://www.trai.gov.in/Default.asp, accessed 10 December 2010. 55 “TRAI: The Indian Telecom Services Performance Indicators (July – September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011. 56 Jensen, R., “The Digital Provide: Information (Technology), Market Performance and Welfare in the South Indian Fisheries Sector,” The Quarterly Journal of Economics, 2007.

Enabling the next wave of telecom growth in India

34

Total teledensity by state in India, FY10

The Indian telecom industry employs more than 430,00057 direct employees, with the majority of these employees being a part of the public sector undertakings (PSU). The ratio of the number of subscribers per employee is very high in the case of private operators in India.
Mix of private and PSU operators, by subscriber base
100%= million 98.4 140.3 43.5% 205.9 34.7% 300.5 26.5% 429.7 20.8%

52.9%

47.1%

56.5%

65.3%

73.5%

79.2%

Low teledensity: 0%–50% Medium teledensity: 50%–100% High teledensity: 100% and above
Source: TRAI

FY05

FY06

FY07

FY08 PSU operators

FY09

Private operators
Source: TRAI; Dun & Bradstreet

3.1.2 Teledensity and employment
Over the past decade, private telecom players have considerably expanded their operations, which has resulted in an increase in employment opportunities in the telecom sector. The sector has created direct employment across various business areas such as sales and marketing, technology, R&D and customer care, as well as indirect employment. The expansion of the Indian BPO industry is a classic example of indirect employment.

Employees of private and PSU operators
100%= 436,891 9.7% 90.3% FY05 429,400 11.0% 89.0% FY06 432,771 14.7% 85.3% FY07 PSU operators

Private operators

Subscribers per employee ratio in India
FY05 PSU operators Private operators 132 1,089 FY06 158 1,678 FY07 193 2,110

The development of telephony in India has played an important role in altering the structure of the economy. It has paved the way for a knowledge- and information-based economy, which augurs well for sectors such as IT/ITES, media, technology, education, R&D and financial services.

57 Overview of Telecom Industry, Dun & Bradstreet website, December 2009.

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Enabling the next wave of telecom growth in India

3.1.3 Size of the telecom sector and contribution to GDP
The revenues of the Indian telecom sector have increased by almost fivefold from US$7 billion in FY00 to US$35 billion58 in FY09. The growth in revenues has been driven by favorable factors such as the availability of cheaper mobile handsets, lower tariffs, the increase in mobile penetration in both urban and rural areas and the adoption of VAS. In addition, infrastructure sharing has enabled operators to improve margins by bringing down costs significantly. India’s telecom sector is a voice-centric market characterized by high MoU and ARPU. A sharp decline in call charges and the cost of services has enabled the rise of mobile subscribers and revenues. Indian telecom sector gross revenues
40 35 Revenue (US$ billion) 30 25 20 15 10 5
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

The contribution of the telecom sector to India’s GDP is estimated to increase from 1.5% in 2006 to 2.8%59 in 2010. The Indian economy is expected to sustain an 8% or a higher growth rate in the future. As the country aims to achieve higher teledensity, the contribution of the telecom sector in GDP is expected to increase. According to an ICRIER study, a 10%60 increase in mobile penetration results in a 1.2% increase in GDP.
Contribution of telecom to GDP
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 1.5% 1.7% 1.6% 1.6% 2.2% 2.2% 2.3% 2.3% 2.6% 2.8% 2.4%

31 25 17 20

Source: TRAI; Ernst & Young estimates

15 7 8 8 9

0

Source: TRAI; Ernst & Young analysis

The contribution of the telecom sector also has a multiplier effect on growth, due to associated individuals and businesses. Further, the GoI’s aim to reach rural teledensity of 40%61 by 2014 from the current levels and achieve broadband coverage of all 250,000 village panchayats under the Bharat Nirman Program is expected to enhance the contribution of the telecom sector to India’s GDP.

58 Transfer Pricing Report — Telecom (general), Ernst & Young, 2010. 59 Ernst & Young analysis. 60 “High-teledensity states grew faster, says study,” LiveMint, http://www.livemint.com/2009/01/19224316/Highteledensity-states-grew-f.html, accessed 10 October 2010. 61 “Bharat Nirman: A business plan for rural infrastructure,” Bharat Nirman website, http://www.bharatnirman.gov.in/page2.html, accessed 20 October 2010.

Enabling the next wave of telecom growth in India

FY10

35

33

0.0%

36

3.1.4 FDI in the Indian telecom sector
In the past decade, India has witnessed a considerable rise in FDI. During the last decade, FDI in India increased at a CAGR of 28.0%62 to reach US$37.2 billion63 in FY10. The telecom sector is among the leading sectors attracting FDI, accounting for 8.1% of the cumulative FDI equity inflows from FY00 to FY10. Over the past few years, a number of foreign ownership and equity regulation reforms have been introduced in the telecom sector. These reforms have led to an increase in FDI inflow in the sector.

From FY08 through FY10, FDI equity inflows in the telecom sector increased at a CAGR of 42.3%65 to reach US$2.6 billion. Higher levels of FDI in the telecom sector have intensified competition and strengthened market penetration. They have also opened up opportunities for telecom manufacturing and related business areas in the sector.

3.1.5 Restructuring mobile tariffs
The decline in tariffs has enabled the industry to reach a phenomenal size in terms of subscribers, while at the same time diluting the ARPU. In the early days, mobile tariffs were targeted toward both the calling and receiving party, with the regime popularly known as “receiving party pays.” In January 2003, TRAI announced the implementation of the “calling party pays” regime, with incoming calls being free of charge for the receiving party.

FDI limits in telecom64
• 100% FDI is permissible in the case of infrastructure providers that offer dark fiber, ROW, duct space, tower, email, and voice mail: • FDI of up to 49% can be done on the Automatic Route (without prior government approval); beyond that, prior approval is required • 74% FDI is permissible in the case of basic, cellular, unified access services, NLD/ILD, V-Sat, public mobile radio trunked services (PMRTS), global mobile personal communications services (GMPCS) and other VAS • FDI of up to 49% can be done on the Automatic Route (without prior government approval); beyond that, prior approval is required • 74% FDI is permissible in the case of ISPs with gateways, ISPs not providing gateways, radio paging and end-to-end bandwidth • FDI of up to 49% can be done on the Automatic Route (without prior government approval); beyond that, prior approval is required

Cumulative FDI equity inflow in India, FY00-10

21.4%

Services sector Computer hardware and software Telecommunications
9.0%

FDI equity inflow in the telecom sector (US$ billion)

Housing and real estate Construction activities

38.3% 8.1% 7.6% 7.3% 4.1% 4.2%

Power Automobile Others FY08 1.3

2.6

2.6

FY09

FY10

Source: Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry 62 Ernst & Young analysis. 63 “Fact Sheet on Foreign Direct Investment from August 1999 to July 2010,” Department of Industrial Policy & Promotion, http://dipp.nic.in/, accessed 10 October 2010. 64 Department of Industrial Policy & Promotion: Consolidated FDI policy effective from April 2010, Department of Industrial Policy & Promotion, April 2010, page 58. 65 Ernst & Young analysis.

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Enabling the next wave of telecom growth in India

The effective price per minute for an outgoing mobile call has declined from approximately INR16.4066 in 1995 to almost INR0.30 today. Since the formulation of NTP 1999, the industry has experienced a decline of about 95% in mobile tariffs. The entry of new service providers has resulted in a tariff war, as the market entrants have used pricing to grab market share. Per-second billing has emerged as an industry norm, thereby creating a win-win situation for subscribers. The intense competition in the telecom sector has led to declining ARPU among mobile operators. From FY06 through FY10, the ARPU of GSM and CDMA operators decreased by 64.2% and 70.3%, respectively. The average annual decrease for GSM and CDMA operators was 22.1% and 25.8%, respectively. ARPU levels are estimated to continue declining over the next few years, though the rate of decline is expected to be slow. Following the introduction of the NTP 1999, the MoU among telecom service providers have also witnessed an increase. Although India has recorded one of the highest MoU globally in the past few years, the sector has also experienced a decline in MoU, especially in the case of CDMA operators. In addition, the rate per minute (RPM) has declined due to the increase in competition in the sector.

GSM operators: ARPU and MoU
600 500 ARPU (INR) 400 300 200 100 0 FY06 FY07 FY08 FY09 395 366 298 264 205 131 FY10 164 Sep10 471 493 484 410 423 600 500 400 300 200 100 0 MoU (minutes)
MoU (minutes)

ARPU
Source: TRAI

MOU

CDMA operators: ARPU and MoU
600 500 ARPU (INR) 400 300 200 100 0 FY06 FY07 FY08 MOU FY09 256 202 550 471 364 159 99 352 600 500 400 308 78 300 200 76 100 0

307

3.1.6 Handset prices
The Indian mobile handset market is estimated to be worth INR500 billion.68 The market has witnessed the entry of a number of mobile manufacturers, raising the total number of manufacturers to about 30 from approximately 5 in 2008. The Indian mobile handset market is dominated by established global brands. The market is characterized by the presence of both high–end and low–end mobile phones, with a wide gap between handset prices. The market is also inundated with unbranded and cheap imported mobile phones, which are primarily Chinese in origin. The growing mobile subscriber base in India has led to the entry into the market of a number of “homegrown” mobile handset manufacturers.

FY10

Sep10

ARPU
Source: TRAI

GSM and CDMA operators: RPM
1.0 0.9 0.8 0.7 INR 0.6 0.5 0.4 0.3 0.2 0.1 0.0 FY06 FY07 FY08 GSM
Source: TRAI

0.9

0.6 0.5 0.5 0.4 0.4 0.3 0.2 FY09 FY10 Sep10 0.4 0.3 0.4 0.3

CDMA

66 “One Minute at a Time,” Outlook India, http://business.outlookindia.com/printarticle.aspx?266748, accessed 21 October 2010. 67 Ernst & Young analysis. 68 “Small handset makers making big strides,” Business Standard, 15 April 2010, http://www.business-standard.com/india/news/small-handset-makersmaking-big-strides/391912/, accessed 5 October 2010.

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Average selling price (ASP) of mobile handsets
200 Average selling price (US$) 180 160 140 120 100 80 60 40 20 0 1Q08 Nokia 2Q08 3Q08 Motorola 4Q08 Samsung 1Q09 2Q09 Sony Ericsson 2Q09E 4Q09E Others 1Q10E 2Q10E

Source: Company data; Macquarie Capital

In the past decade, mobile handsets have evolved rapidly, adding numerous features ranging from monochrome screens to touch screens, monotone ringtones to MP3 ringtones, Video Graphics Array (VGA) to 8-to-12-megapixel cameras, enhanced memory, Global Positioning System (GPS), email, 3G and an improved user interface. Globally, the average selling price (ASP) of both feature phones and smartphones has been on the decline. However, the price of feature phones is declining at a faster rate than smartphones. Over the next few years, the ASP of feature phones is expected to be US$50, and the ASP of smartphones is expected to drop below US$200. Indian mobile handset market
120 100 Volume (million units) 4.7 80 60 40 20 0 33.4 FY06 FY07 FY08 FY09 FY10 3.2 95.6 71.8 101.5 108 6.0 5.4 7 5.6 6 5 4 3 2 1 0 Value (US$ billion)

3.1.7 Global outreach of Indian telecom companies
In the early 1990s, greenfield investments were a popular mode of overseas investment among Indian firms, and foreign affiliations were formed through joint ventures, usually with a minority ownership. Over the period, India has witnessed prominent diversification in the industry composition of overseas activities of Indian firms. Over the past decade, FDI by firms belonging to developing countries has gained momentum and has become an integral part of globalization. Indian companies have reached overseas destinations to tap new markets and have acquired technologies. The market has witnessed investment in the form of greenfield projects, and the majority of this capital value has been used to acquire companies. M&A provide benefits such as expansion of global footprint, access to niche technologies, new product mix, a wider customer base and growth momentum. In line with the change in the pattern of investments, the structure of ownership has also shifted toward majority and full ownership. According to the National Council of Applied Economic Research (NCAER), India’s FDI outflows (debit) have grown at a CAGR of 47.5% to reach a projected US$18.6 billion69 in FY09, from US$0.8 billion in FY01. The share of manufacturing in the investment activity has

Source: Voice & Data

69 “NCAER: FDI in India and its growth linkages,” Department of Industrial Policy & Promotion, August 2009, http://dipp.nic.in/, page 13, accessed 10 October 2010.

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declined considerably, whereas the share of services has increased. The Indian telecom sector has actively been a part of the global M&A activity, leading to the emergence of telecom giants from India.

Key overseas M&A by Indian firms
Year 2010 2010 2003 2005 2010 2000 Target company Zain Africa BV Warid Telecom, Bangladesh FLAG Telecom Group Ltd Teleglobe International Holdings Ltd. Telecom Seychelles Astratel Nusantara PT Acquirer company Bharti Airtel Ltd Bharti Airtel Ltd Reliance Gateway Net Pvt Ltd TCL Bharti Airtel Ltd CDC Capital Partners Deal value (US$ million) 10,700.0 300.0 194.8 177.0 62.0 30.0

Source: Thomson ONE Banker

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3.2. Key challenges of NTP 1999
NTP 1999 envisaged the affordability and availability of telecommunication services for the common populace, along with the benefit of VAS such as internet for the urban and rural population and the abolition of the digital divide. However, the telecom sector continues to face various issues that act as impediments to its growth. Globally, broadband penetration is accepted as a measure of a country’s ability to compete as an economic power. Despite India’s status as an IT superpower, broadband penetration levels in India are far below other emerging countries such as Brazil, Russia and China. According to Boston Consulting Group, India has an internet penetration of 7%,72 in comparison with 33% in Brazil, 31% in Russia and 28% in China. The Broadband Policy 2004 has failed to keep pace with advances in technology and failed to boost the telecom sector.

3.2.1 Growth of wireline
The wireline segment has added just 10 million users since the introduction of the NTP 1999, and the number of wireline subscribers has fallen from 41.5 million in FY06 to 37 million in FY10. Although wireline infrastructure in India has been in place for an extended period, the growth of wireline phones is not in sync with the rise in the number of wireless subscribers. The decline has been due to lower mobile tariffs, cheaper handsets, improved mobile coverage, the advantage of mobility among wireless networks and the inadequate infrastructure of the wireline network. However, wireline and wireless complement each other. The stagnancy in the growth of wireline networks has an impact on the overall growth of the telecom sector and other services such as internet and broadband services.

3.2.3 Spectrum challenges
The Indian telecom industry has witnessed phenomenal growth in the number of subscribers, with a CAGR of 77.5% during the period FY00–10. Furthermore, according to TRAI, the Indian telecom industry is expected to reach 1 billion73 wireless subscribers by March 2014. In line with the growth of subscribers, the need for spectrum to service these subscribers has also increased. According to TRAI, the bandwidth required by 2014 may be as high as 800MHz.74 Spectrum bands such as the 900MHz band are of great value to mobile operators due to the longer ranges these can support, therefore requiring lesser BTSs density and lower capital and operating expenditure. Currently, in the absence of a long-term plan to meet future requirements, the advent of new technologies is expected to create conflicts for spectrum. The availability of spectrum for commercial services in India is below the required levels. Despite being the second-largest market in terms of the subscriber base, India lags behind in terms of availability of spectrum for commercial use.

3.2.2 Growth of broadband
As of September 2010, there were 17.9 million70 internet subscribers and 10.3 million broadband subscribers in India; the Broadband Policy 2004 had anticipated 40 million71 internet subscribers and 20 million broadband subscribers by 2010. The sluggish growth in broadband services is attributable to the absence of low-cost devices, inadequate content and applications in regional languages, the affordability and availability of broadband services and inadequate infrastructure.

70 “TRAI: The Indian Telecom Services Performance Indicators (July - September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011. 71 “Broadband Policy 2004,” DoT website, http://www.dot.gov.in/ntp/broadbandpolicy2004.htm, accessed 10 October 2010. 72 The Internet’s New Billion, Boston Consulting Group, September 2010, page 7. 73 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, page 339, May 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 74 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 18, http://www.trai.gov.in/Default.asp, accessed 10 October 2010.

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Spectrum and license allocation timeline in India
First stage: 1995–2003 Auctioning scarce spectrum • • •
In 1995, the GoI auctioned 2x4.4MHz of start–up spectrum for GSM-based services Two operators were selected for each License Service Area (LSA). Subsequently, in 2001, the third operator license was awarded, along with 2x4.4MHz of start-up spectrum in the 900MHz band, to the government operator on a pro bono basis In 2001, the fourth operator license was issued using a three-stage auction procedure. Start-up spectrum of 2x4.4MHz in 1,800MHz was given to the winning bidder:

• •

In addition to the entry fees, licensees were required to pay a percentage of annual revenue as spectrum charges

In 2002, subscriber based norms (SBN) was introduced. It laid down a roadmap for the allotment of 2x12.5MHz of spectrum per operator in each LSA

Second stage: 2003–06 Unified Access Service (UAS) licenses

• •

In November 2003, GoI announced UASL that allowed basic service license holders to provide full mobility-based services with a stipulated entry fee based on the bid price paid by the fourth operator in 2001 The fixed fee-based license allowed any number of mobile licenses to be provided and implicitly de-linked spectrum allocation from licensing. Although firms were awarded licenses after paying the required entry fee, they were given start-up spectrum only as and when available Following the entry of two or three CDMA-based mobile operators in each LSA, one or two new firms also paid the stipulated entry fee and obtained a license to operate GSM services in certain LSAs 3G services were treated as a separate service from 2G, and TRAI continued to maintain that there was a shortage of 2G spectrum A new SBN policy was defined, and incumbents were kept out of fresh allocations. The GoI allocated spectrum to new telecom players in service areas across India The defense services agreed to vacate 2x20MHz in the 1,800MHz band, in addition to 25MHz in the 2.1GHz UMTS band The DoT proposed new 2G spectrum usage charges for all operators. All operators were expected to pay higher spectrum usage charges, irrespective of the quantity they held. This differed from the earlier strategy of increasing spectrum charges only for those operators who held more than 6.2MHz per circle in case of GSM players and above 5MHz for CDMA In August 2008, the GoI announced the policy for 3G mobile services, in line with TRAI’s recommendations, and opted for the auction of a start–up spectrum of 2x5MHz in the 2.1GHz band with reserve prices for different categories of LSAs In May 2010, the e–auction of 3G mobile services was concluded after 183 rounds of bidding across all service areas. All of the 71 blocks up for auction across the 22 service areas were sold:



Third stage: 2006–08 Criterion for allocation of spectrum

• • • •

Fourth stage: 2008–10 Policy on 3G and 3G auctions

• •

• •

All the winners of the auction were required to pay INR509.7 billion to the GoI within 10 days of the closing of the auction. Including the amount paid by state-owned BSNL and MTNL, it totalled to INR677.2 billion Following the completion of the 3G auctions, the bandwidth for broadband services (WiMAX) was auctioned by the GoI. It auctioned two 20MHz blocks in the 2.3GHz range in each of the country’s 22 service areas. The GoI raised INR385.4 billion from the broadband wireless auction

Source: “A peep into RF spectrum allocation process in India,” Integrated Defense Staff http://ids.nic.in/tnl_jces_Sep_2009/Spectrum%20allocation%20 procedure.pdf accessed 02 August 2010

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3.2.4 Licensing challenges
NTP 1999 permitted Cellular Mobile Service Providers (CMSPs) to provide all types of mobile services, including voice and non-voice messages, data services and PCOs, in their service area of operations, using any type of network equipment that met the International Telecommunication Union (ITU) or Telecommunication Engineering Center (TEC) standards. Prior to this, licensees were required to use GSM technology. The policy made the cellular license technology neutral, and also allowed licensees to migrate from a fixed license regime to a revenue-sharing arrangement starting in August 1999. In November 2003, the GoI introduced the UAS licensing regime, permitting an access service provider to offer either fixed or mobile services or both. Since the introduction of the UAS licensing regime, the total number of licenses in a circle ranges from 12 to 14.75 Globally, the allocation of spectrum is separate from the grant of license to provide service. However, in India, licenses are bundled with the allotment of a certain amount of spectrum.

3.2.6 Infrastructure
Telecommunications infrastructure, despite being a “key infrastructure,” is far from ubiquitous. There are huge gaps in low-income or sparsely populated areas, especially away from cities and towns, where telecom companies see poor returns on the expensive investment required in setting up the infrastructure. Completing the important task of connecting the remaining areas therefore requires an all-round effort by improving the economics of rolling out networks and addressing any other stakeholders’ concerns that act as a barrier. Telecom infrastructure service providers face several challenges, which are highlighted below: Role played by multiple state agencies: there is no uniform approval process across the states, and the biggest barrier to setting up telecom towers and other infrastructure is the wide variation in the approval process adopted by local bodies. Several demand prohibitive fees; others require dealing with multiple agencies; some treat infrastructure business in the same way they treat petty commercial undertakings; and some look at infrastructure companies as a means to finance deficits. Tower companies, therefore, incur huge costs and delays because several state agencies are involved in granting approval for setting up towers. Inadequate utilization of towers: towers are not fully utilized as no law ensures that no new tower is built in an area where an existing tower is under utilized. Civic issues: there is a need to address civic issues such as zoning regulation, single window clearance, preferential treatment for sharing and incentives in a timely manner.

3.2.5 Equipment manufacturing
The Indian telecom sector has witnessed rapid growth. However, telecom manufacturing in India has not been able to keep pace. Currently, there is a limited number of telecom equipment manufacturers and providers tend to be highly dependent on imported equipment during the setup of mobile networks. Moreover, the country lags behind in terms of telecom R&D and continues to be reliant on imports.

75 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 59, http://www.trai.gov.in/Default.asp, page 59, accessed 10 October 2010.

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Taxation on towers: multiple levies and high taxes are imposed for setting up mobile towers. For instance, the Municipal Corporation of Delhi (MCD) charges INR100,000 per tower and the New Delhi Municipal Council (NDMC) charges INR200,000 per tower as a one-off registration fee in Delhi. Delays and cumbersome processes for the SACFA clearances: the SACFA gives siting clearance of all wireless installations in the country. The site clearance basically requires examination from the point of safety for flight navigation and interference with existing wireless systems. Utilization of USOF and incentives: since the next level of growth is expected to come from rural areas, there is a need to accelerate the pace of setting up the tower infrastructure in these areas. Although the USOF was created with the sole aim of promoting rural telephony, the fund rules are too cumbersome and lack focus. They do not reflect the fact that USOF subsidies are perhaps most urgently required to defray the cost of infrastructure creation in rural areas. Grievance redressal: there is no clear grievance escalation/ redressal mechanism that infrastructure companies can seek when a conflict arises. Safety: the construction of telecom towers is still a self-regulated activity throughout India. Currently all the telecom operators are following IS codes, namely IS:800, IS:802 and IS:875, for the design of towers. The above IS codes are primarily meant for electric/power transmission line tower design, and the load criteria for telecom towers and transmission line towers are different.

Power consumption: one of the major problems faced is the lack of reliable grid power. Without it, service providers are forced to use diesel generator sets at tower sites most of the time. Secondly, the power connection to telecom towers is treated as one to a “commercial establishment,” and thus, the highest tariff is applied to the telecom site. In large parts of India, the power is either unavailable or erratic. This increases the dependence on diesel, which is not only more expensive but also polluting. Further, there is no clarity on the rates to be paid by infrastructure companies. Some agencies charge them “industry” rates, while others charge “commercial” rates, and there are other options as well. This adds avoidable uncertainity in an already tough business. Energy consumption: cell sites account for most of the energy consumed by mobile networks, as these are dependent on diesel generators to keep running. Diesel fuel is subsidized, and it is estimated that India as a country consumes more than 2 billion liters of diesel per year for cell sites. Environmental issues: diesel consumed by towers results in about 17,000 tonnes of CO2 and 24,000 tonnes of carbon equivalent. The cumulative carbon footprint of telecom towers due to diesel consumption in a year is more than 5.5 million tonnes.76 The thrust in increasing rural telephony will further aggravate the diesel dependence by telecom towers. Misplaced apprehensions on health hazards of electromagnetic radiation from mobile antennas: many state governments and municipalities have barred towers in residential areas, citing concerns over alleged health hazards relating to BTS.

76 Industry estimates.

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4
• • • •

Key enablers
As we enter the second decade of the 21st century, India’s telecom industry is at a crossroad. This is the appropriate time to look again at the NTP 1999 and customize it to meet current and future needs. The NTP 1999 has served the sector well for more than a decade, which witnessed significant changes in the socioeconomic environment, technological advancements and business dynamics of telecommunications. Therefore, the time is ripe for a comprehensive review to build a forward-looking, strong and transparent policy framework that will be the backbone to achieving the India Telecom Vision 2020. India needs a principle and objective-based, transparent, efficient, independent and competitively neutral policy that will accelerate the pace of growth in telecom services and manufacturing. A principle- and objective-based policy that provides a clear roadmap of the telecom sector and is reviewed regularly to keep abreast with rapid technological developments in the sector A transparent approach to policy formulation, providing interested parties with concrete opportunities to navigate the growth of the telecom sector The creation of an efficient mechanism to implement regulatory decisions. It needs to identify and address barriers to growth The functioning of the regulator in an unbiased manner, and the formulation of a competitively neutral policy that is not discriminatory toward any of the stakeholders

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4.1. Connected India: telecom vision 2020
The policy initiatives should focus on achieving the vision for connected Indian Telecom 2020: India should have a convergence services enabled network with voice, data, video, media, broadband and internet services delivery to subscribers with high quality of experience. It should be supported by different metrics of quality of services at affordable tariffs meeting the needs of different segments of society, with inclusive participation from rural India to ensure telecom coverage for all.

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4.2. Connected India: telecom mission 2020
Connected India: telecom mission 2020 should aim to achieve the following objectives:



To recognize and treat telecom infrastructure as critical infrastructure to accelerate the pace of growth of the sector and increase its contribution to the Indian economy To connect the unconnected at affordable prices to ensure 100% telecom coverage of the country; achieve rural penetration of 100% and reach overall wireless penetration of 110% To strengthen broadband penetration to reduce the digital divide; achieve total broadband connections of 150 million To earn revenues of around US$60 billion



• •

A two-pronged strategy is needed to achieve connected India Telecom Mission 2020. First, the existing challenges faced by various stakeholders need to be addressed. This involves key enablers such as licensing framework, spectrum, USOF, broadband penetration, M&As, equipment manufacturing and infrastructure development. Second, the policy should be able to meet future opportunities. This will, among other things, include the unique identification number (UID) scheme, financial inclusion and m-commerce.

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4.3. Key enablers under existing scenario
4.3.1 Licensing77
The telecom sector has evolved from a monopolistic regime in the early 1990s to 12–14 licensees in a circle now. In November 2003, the GoI introduced the UAS licensing regime, which let the provider offer fixed, mobile or both services under the same license, using any technology. The GoI has issued many new UAS licenses since the introduction of the UAS regime. Globally, the number of incumbent telecom service providers varies from four to six, with the allocation of spectrum separate from the allocation of a license. However, in India, under the UAS regime, a licensee is entitled to obtain a certain amount of spectrum, subject to its availability and efficient usage.

Parameters
Spectrum and license

Recommendations
Need to have a single universal license for all telecom services. The policy must preserve competition and ensure that no service is given a price arbitrage over others.

Fee

There should be a uniform license fee across all telecom circles. Multiple levies, including service tax and license fees (such as universal service obligation fees and spectrum charges), are currently imposed on the industry. Moreover, states levy additional taxes such as octroi, VAT, stamp duty, entry tax and levies on towers, which aggregate to 30% of the revenues earned by telecom companies. A uniform revenue share license fee of 1%, excluding the USOF, should be fixed. Since there is a significant cash reserve lying unutilized in the USOF, DoT should consider lowering the contribution from 5% of AGR to 1% of AGR. Pure internet service providers should continue to be free of any license fees.

77 See 5.1. for global practices.

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License renewal

Ensure regulatory certainty and ease investor concerns: • Provide a clear license renewal regime that includes legislation, renewal procedures, reasons for refusal to renew and appeals to regulatory decisions • Provide details along with the license, if the legislative framework is not comprehensive • Create a balance between certainties in the renewal process • Regulatory discretion to clear parameters of license renewal with appropriate checks and balances Procedures for license renewal: • Initiate renewal process well in advance of expiry • Perform periodic forward review of market and needs • Disclose and publish reasons for non-renewal of licenses • Adopt a public consultation process • Guarantee a right to appeal In the event of non-renewal: • Provide minimum notice period • Delay vacancy of spectrum to give enough time for operators to adapt strategies • Ensure exit strategies for operators and continuity of service to consumers Change in license conditions and obligations: • Renewal process is a good occasion to review license conditions • Ineffective mandatory service obligations create an anti-competitive impact, if the burden is not kept at a manageable level

Amendments

Currently, amendments to license agreements are carried out unilaterally. Service providers should be consulted before provisions in license agreements are amended.

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4.3.2 Spectrum78
Spectrum, being a scarce natural resource, plays a critical role in the provision of mobile telecom services. In India, the National Frequency Allocation Plan (NFAP) is the basis for spectrum utilization and development and the manufacturing of wireless equipment. The next five years are going to see the spread of telecom services enabling subscribers to benefit from voice, data and other application services. An increasing availability of smart-phones with significant processing capacity and a wide array of applications are resulting in higher requirements of spectrum. It is estimated that the total requirement of spectrum in the next five years would be of the order of 500-800MHz including 275MHz for voice services alone. In line with estimated demand of approximately 500-800MHz spectrum across various bands out of a total 1,161MHz79 of identified spectrum by TRAI, a minimum of 287MHz and a maximum of 454MHz is currently available. A mechanism to ensure transparent and non-discriminatory spectrum management is needed.

Spectrum available for telecom operators in different frequency bands80 Frequency band (in MHz)
450-470 698-806 806-824 824-844 869-889 890-915 935-960 1,710-1,785 1,785-1,805 1,805-1,880 1,880-1,900 1,900-1,910 1,920-1,980 2,010-2,025 2,110-2,170 2,300-2,400 2,500-2,690 3,300-3,400 3,400-3,600 Total

Spectrum available in the band (in MHz)
20 108 18 20 20 25 25 75 20 75 20 10 60 15 60 100 190 100 200 1,161

Spectrum available for telecom sector
20 20 18.6-21.8 18.6-21.8 35-75 35-75 0-20 (after coordination) 0-60 60 40 40 100 (ISPs) 287.2-453.6

78 See 5.2. for global practices. 79 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 22, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 80 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 22, http://www.trai.gov.in/Default.asp, accessed 10 October 2010.

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Country-wise spectrum availability
Country Total licensed spectrum for mobile services, MHz (2008) 170 200 265 140 120 120 358 353 294 Wireless subscribers, 2008 (million) 46.5 150.6 150.6 14.8 41.4 75.3 49.6 77.4 270.3 Subscriber/MHz (million/MHz) 0.27 0.75 0.57 0.11 0.35 0.63 0.14 0.22 0.92

Argentina Brazil Canada Chile Colombia Mexico Spain UK US

Source: “Digital Dividend Pavilion - Latin America Wireless Roadmap,” 3g Americas website, February 2009, http://www.3gamericas.org/documents/MWC%202009%20Digital%20Dividend%20Pavilion-3G%20Americas%20 Erasmo%20Rojas.pdf, accessed 14 January 2011; ITU - ICT Statistics 2008; Ernst & Young analysis.

Circle-wise spectrum allocated in India81
Circle Allocated spectrum (MHz) GSM Delhi Mumbai Kolkata Maharashtra Gujarat Andhra Pradesh Karnataka Tamil Nadu Kerala Punjab Haryana Uttar Pradesh — West Uttar Pradesh — East Rajasthan Madhya Pradesh West Bengal Himachal Pradesh Bihar Orissa Assam North East Jammu & Kashmir 53.6 72.4 60.4 69.4 60.4 69.4 69.4 67 61.2 63.2 63.8 61.2 62.4 63.8 63 53 57.6 66.8 59.4 55 53.2 49.4 CDMA 15 15 13.75 15 12.5 13.75 13.75 12.5 15 15 12.5 13.75 13.75 15 12.5 11.25 10 13.75 11.25 10 10 10 Total 68.6 87.4 74.15 84.4 72.9 83.15 83.15 79.5 76.2 78.2 76.3 74.95 76.15 78.8 75.5 64.25 67.6 80.55 70.65 65 63.2 59.4 No. of operators GSM 12 11 10 12 11 12 12 11 11 12 12 11 11 12 11 10 11 12 11 10 10 10 CDMA 4 4 4 4 4 4 4 4 4 5 4 4 4 4 4 4 4 4 4 4 4 4 Total 16 15 14 16 15 16 16 15 15 17 16 15 15 16 15 14 15 16 15 14 14 14 33.5 31.3 19.2 50.7 38.9 52.7 43.1 62.2 28.1 24 17.2 37.2 53.3 37.6 37.3 31 6.1 44.7 18.6 10.2 6.2 4.7 0.49 0.36 0.26 0.6 0.53 0.63 0.52 0.78 0.37 0.31 0.22 0.5 0.7 0.48 0.49 0.48 0.09 0.55 0.26 0.16 0.1 0.08 Subscriber (million) Subscriber/MHz (million)

81 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 22, http://www.trai.gov.in/Default.asp,accessed 10 October 2010; “TRAI: The Indian Telecom Services Performance Indicators (July-September 2010),” TRAI website, January 2010, http://www.trai. gov.in/Default.asp, accessed 15 January 2011; Ernst & Young analysis.

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Operator spectrum holdings
Country/Region/Operator India Denmark EU average France Germany Italy Spain Sweden UK US Spectrum holding per operator, MHz 28-37 118.4 92.6 138.5 65 72.7 100.6 92 82.2 75-96

Source: “Digital Dividend Pavilion - Latin America Wireless Roadmap,” 3g Americas website, February 2009, http://www.3gamericas.org/documents/MWC%202009%20Digital%20Dividend%20Pavilion-3G%20Americas%20 Erasmo%20Rojas.pdf, accessed 14 January 2011; “Presentation to the DoT committee on spectrum allocation criteria,” Communications Today, http://www.communicationstoday.co.in/images/1-pdotfinal.pdf, accessed 14 January 2011.

Parameters
Availability

Recommendations
Align spectrum bands with globally harmonized bands to achieve interference-free coexistence and economies of scale. Identify and vacate new spectrum bands for future use. Need to bring in additional spectrum for commercial telecom services. Need to review the present usage of spectrum available with government agencies so as to identify the possible areas where spectrum can be re-farmed, and to draw up a suitable schedule. Regular spectrum audits should be carried to oversee the efficient utilization of spectrum.

Re-farming

Spectrum allocation

Spectrum allocation should be based on technology neutrality, service flexibility, timely allocation, timely spectrum reconciliation and enhanced transparency. Need to lay down a clear roadmap for spectrum management which should state the requirement and availability of spectrum for each circle as well as for the whole country. This roadmap should be made available publicly to ensure transparency. National frequency allocation plan should be reviewed every two years. 

Spectrum allocation to existing players

2G spectrum up to the contracted limit should be ensured as initial spectrum. Allocation of spectrum beyond the contacted limit should be based on market mechanisms. The contacted limit of spectrum will be 6.2MHz for GSM operators and 5MHz for CDMA operators. Allocation of spectrum should be based on auctions. Spectrum should be provided to the highest bidder, based on a transparent auction mechanism to determine the price. The criteria for levying spectrum usage charges should be identified upfront at the time of allocation of spectrum. Service providers should be allowed to enter into arrangements for transfer/sharing of spectrum among themselves so as to effectively utilize it and attain maximum spectral efficiency in the sector. It should be based on market price and not administered pricing.

Spectrum allocation to new players Spectrum usage charges Spectrum sharing and trading

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4.3.3 Universal Service Obligation Fund (USOF)82
NTP 1999 envisaged access to basic telecom services for all, especially those in rural and remote areas, at affordable prices. In 2002, the Universal Service Support Policy came into effect, with a universal service levy of 5% being levied on the adjusted gross revenue (AGR) earned by all telecom operators except on VAS such as internet service, voice mail and email. The USOF is estimated to hold around INR180 billion,83 at the end of FY10. However, rural teledensity is at 28.4%, whereas urban teledensity is about 137.3%, resulting in a huge digital divide. The USOF has a long way to go to provide impetus to rural telephony and bridge the gap between the funds collected and disbursed in an effective manner. The USOF covers rural and remote areas with public access telephones and individual rural household telephones in net high cost rural and remote areas. The USOF has enabled telecom development in rural areas through the following key developments: Disbursement of the USO levy to the operators
60 50 54.1 39.4 32.2 17.7 18.5 55.2

VPT and RCP: around 570,000 VPTs are currently eligible for financial support for operation and maintenance. As of 31 December 2009, BSNL has provided VPTs to 61,186 out of 62,302 uncovered villages. Out of the target of 40,705 rural community phones (RCPs), 40,694 have been provided as of December 2009. Tower infrastructure: provide infrastructure support to set up and manage 7,436 infrastructure sites spread over 500 districts in 27 states. As of 31 December 2009, about 6,950 towers have been set up under this scheme. Rural broadband: 95,011 broadband connections out of the proposed 888,832 wireline broadband connections have been provided as of 31 December 2009. Multi access radio relay (MARR)-based VPT: out of 185,121 MARR-based VPTs installed before April 2002, about 184,500 have been replaced as of 31 December 2009.

(INR billion)

40 30 20 10 0

34.6

13.1

15.0

12.9

16.0

N/A FY05 Funds collected FY06 Funds disbursed FY07 FY08 FY09 Dec-09

Source: DoT

82 See 5.3. for global practices. 83 “Minister Sachin wants to ‘Pilot’ IT revolution in northeast,” Indo-Asian News Service, 7 March 2010, via Dow Jones Factive, © 2010 HT Media Limited.

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Parameters
Objectives

Recommendations
The USOF framework needs to be reviewed regularly to effectively utilize the funds to achieve universal service. The USOF should aim to achieve the following: • 100% rural teledensity by 2015 • 25-30 million broadband subscribers in rural areas over the next five years • Data coverage to all villages through cable modem termination system (CMTS) data technology by 2015 • Broadband connectivity for 250,000 gram panchayats by 2012 • At least 20 active public information kiosks with at least 256 kbps speed in every district headquarters by 2015

Potential usages

The USOF should be utilized for the following: • Provision of public telecom and information services • Provision of household telephones in rural and remote areas as may be determined by GoI from time to time • Creation of infrastructure for provision of mobile services in rural and remote areas • Provision of broadband connectivity to villages in a phased manner • Creation of general infrastructure in rural and remote areas for development of telecommunication facilities • Induction of new technological developments in the telecom sector in rural and remote areas

Method of allocation Fund collection

Subsidies should be distributed through transparent market-oriented allocation methodology. There is a significant cash reserve lying unutilized in the USOF, so DoT should lower the contribution from 5% to 1% of AGR.

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4.3.4 Broadband84
India trails all developing Asian countries, as well as its BRIC counterparts, with a broadband penetration of just 0.74%.85 There were just 8.8 million broadband connections at the end of FY10, against the target of 20 million by 2010 set in the Broadband Policy of 2004. The net broadband addition per month is just 0.1 to 0.2 million. The growth of broadband is restricted by several factors such as its perceived utility, application, connectivity, lack of vernacular content, cost of device and affordability. Today, socioeconomic growth is dependent on the spread of broadband services across the country. India has set a target of 100 million broadband connections by 2014, connecting 40% of the households in the country. The drivers for broadband services are broadly classified as technological, economic, social, behavioral and government initiatives. India lags behind in terms of ITU’s ICT Development Index (IDI),86 with a ranking of 129, 106, and 118 out of 154 countries in terms of ICT access, use, and skills, respectively. This calls for a critical review of the Broadband Policy 2004 and the creation of appropriate infrastructure to support broadband growth. Broadband services should be encouraged using wireless media because the laying of fibers block by block at district headquarters would be costly and time-consuming. To kick-start the broadband penetration in rural and far-flung areas, deployment of wireless access should be given preference and fiber media should be utilized from the already available fiber capacity across nation. The last mile access issue can be addressed through the deployment of wireless technology. Broadband should be redefined and clauses such as ‘’always on’’ and minimum speed should be removed from National Broadband Policy, 2004, in order to encourage broadband. The 3C’s — customer, cost and competition — are essential for improving broadband penetration. The need to provide broadband services in rural areas should be met with the help of easy financing and the means to share capital expenditures. Further, there should be balanced competition to ensure the quality and affordability of services.

84 See 5.4. for global practices. 85 “TRAI: Consultation Paper on National Broadband Plan,” TRAI website, June 2010, page 3, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 86 “TRAI: Consultation Paper on National Broadband Plan,” TRAI website, June 2010, page 28, http://www.trai.gov.in/Default.asp, accessed 10 October 2010.

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Enabling the next wave of telecom growth in India

Parameters
Infrastructure

Recommendations
Optic fiber communication (OFC), high-capacity microwave and satellite connectivity should be extended to rural, remote and inaccessible areas. Backhaul connectivity and OFC should be provided to all telecom towers, BSCs and BTS from the nearest block headquarters. The development of the customer premises equipment (CPE) model should be supported for the interoperability of broadband. There is a case for private-public partnership (PPP) in broadband along the lines of highway construction in India through the build, operate and transfer route. The Government should foster competition to improve the pace of penetration. More than two service providers with a rollout obligation should be funded.

Wireless broadband

More spectrum should be made available. Since growth will be through wireless broadband, the government and private sector should collectively work toward developing low-cost mobile applications.

Regional content

Content and applications in regional languages should be created to promote rural broadband. Investments should be made in key content development and services such as e-health and e-education. The support for local access and content delivery to towns should extend beyond the 150 commercially viable towns.

PC penetration

Workshops by local entrepreneurs should be promoted under the common services centers (CSC) scheme, which is a part of the National e-Governance Plan (NeGP). Computer usage by government employees should be encouraged. Online fee payments should be encouraged for land records, vehicle registration, driving licenses, payment of electric and water bills. Discounts should be provided for online payments.

Fiscal incentives

Tariffs need to come down. This can happen only if there are incentives to build infrastructure and provide broadband services. The GoI should consider a differential tax to encourage the private sector to set up common access points. The tax status for expenditure on connectivity/usage should be similar to policies on other public welfare services such as education and medical allowance.

Right of way (ROW)

ROW procedures should be uniform, and charges for broadband services should be rationalized across all states. Broadband connectivity should be made mandatory for all buildings requiring a completion certificate, on the lines of water and power connectivity. In addition, building and cooperative society bylaws can be effectively modified to make it mandatory for such entities to invite broadband service providers to broadband-enable buildings by at least 10 Mbps per household. Similarly, all national and state highway projects should include the laying of an optic fiber backbone.

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4.3.5 Mergers and acquisitions87
At present, intra-circle M&A is allowed subject to the following conditions:

• • •

The total number of operators in a circle should not fall below four Market share and revenues of the merged entity should be less than 40% in each circle A three-year lock-in for owner’s equity in the new operators that have been given licenses recently (no lock-in if fresh equity) Maximum spectrum of the merged entity will be capped at 15MHz for Metros and A circle and 12.4MHz for B circle and C circle No one entity can hold equity stake of 10% or more in more than one licensee company in the same circle





The Government should continue to follow the policy to permit mergers but at the same time retain enough competition in the market so as to protect the consumer interest. The TRAI recommendations dated 11 May 2010 should be followed to maintain the balance between the interests of consumers and service providers.

Parameters
Number of operators Service area and license stipulations

Recommendations
Mergers should not result in less than six operators in the circle. Merger of licenses shall be restricted to the same circle. Merger of license(s) shall be permitted in the following category of licenses: cellular mobile telephone service (CMTS) license with CMTS license, unified access services license (UASL) with UASL, CMTS license with UASL, and UASL with UASL. Merged licenses in all the categories above shall be in UASL category only. The share of a merged entity should not be greater than 30% in terms of sub-base or AGR. The stipulation regarding the minimum period of three years from the effective date of license for merger or acquisition should be done away with.

Market share of merged entity Lock-in period

87 See 5.5. for global practices.

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4.3.6 Taxation
Over the years, the significance of the telecom sector to the Indian economy has grown immensely. Currently, the sector contributes significantly to GDP, as well as tax. According to TRAI, the operators pay up to 30%88 of their total revenues toward different levies, which is 23%–25% higher than their counterparts in other Asian countries. The Indian telecom sector is subject to numerous taxes and levies. This includes the uniform license fee, 5% levy for USOF, VAT, custom duty and other taxes. Currently, the revenue share license fee (including the USOF) is prescribed as follows:



• • •

6% to 10% of AGR for access services, depending on the category of circle 6% of AGR for NLD/ILD services 6% of AGR for internet service providers for revenues accruing from internet telephony service

Despite the significant contribution of the Indian telecom sector to the growth of the GDP and the tax revenue of the Indian economy, there are certain key challenges faced by the sector which are outlined below:

Recharge coupon vouchers (RCVs): the Indian telecom sector is also characterized by a large prepaid subscriber base. As of September 2010,89 96.4% of the GSM subscribers and 94.1% of the CDMA subscribers were prepaid subscribers. RCV is one of the most popular ways to pay for telecommunication services, which account for 80%–85% of the operator revenues. Over the years, the bouquet of services has changed, as the RCVs are witnessing liberalization in the flexibility of their usage, such as to procure merchandise, or other services. The issue whether the sale of RCVs should attract service tax or VAT has been a subject of constant debate and discussion. It is important to note that currently industry players are paying service tax on RCVs, while the dominant purpose for selling these RCVs is provision of telecom services to subscribers. The levy of VAT on the sale of RCVs to subscribers would result in double taxation, thereby leading to greater financial burden on the telecom sector. Central value-added tax (CENVAT) position on tower materials and shelters: telecom operators are availing CENVAT credit on goods such as angles, channels and beams, which are used for building transmission towers. Towers and shelters fall under Chapter 73 and 94 respectively of the Central Excise Tariff Act 1985. The classification of tower, tower material and shelters has been an industry issue on which even the service tax authorities in different jurisdictions have taken a different stand and have sought to deny credit on these goods treating such goods as not qualifying as “capital goods” under the CENVAT Credit Rules 2004. However, these goods could be treated as “component/ spare/accessories” of “capital goods” (i.e., BTS etc.) and accordingly they can be treated as capital goods in the hands of an operating company given that towers and shelters are essential for the provision of telecommunication services. This position has been adopted by industry players. Denial of credit on such goods would lead to an increase in the financial burden on telecom operators.





Sale of light energy: broadband services also continue to face taxation-related concerns. Various states across India have issued show cause notices, or passed orders demanding VAT/sales tax on the activity of providing broadband connectivity by use of optical fiber cables treating it to be sale of “artificially created light energy” under the respective state VAT legislation. The issue was first taken up in the case of a leading telecom player by the state of Karnataka, with the matter going up to the Supreme Court. The Supreme Court without going into the merits of the case has ordered a relook at the matter by the state VAT authorities. It is important to note that currently the industry players are paying service tax on such broadband services. The levy of VAT on the activity of providing broadband connectivity services would lead to double taxation of such services, thereby leading to greater financial burden on the telecom sector.

88 “Telecom firms want lower tax burden,” The Economic Times, http://economictimes.indiatimes.com/news/news-by-industry/telecom/telecom-firms-wantlower-tax-burden/articleshow/2753840.cms, accessed 10 January 2011. 89 “TRAI: The Indian Telecom Services Performance Indicators (July – September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011.

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Levy of entertainment tax on VAS products: there is a proposal in certain states to levy entertainment tax on VAS products as such products to entertain the caller. It is important to note that as per the current proposal, entertainment tax is not proposed to be subsumed in goods and services tax (GST). In case entertainment tax is levied on VAS products, the non-subsumation of entertainment tax in GST could impose a significant financial impact on the telecom industry. Upcoming GST regime: according to industry experts, in view of the exponential growth witnessed by the telecom sector, GST should not translate into an ambitious target to generate higher service tax revenues from the telecom sector. The upcoming GST regime should aim to simplify the tax structure for the industry, with all services and goods being taxed at a standard rate. Further, special consideration has to be given on certain areas in the backdrop of the peculiarities of the telecom sector such as “place of supply rules90” i.e., the state where GST will be paid for different kind of telecom services; ease in statewise compliances. The upcoming GST regime should, thus, aim to rationalize the tax structure in the Indian telecom industry, along with the creation of a roadmap for a single unified levy. The sector should be provided tax benefits and incentives in recognition of being a key contributor to the socioeconomic development and GDP of the country.



90 Place of supply rules define the place (state) which has the right to tax a service transaction.

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Enabling the next wave of telecom growth in India

4.3.7 Foreign direct investment (FDI)
In the past decade, globalization has led to a rapid increase in FDI, thereby enhancing economic growth in developing countries. The telecom sector has been among the sectors that have witnessed substantial growth in FDI. The telecom sector has a substantial impact on a nation’s economic development, social stability and national security. Hence, the balance between economic gains from foreign investment and national telecommunications sovereignty presents a challenging task. FDI in telecom brings advanced technological skills and large amounts of funds, and enhances market competition. However, many countries control FDI in telecom according to their economic and developmental needs, and due to its influence on national security. As a result, telecommunication industries are often state-operated and monopolized in many countries. The Indian telecom sector needs to foster a suitable environment where investment and entrepreneurship, including the development of new forms of electronic commerce, prosper together. Globally, major FDI in the telecom sector is facilitated by two international organizations — the World Trade Organization (WTO) and the International Telecommunication Union (ITU). The WTO aims to promote foreign and domestic investment, and the ITU allocates global spectrum to particular services and manages scarce communications resources among countries for the benefit of trade liberalization and to prevent discrimination between domestic and foreign suppliers. Together, the WTO and the ITU encourage the development of a global telecommunication infrastructure and the formation of an integrated global telecommunication market. In the Asia–Pacific region, the telecommunications market reform has continued, with countries such as the Philippines, Taiwan and Thailand opening their markets to foreign investment. In Latin America, several countries that first privatized their domestic operators in the early 2000s are now preparing for a second round of market openings. Foreign private investment has entered the developing markets through joint ventures with local telecommunication operators or the sale of equity stakes in state-owned telecommunication entities to private foreign investors. FDI in developing countries enables the development of a local telecommunication infrastructure and universal access. It results in substantial progress in meeting such countries’ basic telecommunication requirements. Given the importance of foreign investment, the policy should consider raising the upper limit on foreign investment to encourage more foreign players to invest in the capexintensive telecom sector.

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4.3.8 Consumer affordability and rural penetration
The Indian telecom market has some of the lowest tariffs in the world, with a large majority of people using low-cost mobile handsets. The DoT has been successful in providing world-class telecom infrastructure at globally competitive tariffs and has reduced the digital divide by extending connectivity to unconnected areas. Mobile tariffs per minute in US$
0.3 0.2 0.2 0.1 0.1 0.0 Belgium UK France Brazil 0.23 0.19 0.17

0.16 0.11 0.09 Malaysia 0.05 Thailand 0.04 Pakistan 0.03 China 0.01 India

Phillipines

Source: DoT; India Telecom 2010 brochure

In February 2006, a leading operator launched the “One India Plan.” It was considered affordable, customer friendly and innovative for both local and long distance calls. It also removed the distinction between fixed-line and cellular tariffs. The plan enabled customers to make calls to any phone from one end of the country to the other for INR1 any time during the day. This was

followed up by incumbent operators introducing cheaper tariffs, giving India some of the lowest tariffs in the world. Furthermore, the increase in subscriber base and teledensity has enabled telecom companies to achieve economies of scale and, at the same time, provide leading class services.

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Drivers of affordable mobile communication
• • • • • Transparent regulation Easy market entry Lower tax burden Low risk License reforms to permit mobile resale Innovative business model Reduction in capex and opex Increased usage Highly utilized networks

Policy and regulatory approach

Affordable mobile communications Operator strategies

• • • •

Affordable mobile communication is driven by policy and a regulatory approach and operator strategies. Factors such as transparent regulation, easy market entry, lower tax burden, and low risk enable the creation of policy and a regulatory approach that helps to drive down tariffs. On the other hand, operator strategies such as innovative business models, reduction in capital expenditure and operational expenditure, increased usage and highly utilized networks also help lower tariffs. Pakistan has taken initiatives on the policy and regulatory front by removing import duties on mobile handsets and reducing SIM card activation charges to make mobile communication more affordable. Similarly, operators in Bangladesh have designed products and services such as micro prepaid topups, which are available in very small increments, and also allow consumers to transfer airtime between each other and use it as currency.

There is a need to create a regulatory framework that enables greater sharing. In order to drive penetration in rural and remote areas, it is important that alternative models such as mobile resale be introduced. Resale of mobile services will allow an entity to resell mobile services after buying connections in wholesale from the underlying service provider. The entity will sell the connections to their end customer and contract and bill them in their own capacity for the services provided. The entity will not replicate the efforts of service provider. The services will be provided only by the underlying access provider who will continue to address the related compliance requirements. For the service provider, the entity buying connections in wholesale will be the customer. This arrangement will allow SMEs, small office, home offices and other organized/ unorganized groups in rural and remote areas to serve the needs of the population in a holistic way.

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4.3.9 Human resource
India has the benefit of a huge population, which is characterized by a dynamic young population base– more than half of which is under 25 years old. However, only 17%91 of those in their mid–20s or older have completed their secondary education. India possesses a developed higher education system that offers training in many fields. In terms of size and diversity, India has the largest number of higher education institutions, followed by the US and China. As of December 2009,92 there were 504 universities and university-level institutions, including 243 state universities, 53 state private universities, 40 central universities, 130 deemed universities and 33 institutions of national importance. However, India lags behind China and the US in terms of student enrollment.
Number of higher education institutions and student enrollment
30,000 Number of higher education institutions 21,213 20,000 12.9 10,000 6,706 17.8 25.4 30 25 20 15 10 21,213 5 0 Student enrollment in higher education (million)

Number of students by field of study in India
1% 2% 3% 7% 45% 3% Arts Science Commerce/ Management Engineering/ Technology Medicine Law Agriculture 21% Others

18%

Source: Making the Indian higher education system future ready, Ernst & Young, 2010

0

India

US

China

Source: Making the Indian higher education system future ready, Ernst & Young, 2010

In keeping with the NTP 1999’s R&D objective, organizations such as the Telecom Centers of Excellence (TCOE), the Center of Excellence in Wireless Technology (CEWIT) and the Broadband Wireless Consortium of India (BWCI) have been established. Such organizations promote R&D and help in creating a talented workforce. For instance, in May 2007, a committee comprised of the DoT, COAI, and AUSPI submitted a report that suggested ways to form seven TCOEs across India in a PPP mode. Each TCOE is sponsored by a telecom operating company and is hosted by a premier technical or management institute. The main funding for a TCOE comes from the sponsoring telecom operators, while the GoI provides basic and research infrastructure.

91 Unleashing India’s Innovation, World Bank website, October 2007, page xv. 92 Ministry of Human Resource Development, Government of India — Annual Report 2009–10, Ministry of Human Resource Development, FY10.

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4.3.10 Equipment manufacturing93
The production of telecom equipment in India has increased at a CAGR of 29% from FY04 to FY09, reaching a value of INR518 billion94 in FY09 during the last five years. The value of telecom equipment exports was INR81 billion in FY09 during the last five years. According to DoT estimates, the requirement for telecom equipment in India is expected to be about INR5 trillion95 by 2015. However, the share of locally manufactured equipment has declined to 30% in FY09 from 74% in FY04. India needs to position itself as a telecom manufacturing hub in the long term, and policy initiatives should be focused on encouraging localized manufacturing. The case for a growing telecom electronics and equipment manufacturing industry is as follows:



Significant export potential: according to the Telecom Equipment and Services Export Promotion Council (TEPC), the segment holds an export potential of INR450-500 billion96 by FY14, further strengthening the case for a robust telecom manufacturing industry. Increased competitiveness in the global market: a technologically advanced manufacturing ecosystem in India prospectively offers an international platform to telecom manufacturers. Thus, localized players can expect to compete globally with established manufacturers and make their own mark in foreign markets in the long run.





Employment generation: given the right impetus, growth in the segment holds the potential to triple the country’s current employment base by FY14.

Parameters
Manufacturing hub

Recommendations
There is a need to set up hardware manufacturing cluster parks (HMCP) across the country and to upgrade localized infrastructure to support large volume contract manufacturing. The policy should provide encouragement to localized manufacturers for products designed and manufactured in India as well as products that are manufactured but not designed in the country.

Fiscal incentives

Domestic telecom equipment manufacturers may be allowed to have access to external commercial borrowing for capital expenditure and working capital requirements. In addition, financial institutions should lend money for the capital expenditure and working capital requirements of the telecom equipment manufacturers at the rates they use when lending to telecom service providers or infrastructure providers. It is necessary to ensure the free movement of the equipment/raw materials. In addition, the provision of a single window clearance for all state-level approvals would be a vital fiscal measure. Other significant incentives would encompass the removal of withheld tax on the fee for transfer of technology and software import. The tax on the payment of royalty should be as low as possible. In order to encourage technology transfer, royalty payments of up to 5% on domestic sales and 8% on exports should be exempted from income tax. In order to reduce transaction costs, customs clearance for imports and exports should be done on a self-declaration basis. There should be provision for round-the-clock customs clearance, supported by the banking system.

Export promotion

The Government could create a sizable export promotion fund for the Telecom Equipment and Services Export Promotion Council (TESEPC), resulting in the significant growth of exports to developing nations. There is a need to align product certification with international standards and to facilitate global accreditation for the testing facility.

93 See 5.6. for global practices. 94 “Indian Telecom: A Tale of Stupendous Growth,” The Viewspaper, 28 February 2010, http://theviewspaper.net/indian-telecom-a-tale-of-stupendousgrowth/, accessed 20 October 2010. 95 “Indian telecom firms may get DoT boost,” LiveMint, 01 April 2010, http://www.livemint.com/2010/04/01215017/Indian-telecom-firms-may-get-D. html, accessed 02 August 2010. 96 Policy Recommendations to Increase Domestic Telecom Growth and Exports of Telecom Equipment & Services - Telecom Equipment and Services Export Promotion Council (TEPC), page 4.

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Bilateral trade programs

Telecom exports from India may be included in bilateral trade agreements with emerging markets in regions such as South Asia, Africa, Latin America, Russia and Eastern Europe. Indian trade missions in these regions should proactively seek opportunities in the telecom electronics and equipment domain and facilitate business interactions.

Taxation Financial support Investments for accessories R&D

The current taxation structure for mobile handsets must be maintained for long-term growth. Set up an autonomous body, similar to the Telecom Finance Corporation, to assist and provide guidance to those who want to set up a manufacturing facility. A detailed program should be created to attract investment in the manufacturing of accessories such as batteries and chargers for mobile handsets. R&D should be the key focus. The active participation of the private sector in multiple projects is expected to lead to R&D benefits that will flow to both the public and the private sector. A fund for R&D and product development for the segment should be created. Leading class R&D centers in the PPP mode should be promoted.

Service hubs

Telecom equipment manufacturers should be encouraged to create service hubs to develop a global network and strengthen their presence across India.

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Enabling the next wave of telecom growth in India

4.3.11 Telecom infrastructure97
Infrastructure growth is critical to the rollout of services. For India to achieve 85% teledensity, it needs 95% coverage. At present, there is no uniform approval process across states for setting up telecom infrastructure. The telecom infrastructure service provider needs to apply to the local municipality or panchayats for permission to build a tower. But the lack of guidelines or standard procedures results in enormous delays and huge cost implications. Moreover, the tower business is characterized by high initial capital investments, stable and predictable cash flow, low working capital requirements and high incremental profitability. The profitability is dependent on the ability to increase tenancy on the tower, the rents charged, the scale and spread of the tower portfolio and the ability to raise capital. The biggest barrier to setting up telecom towers and other infrastructure is the wide variation in the approval process adopted by local bodies. Given the challenges that the industry faces, there is a need to lay down a National Telecom Critical Infrastructure Policy on the lines of NTP 1999 elaborating uniform procedures for land acquisition, creating a uniform taxation regime, and extending subsidies and other packages to create a conducive environment to boost national telecom infrastructure building and thereby ensure the increased participation of all the stakeholders.

Parameters
State subject

Recommendations
There is an urgent need for simplification and harmonization of complex rules and processes so that unreasonable barriers do not impede the rollout of infrastructure. GoI should announce a National Telecom Critical Infrastructure Policy (NTCIP). If legislative amendments are needed, they should be adopted in a timely manner. There is a need for national ROW policy for rollout of backhaul network. Tower infrastructure needs to come under the Indian Telegraph Act, and GoI should declare mobile and tower infrastructure as “Critical Infrastructure Services.” Tower infrastructure should be erected in accordance with the NTP and licenses granted by the GoI under the Indian Telegraph Act. These are not matters of local self-government or municipal departments, but are matters liable to be governed by the GoI or regulatory authority constituted by it in accordance with the NTP. Telecom/broadband connectivity should be considered a necessity such as water and power in every housing facility. This mandate should be included in bylaws of the local and state governments. There is also a need for an empowered committee or similar structure to engage with roads and power ministries, which are directly connected with the growth of tower infrastructure.

Full utilization of towers— optimum sharing

There should be laws governing the rollout of towers. A 70-meter tower could service an area of 2-3 square kilometers, and there could be distance guidelines for the same. The rollout subsidy could be fixed at a flat amount based on the approved tower design for a period of five years. Every tower should be fully utilized. If an existing tower is not operating at 100% capacity, then no new tower should be allowed in that zone, which avoids duplication of capex. Once the existing tower is at capacity, a new tower could be awarded through a bidding process. Such practice is being followed in developed countries such as the US. Technological approaches that can potentially reduce the direct and indirect costs of creating telecom infrastructure should be encouraged. The march of technology-IP/converged platforms is leading to integrated technology-neutral host platforms. Also, in-building solutions and DAS make it possible to conserve spectrum and reduce the visual impact of towers.

Civic issues

Civic issues such as zoning regulation, single window clearance and preferential treatment for sharing and incentives need to be addressed in a timely manner.

97 See 5.7. for global practices.

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Taxation on towers

Rationalize the tax structure across states in the form of tax cuts, fiscal incentives and subsidies. The fee levied on tower companies should not be viewed as a source of income to fund the development of a municipality. The Central Government should not impose a cess on tower operators. Since tower operators do not  directly serve the end consumer, a cess should not be levied on them. Currently, there is no cess on handset manufacturers, call centers (with about 40,000 employees) and BTS manufacturers. The immediate cost of infrastructure creation can be brought down significantly by reducing  government duties and taxes, which account for 60% of infrastructure companies’ outgo. Infrastructure companies are akin to players such as equipment vendors and network management companies. There is little justification for imposing costs such as lincense fees on these players, because they do not interface directly with end users.

SACFA clearances

Telecom service providers coordinate with a variety of departments for site clearances which is a time-consuming process. The SACFA Committee should be revamped as part of a faster and simpler site clearance process. USOF subsidies are required to defray the cost of infrastructure creation in rural areas. The USOF contribution toward the setup of telecom infrastructure and its role for rural rollouts should be specified. Time-related incentives ought to be provided to tower infrastructure providers to speed up deployment.

Utilization of USOF and incentives

Grievance redressal Safety concerns

A broader framework should be created to handle and settle grievances involving infrastructure companies in the event of a conflict. Each tower should have a structural certificate, which should be approved by a competent authority. Tower specification and standardization requirements should be clearly spelled out. There could be 6-10 standard designs for a tower, which would be approved by a “design approving authority.” The development of specific IS code of telecom towers will help the industry to follow optimized design parameters, which will make towers safer. Standardized design across operators and geography would further help optimize sharing and potentially reduce cost.

Power tariffs and consumption

Telecom services should be treated as a public utility service, and the industrial rate structure should be made applicable to towers across all states. The state electricity boards should be advised to place a priority on applications for utility connections from telecom infrastructure service providers. Grid power supply should be made available.

Energy consumption

Indian mobile operators and equipment vendors need to develop energy-efficient networks by designing and deploying low-energy BTSs that are powered by renewable energy. Operators should reduce their existing diesel generator run times by deploying the latest fastcharging batteries and improving their partial-state-of-charge capabilities. The energy used by tower companies should fall under a uniform classification in all states. The dependence on diesel could be reduced if the Government utilizes the current diesel subsidy to support a move toward renewable energy options such as solar, fuel cells or wind power, and treating these efforts as part of the overall effort to reduce greenhouse gases and the country’s carbon footprint. There should be a method to cash in carbon credits.

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Aesthetic concerns

There could also be special consideration made for camouflaging towers in and around certain specific urban areas having heritage or other architectural significance; and not for all generic urban areas. Even for limited camouflaging, there should be a joint endeavor between civic agencies and other related departments.

Environmental issues

If these BTSs can be run on renewable energy resources, annual carbon emissions could be reduced. 118,000 renewable energy base stations could reduce annual carbon emissions by up to 6.3 million tonnes. Alternative sources of energy need to be developed and deployed wherever found feasible. Service providers are using green shelters or deploying outdoor BTS wherever found feasible to reduce power consumption. Operators are also experimenting with the use of non-conventional sources of energy wherever feasible for meeting energy requirements. The feasibility of using biofuels is also being studied. These measures have the potential to reduce the carbon footprint significantly, increase the energy efficiency of new network equipment and optimize network technology to increase energy efficiency. There should be incentives for tower companies to optimize fuel and power costs. Operators should be encouraged to use green technologies.

Misplaced apprehensions on health hazards of electromagnetic radiation from mobile antennae-BTS

International institutions like the World Health Organization, the British Medical Association, the International Commission on Non Ionizing Radiation Protection (ICNIRP) and the GSM Association have opined that there is no conclusive evidence of any health hazards due to radiation from mobile towers. Local authorities and consumer groups should be made more aware of this. While the operators are making their best efforts to educate the general public, a positive public stand by the regulator would be extremely helpful. Furthermore, there is a need to fix the feed strength to control radiation emissions. Recent surveys have shown that the radio frequency exposure from base stations ranges from 0.002% to 2% of the levels of international exposure guidelines, depending on a variety of factors such as the proximity to the antenna and the surrounding environment. In fact, due to their lower frequency, at similar radio frequency exposure levels, the body absorbs up to five times more of the signal from FM radio and television than from base stations. This is because the frequencies used in FM radio (around 100MHz) and in TV broadcasting (around 300 to 400MHz) are lower than those employed in mobile telephony (900MHz and 1,800MHz) and because a person’s height makes the body an efficient receiving antenna. Further, radio and television broadcast stations have been in operation for the past 50 or more years without any adverse health consequence being established.

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4.3.12 Enterprise data
The share of data service in India’s total telecom revenue is about 11% as compared with many other countries where it ranges from 20% to 40%. India does not rank in the top 10 data revenue earning countries. The Indian enterprise sector requires the ability to provide sophisticated IP-based and other data communications services to meet needs of enterprise and multinational customers. However, current ILD and NLD licenses were drafted before the development of current GTS services and technologies, and are largely premised on the provision of mass market consumer voice services. Therefore, these licenses do not allow the use of adequate encryption in accordance with current commercial standards to protect confidential information. They also do not address the contracting and billing arrangements required by enterprise and multinational customers and do not clearly set forth licensee obligations regarding data services required by customers. Despite the large number of players entering the enterprise data segment, telecom licenses are voice-centric. Therefore, most regulations are voice-centric and do not cover issues related to enterprise service providers. Regulatory restrictions related to interconnection of data and public switched voice networks interfere with the realization of these services’ full potential.

Ranking of subscribers, data revenue, and service revenue98 by country
Rank 1 2 3 4 5 6 7 8 9 10 By subscribers China India US Russia Brazil Indonesia Japan Germany Pakistan Italy By data revenue US Japan China UK Italy Germany France Korea Spain Australia By service revenue US China Japan France Italy UK Germany India Spain Brazil

Focus area
Encryption

Recommendations
Encryption levels in ILD and NLD licenses should be upgraded to allow strong encryption of up to 256 bits to protect confidential information in accordance with international best practices. In the interest of national security, the customer should undertake to make its encryption key available to the licensed entity on demand.

Lawful interception

The proper treatment of data services under the ILD and NLD licenses, including lawful interception  and monitoring conditions, should be clarified. The security/lawful monitoring and interception requirements applicable to enterprise data services should be specified, with attention given to MPLS and IP-VPN services, which do not connect to a public network.

International private leased circuit (IPLC) regime

Indian BPOs are addressing contact center requirements globally to collect voice calls outside of India and transporting them over an IPLC or MPLS link provided by the authorized service providers. In line with international practice, BPO customers need variable per minute usage-based pricing model both for inbound and outbound calls. To promote competition in the IPLC segment, a wholesale pricing regime should be introduced. It should be retail minus and avoid vertical price squeeze by the incumbent.

Interconnection regime and cable landing station (CLS) access

Access charges under existing Reference Interconnect Offers (RIOs) should be fair, non-discriminatory and cost-based. Access charges under new RIOs for accessing new cables should represent only the actual incremental network costs of providing the access services. Costing should be in place for RIO charges to ensure proper cost-oriented charges, specifically LIRC. Need to eliminate the cumulative assessment of licensing fees on the purchase of inputs, which imposes double taxation on ILD and NLD license holders.

Taxation

98 Enterprise Sector, Association of Competitive Telecom Operators, November 2010.

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4.3.13 Convergence99
The ITU defines convergence as the integration of customer end terminal equipment, or access devices such as the telephone, television and personal computer. Triple play is also used to define the end result of convergence, which refers to the combination of three services — internet, telecom and telephone. Convergence has evolved due to the processes of digitalization and computerization. Technological convergence has made way for business convergence, with a service provider offering a bundle of services. Hence, a telco provides video, data and telephone through separate channels, whereas another telco provides triple play through a single channel. In the US and Hong Kong, commercial power lines have been used to provide telecommunication and internet services. In the near future, it is expected that these lines will become an alternate medium for providing information services, taking convergence to a new level. Convergence creates opportunities such as the combination of either equipment or businesses to provide multiple telecommunications, broadcasting and internet-based services by a single operator. At the same time, it poses challenges that need to be addressed from a regulatory perspective. It is essential to create a regulatory framework that addresses the issues arising from both technological and business convergence. Market-related convergence arises due to consumer expectations of one-stop service availability and bundling of services. Today, most of the telecom operators provide broadband services in addition to voice communication services. As a result, the convergence of voice and data has created a trend for tariff plans based on the volume of data transferred with common billing for interchangeable use of voice calls and data services. Convergence has led to increased competition in the marketplace, impacting both the telecommunications and broadcasting sector as a whole.

99 See 5.8. for global practices.

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4.3.14 Security
In the recent past, India has witnessed a series of terrorist attacks, with terrorism being primarily attributable to religious communities and radical movements. The key stakeholders associated with security concerns surrounding telecom equipment include the DoT, the Ministry of Home Affairs, Indian intelligence agencies, telecom equipment manufacturers and telecom operators. As a result, the GoI has taken steps regarding telecom infrastructure equipment, issuing guidelines related to the import of network equipment from foreign telecommunications vendors. The key players that have been impacted by the security concerns include one of the world’s leading mobile handset manufacturers, virtual private networks (VPNs), internet service providers and one of the world’s leading internet search engines. manufacturers, as the requested information is considered sensitive and proprietary. In 2009, the DoT blocked calls to mobile devices without a 15-digit International Mobile Equipment Identity (IMEI) number, which is a unique number allotted to every mobile phone for the identification purposes. The IMIE number helps intelligence agencies track mobile phone users and curb anti–national activities. This move is expected to have impacted approximately 25 million users, with Chinese mobile phones being the major category.

Although the GoI has initiated these steps to enhance security and curb terrorism with the help of mobile telephony, other issues remain that continue to raise concerns over security. Firstly, Know Your Customer (KYC) verification process for a mobile connection faces issues The guidelines mandate the sharing and monitoring of such as forged documents, leaving the telecom system source code and design along with Indian security agencies. highly vulnerable. Secondly, with the rapid growth in Further, the guidelines put the onus for compliance on the voice and data traffic, modern data mining and network mobile operator, with penalties for non-compliance. The management infrastructure that is able to monitor DoT has also mandated thorough inspection of hardware, terabytes and exabytes of data need to be set up, along software and facilities at the time of procurement and with a trained workforce. Thirdly, any suspicious equipment periodic review thereafter. The guidelines outlined by the that is active in a network should be liable to being disabled GoI impact the commercial viability of telecom equipment via government-approved encryption.

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4.4. Key enablers for potential opportunities
Telecom will find its immense use in schemes and initiatives aimed at socioeconomic development in the years to come such as m-commerce, the UID scheme and financial inclusion. in India is expected to boost market growth, driven by the uptake of services such as mobile web browsing, mobile banking and multimedia messaging service (MMS). The m-commerce service umbrella in India has been limited primarily to payment and transfer systems, with each broad category providing an array of services. Going forward, the rollout of 3G services and increasing usage of WAP, web-enabled phones and smartphones by mobile subscribers is expected to play an important role in the growth of m-commerce. It is forecasted to overtake e-commerce in terms of the number of transactions, with synergy existing between e–commerce and m–commerce, especially in the case of banking and internet-based purchases.

4.4.1 m-commerce100
The next revolution that is expected through the use of mobile phones is the emergence of m-commerce. Mobile phones provide the consumer an opportunity to transact anytime and anywhere. m–commerce finds its applications across various end markets such as banking and financial institutions, paying bills for utilities such as power and gas, booking tickets for transportation services such as trains and taxis and online shopping. The rollout of 3G services

m-commerce
Mobile banking • Inter–account fund transfer • Account inquiry • Stock trading • Bill payment Mobile payments • Information services, including current affairs, tourism and search engines • Ticketing (e.g., train, cinema) • Shopping (i.e., purchase of goods and services) Mobile transfer • Prepaid card top-up • Person-to-person transfers • International remittances

100 See 5.9. for global practices.

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4.4.2 M2M communication
According to Ericsson, the world is expected to witness 50 billion101 connected devices in 2020, with machine– to–machine (M2M) communication being the key driver behind this exponential increase in connected devices. Utilities, government, health care, education, finance, transportation and other emerging industries are expected to be at the forefront in adopting M2M communication. M2M is characterized by small amounts of data between the device and network, and will enable networks to support automated machine communications. The key advantages provided by M2M include cost and spectrum efficiency, service quality and security, redundancy and coverage.

monetary settlements. Mobile payment technology will transform the nature of physical interaction between consumers, merchants and banks. The initial application will focus on mobile banking, to look at account information and transfer small amounts of money between various accounts; over a period of time, bill payment related to utility and others will become a major application; thereafter, adoption of other services such as ticketing, coupons and advertising would pick up, with mobile money becoming a truly rich and integrated application for consumer convenience. This will cause a reduction in the cost of transactions, owing to increased volume, disruptive business models and reduced legal and professional fees.

4.4.4 M-health
M-health applications include the use of mobile devices in collecting community and clinical health data, delivery of health care information to practitioners, researchers and patients, real-time monitoring of patient vital signs and direct provision of care via mobile tele-medicine. It offers a huge potential for health care delivery in India. There are a number of government schemes and other initiatives from medical service providers offering tele-medicine services, to extend affordable health care to all in the country.

4.4.3 Mobile money
Mobile communication and secure mobile transaction opportunities will bring a transformation in the manner in which money is managed, mobilized and generated in future. It will significantly impact the banking industry, where the ability to conduct transactions from anywhere and at any time inherently lends itself to real-time

101 The World of 50 billion connections, Ericsson, December 2010, page 2.

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4.4.5 M-education
M-education offers innovative use of mobile and wireless technologies for education. It aims to bridge the supplydemand gap of high-quality teachers in the country. It enables a virtual community to facilitate the learning activities of teachers, students and peers through collaboration in a distributed environment.

4.4.7 MNREGA and UID
MNREGA and UID strive for providing inclusive growth. MNREGA aims at enhancing the livelihood security of people in rural areas by guaranteeing 100 days of wageemployment in a financial year to a rural household whose adult members volunteer to do unskilled manual work. MNREGA achieves twin objectives of rural development and employment. The UID program is critical to improving the delivery of social services, subsidies and other government programs while also strengthening national security. The integration of such programs with mobile telephony will benefit the nation. For instance, an integrated system for taking biometric attendance through hand-held devices and transmitting it through mobile phones for authentication is expected to solve the challenge of attendance. Once workers have logged in, this data could be transmitted to MNREGA, and help them earn their daily wages.

4.4.6 Financial inclusion
Financial inclusion is central to the overall task of inclusive growth. Financial inclusion aims to bring the unbanked and under-banked population into the organized financial services framework and assist in growth of the electronic payments market in India. In India, about 80% of households do not have bank accounts. The ability of the Indian telecom sector to reach the masses owing to its scale and built-in affordability will help to achieve financial inclusion.

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5. Global practices

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5.1. Licensing
Hong Kong In February 2001, the Hong Kong Government released its 3G licensing framework. Following the pre–qualification exercise, the Government decided to issue four licenses through auctions.
The pre–qualification criteria included investment, network rollout, quality of service and financial capability. The Government selected a royalty-based proposal that required the bidder to pay a certain percentage of its annual 3G revenue turnover determined by the auction, with a guaranteed minimum payment. The royalty auction included the following: • Bidders were asked to bid for a level of annual royalty of the percentage of turnover from their 3G services network operations. • Successful bidders were expected to pay a minimum royalty fixed by the Government for the first five years of the license. From the sixth year on, the successful bidders were required to pay royalties according to the royalty percentage determined at the time of auction, with the same royalty percentage applying to all licensees. • Successful bidders were required to provide a five-year rolling guarantee of the minimum royalty payment for the entire license period.

Sweden

• In May 2000, Sweden issued an invitation to provide network capacity for UMTS mobile telecommunications services. The Government decided to issue four licenses for up to 31 December 2015. • The selection of applicants was based on the “beauty contest” criteria (i.e., allotting licenses to operators who best meet stated pre-set criteria). • The Government focused on rapid rollout and nationwide coverage. Further, the Swedish law states that licenses are allocated based on specific criteria, which is to the advantage of operators and consumers, as operators do not pay expensive fees to the state for the issue of licenses.

Japan

• In 1998, the Japanese Ministry of Posts and Telecommunications (MPT) published the draft for the introduction of 3G services and solicited public comment. In March 2000, the MPT established the technical regulations and publicized the licensing policies. • The number of 3G operators was fixed at three per region, with new as well as incumbent opeartors — but not fixed regional operators — being eligible. • Since the 3G license allocation in Japan was straightforward, with the number of applicants matching the number of licenses, the policy for comparative selection was not invoked. • The three-license limit was driven by a shortage of spectrum, with the regulator having a total of 60MHz of spectrum for 3G services.

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Allocation of 3G mobile licenses102
Country Austria Australia Canada Finland France Germany Italy South Korea Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK Number of licenses 6 6 5 4 4 6 5 3 5 4 4 4 4 4 4 5 Mobile incumbents 4 4 4 3 3 4 4 2 5 2 2 3 3 3 2 4 Method Auction Auction Auction Beauty contest + nominal fee Beauty contest + nominal fee Auction Auction Beauty contest + fee Auction Auction Beauty contest + fee Beauty contest + fee Beauty contest + fee Beauty contest Auction Auction Date November 2000 March 2001 January 2001 March 1999 July 2001 July 2000 October 2000 End 2000 July 2000 January 2001 November 2000 December 2000 March 2000 December 2000 December 2000 April 2000 Sum paid (US$ million) 610.0 351.7 1,482.0 Nominal 4,520.0 45,870.0 10,070.0 3,080.0 2,508.0 51.4 44.8 360.0 120.0 each 44.08 116.0 35,390.0

Note: The “beauty contest” approach purports to allocate licenses to operators who best meet stated pre-set criteria.

Policy-makers and regulators should focus on creating interest among providers and providing incentives for long-term investment. This is done through the principle of renewal expectancy, and through promoting regulatory certainty through a fair, transparent and participatory renewal process. It is essential to provide details about license renewal or reissue, and ensure sufficient lead times and transitional arrangements in the event of non-renewal or changes in licensing conditions. Public consultation procedures and the right to appeal also increase the prospects for a successful renewal process.

5.2. Spectrum
Re-farming of spectrum •
The US Government created the Spectrum Relocation Fund (SRF) in December 2004, which provides a funding mechanism through which federal agencies can recover the costs associated with relocating their radio communications systems from certain spectrum bands, which were authorized to be auctioned for commercial purposes. In September 2006,103 the Federal Communications Commission (FCC) concluded the auction of Advanced Wireless Services (AWS) in the 1,710–1,755MHz band paired with the 2,110– 2,155MHz band. The 1,710–1,755MHz band used by federal agencies was reallocated to AWS under the provisions of Commercial Spectrum Enhancement Act (CSEA), including the use of the SRF to facilitate relocation of federal communications systems. The

102 “3G Mobile Licensing Policy,” ITU website, page 50, http://www.itu.int/osg/spu/ni/3G/casestudies/GSM-FINAL.pdf, accessed 22 October 2010. 103 “1710–1755MHz spectrum band relocation,” National Telecommunications and Information Administration website, page 1, http://www.ntia.doc. gov/reports/2008/SpectrumRelocation2008.pdf, accessed 12 October 2010.

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AWS auction raised US$13.7 billion in net winning bids, and facilitates the provision of innovative new wireless services in the commercial market.



In March 2007, the UK Department of Trade  and Industry’s spectrum strategy committee, in consultation with the Office of Communications (Ofcom), formulated policies and a strategic plan for the future allocation of spectrum to meet the needs of users in both the public and the private sector. The committee formulated the strategic plan for the Ministry of Defense (MoD), civil aeronautical, civil maritime, emergency and public safety services (E&PSS) and science services. The MoD has management rights to 35%104 of the spectrum bands listed in the UK Frequency Allocation Table (UKFAT), and it has begun a program to identify which spectrum can be released and time frame for releasing it. In 2006, the Australian Communications and Media  Authority (ACMA) reviewed government spectrum holdings, sharing or reallocation opportunities for spectrum, and spectrum regulation. One of the key recommendations of the Independent Review of Government Spectrum Holdings (IRGSH) was a regular review of all defense band allocations. In 2010, the Brazilian telecommunications regulator, ANATEL, agreed to re-allocate spectrum in the 2.6GHz band to support the nationwide deployment of nextgeneration mobile broadband services. The 2.6GHz band had previously been allocated to multichannel multipoint distribution service (MMDS) operators to support pay-per-view TV services. The re–allocation benefits the country’s mobile operators, giving them the option to deploy LTE immediately. In Italy, as a part of spectrum re–farming, the Ministry of Communications and the Ministry of Defense have agreed to make 2x75MHz spectrum available for WiMAX in the 3.4–3.6GHz band.

is guaranteed the moment it is needed, the possibility exists to use the spectrum for other applications the primary user does not need. Spectrum could be shared on a short-term or long-term basis under the condition that the use is vacated immediately when the need arises.



Geographical sharing: in certain situations, spectrum is needed only in certain geographical areas. Spectrum assigned to the maritime sector may need to be used for maritime radio services only near the coastline, inland waterways and rivers. Such spectrum could be made available for other applications inland.

Spectrum trading •
Spectrum trading gives public and private sector entities the opportunity to decide which spectrum to release or share. It also provides the terms and flexibility to enter into leasing arrangements for a limited time if the bodies do not wish to dispose of the spectrum permanently. The critical success factors for spectrum trading include a large number of buyers and sellers; an inefficient primary mechanism of spectrum allocation that makes it necessary to move to a market-based method of secondary allocation; and innovation in the supply and demand for radio-based technologies. In 1989, New Zealand was the first country to introduce open market trading of spectrum. The secondary trading of spectrum provided benefits such as economic efficiency, promotion of innovation and flexibility. In 2003, the FCC formulated rules for spectrum trading, simplifying them in mid-2004. The FCC distinguished between de jure rights, i.e., assignment of the license to another party, and de facto control, i.e., transferee retains the license and legal responsibilities, but transfers management control of the spectrum. Further, in 2004, the FCC proposed the concept of developing smart devices that adjust to the spectrum they use and take advantage of underused spectrum.











Sharing of spectrum •
Time sharing: defense needs to use part of the spectrum only in crisis situations during exercises. While it is important to ensure that access to spectrum

104 “A Strategy for Management of major Public Sector Public Holdings,” UK Department for Business, Innovation and Skills website, page 28, http://www. bis.gov. uk/files/file38572.pdf, accessed 12 October 2010.

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5.3. Universal Service Obligation Fund
In many countries, a separate universal service fund has been set up, with the aim of increasing overall teledensity. Most European countries, with a relatively small geographical area and high population density, have not considered the creation of a universal fund. On the other hand, countries with large geographic areas and consequently much higher costs to serve rural areas have funds that aim to cater for the rural population. Communication service providers are obliged to contribute to this fund in many countries. The contribution rate ranges from 0.1% in France to 6% in Malaysia. In most countries, subsidies are granted according to formulas for compensating operators already serving high-cost rural areas within their operating territory, or proposing to expand into high-costs areas. Brazil has developed a mechanism that achieves universal objectives through obligations imposed on its licensees. The Brazilian legal framework uses a variety of tools to achieve universal service. As a result, the telecom regulator, ANATEL has imposed a coverage obligation rather than a funding mechanism. In Greece, USO services were provided by incumbent operators. However, after liberalization of the telecom sector, a competitive tender mechanism was used. In the UK, BT is the designated USO provider. In Mexico, the incumbent operator was required as part of its privatization to install payphones in 20,000 rural areas over a five-year period to meet the policy goal of ensuring some telephone access in all villages with at least 500 residents.

Universal service levies by country105
Country Malaysia India Colombia US Russia Canada Peru Uganda Nigeria Contribution by operators 6% 5% of license fee 5% Less than 4% (plus state levies) 2% 1.5% (plus federal contributions) 1% 1% 1%

Considering USOF for rural wireless broadband services
With the rising importance of broadband, governments should consider whether they should create a USOF for broadband services. The key reasons include:

• • • • • • • •

Considering whether broadband is an essential service of significant “social importance” Estimating the degree of expected market penetration of broadband service Assessing the nature and extent to which broadband will not be made available by the market and the associated reasons Identifying and specifying the objectives and desired outcomes Assessing the extent to which market demand and delivery will meet the specified objectives Considering the social and economic disadvantages incurred by those without access to broadband if there is no government intervention Estimating the costs of intervention to widen broadband deployment through the use of the USO mechanism Estimating the costs of intervention through the use of the USO mechanism compared with the use of other approaches

105 Organization for Economic Co-operation and Development: Working Party on Telecommunication and Information Services Policies, page 19, http:// www.oecd.org/dataoecd/59/48/36503873.pdf, accessed 20 October 2010.

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Methods of utilizing USOF across various countries106
Developed countries Country Australia Canada Source of revenue Levy on licensed operators depending on market share of eligible revenue. Both fixed and mobile operators pay a fixed percentage of eligible telecom revenue. Method of allocating funds The Government determines the level of subsidy paid to the USO provider. Universal service fund compensates costs estimated on the basis of long run marginal costs, and additionally 15% for joint and common costs. Compensation for costs incurred by USO provider. The USO provider makes an offer to provide services at specified cost, and the regulator decides what part to accept. The telecommunication carriers are eligible to receive universal service funds. Method of allocating funds Government to determine based on its goal to increase wireless and wireline teledensity. Universal service fund supports ICT projects consistent with the Government’s development objectives. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. Starting in 2002, operators invited to submit proposals for universal service provider and to be compensated from the fund through a competitive process. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. Subsidies mainly awarded to tele–center projects and areas of greatest need. Subsidies distributed through competitive bidding, with the lowest bidder being the winner.

France Italy

Operators contribute a percentage of revenue i.e., 0.1%. Major operators contribute 1% of revenue.

Japan Developing countries Country Argentina Brazil

Telecommunications carriers contribute to the USOF. Source of revenue 1% of all operators’ gross revenues. 1% of service providers’ gross operational revenues earned from telecom services. Government budget. 5% of national and long distance operators’ revenues, plus funds from license fees. Fixed and mobile network operators contribute 6% of their weighted revenue from designated services to the fund. 2% levy on the revenues of the incumbent operators, ISPs and mobile operators. 5% levy on the revenue of telecommunication operators. 1% of all operators’ gross revenues. 0.16% of all operators’ revenues. 1% levy on all sector participants, including telecom operators, the postal service, couriers and ISPs.

Chile Colombia Malaysia

Nepal India Peru South Africa Uganda

106 Organization for Economic Co-operation and Development: Working Party on Telecommunication and Information Services Policies, April 2006, page 19.

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5.4. Broadband
Broadband networks are an essential infrastructure for the global economy, as they provide businesses and consumers with fast and continuous access to internet–based services, content and applications. Broadband services have economic benefits both in developed and developing nations. However, infrastructure, regulatory environment, urban–rural divide and other factors that impact broadband penetration are very different in developing nations. Emerging markets such as India need to adopt leading practices that facilitate rapid and cost-effective deployment of broadband technologies. The essential leading practices that enable countries to increase broadband penetration include: adoption of regulations that embraces innovation and competition; form PPPs, invest in infrastructure and latest technology; encourage competitive ecosystems; and release spectrum for the sustainable deployment of broadband services. The firm combination of national objectives toward broadband services with leading practices is expected to enable developing nations to achieve benefits of broadband growth. 23%,108 in comparison with 4% in developing economies. Furthermore, it declined to just 2%, if China is excluded from the developing world. Although the world is witnessing a rise in broadband penetration, the growth rate is much higher in the developed world. For instance, during 2005–08, Eastern Europe added 19.5 million fixed broadband subscribers, whereas African countries were able to add 2.4 million fixed broadband subscribers.
Broadband penetration by country 2009
Netherlands Korea UK Finland US Australia China India 0%
Source: OECD; TRAI; Intel

37.1% 33.5% 29.5% 26.7% 26.4% 23.3% 7.7% 0.7% 10% 20% 30% 40%

Monthly broadband charges on a purchasing power parity basis (US$)
60 50 40 30 20 10 0

56 35 UAE Germany 34 Saudi Arabia 32 China 29 Japan 23 UK 22 Canada 20 US 18 Hong Kong
16

India

7 Israel

Source: “Measuring the Information Society,” ITU, 2010; Booz & Company analysis

There are more than 497.8 million107 broadband subscriptions across the world. However, a large digital divide exists between the developed and the developing 2. Increased security aware1. Investment in information world in terms of broadband penetration. The broadband ness controls will be implesecurity has increased: penetration rate ingrowth in theeconomies is nearly to mitigate new or The survey revealed developed mented organization’s annual investment in information security. Of all participants, 61% (46% globally) agreed that their organization will spend more this year in information security than it did last year.

The survey revealed that more A total of 34 % of respondents than 60% of the respondents are revealed that they are either implementing security awareness evaluating or planning to evaluate controls to mitigate new or virtualization techniques in the increased risks. Other top trends next 12 months. However, 23% of 107 World Broadband Statistics: Short report, Point Topic Ltd., page 4. that emerged were increases in the global respondents stated that 108 “Intel: Realizing the benefits of broadband,” Intel website, page 2, http://www.intel.com/Assets/PDF/Article/WA-323857001.pdf, accessed 12 auditing capability and stronger they have embraced cloud October 2010. identity and access management computing, as against only 8% by systems. Indian organizations.

increased risks:

3. The number of organizations currently evaluating the use of virtualization techniques is growing:

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5. The Information Security Management System (ISMS), which covers the overall

South Korea Policy element
Objectives

Action
• The South Korean Government created an action plan for the emergence of a knowledge-based  society, with each citizen having access to a personal computer. The Korean Digital Divide Act created the five–year master plan to close the digital divide, formulated the action plans, and launched the Korean Agency for Digital Opportunity and Promotion (KADO) • Encourage infrastructure investment by incumbents and market entrants  • Support construction of new high-capacity digital broadband backbone, through funding • Financial support for R&D, technology demonstration projects, subsidies for purchase of personal computers by low-income citizens • Promote digital literacy • Support e–governance, e–commerce, education and other information and communications technology (ICT) services

Priorities

Incentives and initiatives

• Offer a 30%-50% discount on telecom service charges to low-income and disabled users  • Provide low-interest loans for communications infrastructure development in less-advantaged regions, as well as funding for information society–related R&D • Plan to implement number portability for both wireline and wireless services • Create fund for promotion of digital literacy • Develop content for disabled people and elderly people • Create and support ICT

United Kingdom Policy element
Objectives

Action
• Create a “digitally rich” UK, where all have the confidence to access the new and innovative services delivered by computer, mobile phone, digital television or any other device • Bridge the digital divide arising due to access cost related to internet services • Establish the UK as a world leader in digital excellence with public services that are responsive, personalized and efficient • Use ICT to reduce social exclusion

Priorities

• Transform learning with ICT • Set up a digital challenge for local authorities to achieve both excellence and equity in ICT • Make the UK a safe place to use the internet • Promote the creation of innovative broadband content • Create a strategy for the transformation of delivery of key public services • Have Ofcom (the independent regulator and competition authority for the UK telecom industry) set out regulatory strategy • Improve access to technology for the digitally excluded and ease technology use for the disabled

Incentives and initiatives

• Ensure that ICT is embedded in education to improve the quality of the learning experience for all, re-engage those who have been disaffected and equip children with skills increasingly essential in the workplace • Have Ofcom research the prospects for home broadband adoption, focusing on adoption among the more disadvantaged • Provide support to BBC and commercial market for experimentation in broadband content using commissions and partnerships

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5.5. Mergers and acquisitions
The telecom sector has evolved at different rates around the world, with different views on each regulatory issue. The emergence of new technologies and applications worldwide has forced mobile operators to expand their global footprint through mergers and acquisitions, especially in emerging markets. However, there is a lack of regulatory consistency at the international level, which would help overcome the challenges posed by globalization. In any country, the key to the telecom sector is radio spectrum management. A spectrum cap refers to the amount of spectrum any operator or group of operators can hold in a geographic area. The US and the UK have gradually eased their respective spectrum caps. In the US, a spectrum cap was in place from 1994 to 2003. It placed a limit of 45MHz on the commercial mobile radio spectrum (CMRS) that a single entity could acquire in any geographical area across the US. In 2001, the cap was raised to 55MHz, and it was abolished in 2003. After the elimination of the spectrum cap, the FCC used a cap of 70MHz in deciding mergers. After the auction in 700MHz band, the spectrum cap in the US stands at 95MHz. In the UK, the telecom regulator, Ofcom, has proposed a cap on the award of spectrum to a mobile operator. The spectrum under 1GHz is the obvious choice for mobile broadband as the airwaves have higher propensity which is needed for high data rate services. Ofcom has proposed a cap on the amount of spectrum held by any operator in the spectrum range under 1GHz. In March 2010, the merger of the UK operations of two mobile operators was cleared by the European Commission. The combined amount of spectrum held by the two parties — at 1,800MHz — was larger than that of their competitors. As a result, the parties offered to surrender 15MHz of spectrum, allowing other competitors to rollout services. Similarly, a spectrum cap has been implemented in Canada, Mexico and Guatemala. However, other countries, such as Australia, have abstained from the implementation of a spectrum cap.

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5.6. Equipment manufacturing
Finland: Market openness, liberalization and innovation drive the telecom equipment industry109
Background • Prior to the 1990s, the Finnish economy was dominated by forest-related industries. However, in the late 1990s, the economy shifted to ICT and consumer electronics, with electronics and electrotechnics accounting for about 25% of the country’s exports. These changes were primarily driven by higher education and the emergence of knowledge-based industries. Further, the country’s ICT sector has benefitted from investment in R&D, which more than doubled between 1985 and 2005. • First-mover advantage: in the 1970s, Finland’s state-owned post, telegraph and telephone (PTT) operator developed the Nordic mobile telephony standard in collaboration with Sweden-, Norway-, and Denmark based PTTs. In 1991, the first GSM network was launched in Finland, with Nordic countries benefitting from the first-mover advantage in the mobile telecom industry worldwide. • Deregulation and increased competition: in the late 1980s and early 1990s, Finland lowered the entry barriers through the introduction of reforms. After the collapse of the Soviet Union in 1991, the country redirected its trade to the West, and joined the European Union in 1993. From 1987 to 1997, Finland deregulated the telecom sector by the adoption of the Telecommunications Act and a new Radio Act, and in 1991, networks were opened to free competition. • Foreign direct investment: in 1993, Finland removed the restriction on foreign ownership in Finnish firms and restrictions on capital inflows. The country witnessed more than fivefold growth in FDI from 1990 to 2000, particularly in the ICT sector. An increase in FDI has resulted in technology transfer and cooperation that has helped to fuel the telecom sector. • Specialization in telecom: Finland’s ICT sector has developed specialization in the manufacturing and export of telecom equipment, with telecom equipment manufacturing accounting for 90% of the ICT manufacturing in 2003. It employed more than 80,000 people in over 4,000 firms in 2000. • Development of clusters: the development of the Finnish telecom industry is also attributed to the emergence of an ICT cluster, which encourages cooperation among a wide range of manufacturers and suppliers. The mobile telecom cluster, which is also known as Finland’s Wireless Valley, includes a wide range of stakeholders, including mobile application developers, equipment manufacturers, component manufacturers and electronics contract manufacturers, content owners and content providers for mobile applications, mobile network operators, academic and research institutions, consulting firms, public certification and standardization authorities and financial service providers. • Skilled workforce: Finland has a strong skilled workforce, primarily driven by a robust educational system in which basic, secondary and tertiary education is free of charge. The country has invested in a number of technical universities, which has facilitated the emergence of Finland in the telecom sector by providing a large pool of engineers.

Strategic initiatives

109 Caroline Lesser, “Market Openness, Trade Liberalisation and Innovation Capacity in the Finnish Telecom Equipment Industry,” OECD Publishing, 29 July 2008.

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China: Emergence of a global manufacturer and innovator110
Background • China’s telecom sector has witnessed rapid growth in the last two decades, with the emergence of Chinese firms that have successfully competed in the global marketplace, despite the presence of multinationals. • Over the years, Chinese manufacturers have evolved from producing cheap and low-quality imitations to products that use high-end advanced technology. • The emergence of a strong telecom sector in China has also been driven by a burgeoning domestic market with the highest number of mobile subscribers in the world, government support to domestic telecom enterprises and the presence of a well–qualified technical workforce. Strategic initiatives Since 1978, China has implemented numerous reforms that have boosted the country’s  manufacturing and trade. The key reforms undertaken by the country include development of a trade policy, reduction in tariff barriers and development of an enabling environment to attract FDI. • Export processing: in the late 1970s and 1980s, China established an export processing policy. Under the policy, raw materials such as parts and components and other intermediate imported goods do not have any duty imposed, as long as they are used to produce export goods. This enabled the country’s domestic and foreign-owned firms to compete, worldwide. • Tariff barriers: during the 1980s and early 1990s, the country reduced its tariff barriers drastically. In the 1980s, some of its tariff rates were above 50%. The implementation of the export processing regime facilitated the reduction of tariff rates. In 2001, the tariffs reached less than 15%. Additionally, the US granted China the most favored nation status in 1980, and the country joined the WTO in 2001. • Foreign direct investment: in 1979, China implemented policies that favored the inflow of FDI, along with technological expertise. This helped the country to produce products rapidly. • Research and development: during the late 1990s, leading global telecom manufacturers launched their R&D centers in China. These centers have helped global players to understand the local market and helped in the overall development of the telecom sector. Furthermore, R&D led to the emergence of Chinese manufacturers that spend a significant portion of their revenues on R&D.

5.7. Telecom infrastructure
• •
Brazil is split into 11 licensing areas with 4 operators in each licensing area. These operators are encouraged to share both civil and electronic infrastructure, particularly in rural areas that may be costly to serve otherwise. Infrastructure sharing has been well accepted globally. In the EU, individual national regulatory authorities are required to notify the EU Commission of decisions regarding infrastructure sharing. The awarding of 3G licenses led to an increase in applications to share infrastructure and in particular for new 3G operators to be permitted to use national roaming to provide full geographic coverage. Initially, the EU took a negative view of the benefits versus costs of infrastructure sharing and saw it as having a potential negative impact on competition. As a result, although national roaming was permitted for new entrants, it was often

time limited. National roaming was permitted in rural areas for a longer period than for urban areas. Other European NRAs followed the Commission’s approach and as such active infrastructure sharing was limited. The operators challenged the Commission’s decision. The European Court of First Instance ruled in favor of the operators and stated that the EU had overplayed the competition concerns. This has led to greater opportunities for operators to engage in infrastructure sharing. In Australia, operators have commercially negotiated for 3G site and RAN sharing. An administrative group has been established to own and operate existing RAN and fund future network rollout plans as agreed with operators. In Sweden, there are five operators, four of whom have formed two separate consortiums of two operators each. Each consortium has built a joint network. The regulator permitted this level of sharing,







110 Behzad Kianian and Kei-Mu Yi, “China’s Emergence as a Manufacturing Juggernaut: Is It Overstated?” Federal Reserve Bank of Philadelphia, 2009.

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but required each operator to maintain 30% of its network separately.





In Norway, a number of commercially negotiated and regulated agreements exist between the two main operators and the MVNOs. There are commercial agreements between the main operators. The main operator is obliged to provide national roaming and MVNO access, publish tariffs and reference offers, implement accounting separation and is subject to price and accounting controls for national roaming. All operators may share sites and masts. Radio network controllers (RNC) may be shared physically, but operators must retain logical control over their networks and spectrum. All transmission routes (i.e., optic fiber, cables, P-P radio lines) may be shared. For core networks, the mobile switching center (MSC) may not be shared. The Ministry of Transport and Communications may, subject to an individual consideration, allow fulfillment of the coverage requirements through roaming in networks based on other technologies than Universal Mobile Telecommunications System (UMTS), provided such networks can offer sufficient capacity and that the arrangement is without substantial disadvantage to subscribers.

In Canada, the Canadian Radio-television and Telecommunications Commission (CRTC) is an independent public authority to regulate and supervise all aspects of the Canadian broadcasting system, as well as to regulate telecom common carriers and service providers. In Canada in 2002, the regulatory functions of the Broadcasting Standards Commission, Independent Television Commission, Office of Telecommunications, Radio Authority and Radio Communications Authority were combined to form Ofcom. It is also the regulator of the UK communications industries, with responsibilities across television, radio, telecommunications and wireless communications services. In July 2005, the Australian Broadcasting Authority and the Australian Communications Authority merged to form the Australian Communications and Media Authority. In July 2000, the Independent Communications Authority  of South Africa was established. It is the regulator of the telecommunications and the broadcasting sectors, and took over the functions of two previous regulators – the South African Telecommunications Regulatory Authority and the Independent Broadcasting Authority.







5.9. m-commerce
Globally, the rollout of 3G has provided the required impetus to drive widespread adoption of m-commerce services. Mobile networks in North America witnessed growth in data services that were also driven by the introduction of smartphones. After smartphones were released, networks’ packet data grew nine times larger than voice services. In India, voice revenues are expected to decline at a CAGR (2008–15) of 1.1% to reach US$19.5 billion111 in 2015, but data revenues are expected to increase at a CAGR of 16.7% during the same period. m-commerce is very popular in countries where most of the population is unbanked. Countries such as Sudan, Ghana, the Philippines and South Africa have been the largest adopters of this service. Latin American countries such as Uruguay, Paraguay, Argentina, Brazil, Venezuela, and Mexico have also implemented m-commerce successfully.

5.8. Convergence

In the US, the Federal Communications Commission (FCC) is an independent agency that regulates interstate and international communications by radio, television, wire, satellite and cable and content. However, cable TV services require approvals at the municipal level. Telecom operators that provide IPTV services on their broadband networks have demanded amendments to the regulations to allow them to provide national franchise and rollout of services. The cable industry has opposed this demand, as the cable industry underwent the time-consuming and expensive process to secure city-by-city franchises over the last three decades. Recently, the state of Texas passed a bill deregulating the telecom markets. This has made it possible for telephone companies to receive a statewide franchise to provide video services that compete with cable.

111 Ovum: Mobile regional and country forecast pack: 2010–15, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010.

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Multiple reforms in the Indian telecom sector have coalesced to produce a remarkable decade of continued success. Looking ahead, progressive policies will become increasingly important to guide unparalleled growth and transformation in the sector.

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Conclusion
The telecom sector in India has witnessed a series of fundamental structural and institutional reforms over the past decade. The best feature of India’s regulatory regime has been its open and transparent approach, with which the regulatory authorities make industry information public and accessible, and encourage a healthy level of consultation with stakeholders. This approach has helped the sector grow by leaps and bounds. The report is an attempt to help understand the viewpoints of various stakeholders and to arrive at reasonable and practical recommendations to help overcome the challenges that the sector faces and harness its opportunities. The key recommendations for improving the existing scenario focus on licensing framework, spectrum, USOF, broadband, M&A, equipment manufacturing and infrastructure sharing.



The USOF should be utilized for the provision of public telecom, information services, household telephones and broadband connectivity in rural and remote areas. It should be used for creating infrastructure for the provision of mobile services and development of telecommunication facilities, and inducting new technological developments in rural and remote areas. The distribution of funds should be through transparent market-oriented allocation methodology. DoT should also consider lowering the contribution to 1% of AGR toward the fund. Operators must be allowed to merge intra-circle while being allowed to combine spectrum. The share of a merged entity should not be greater than 30% in terms of subscriber base or AGR. HMCP should be set up across the country, and fiscal incentives should be provided to promote local manufacturing. R&D initiatives should be encouraged. A National Telecom Critical Infrastructure Policy on the lines of NTP 1999 should establish uniform procedures for land acquisition, a uniform taxation regime, and subsidies and other packages for creating an environment conducive to boosting the construction of national telecom infrastructure and ensuring the increased participation of all the stakeholders.







A single license should cover all telecom services. There should be uniform fee structure across all telecom circles. Future policy should encourage identifying and vacating spectrum bands for future use. Spectrum allocation should be based on technology neutrality, service flexibility, timely allotment, timely spectrum reconciliation and enhanced transparency. Spectrum sharing and trading should be allowed. Broadband infrastructure — OFC, high-capacity microwave and satellite connectivity — must be extended to rural, remote and inaccessible areas. Content and applications in regional languages should be created to promote rural broadband.







The key recommendations for advancing the sector to the next level of growth focus on financial inclusion, m-commerce, convergence, security concerns and consumer affordability.

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Glossary
AWS A2P ACMA ACTO ADC AGR ARPU AUSPI BSCs BTS BWA BWCI CAGR CDB CEWIT CLS CMRS CMSPs CMTS CMTS COAI CPE CPP CRBT CRTC CSC CSEA CVD DAS DoT DSL Advanced Wireless Services Application-to-person Australian Communications and Media Authority Association of Competitive Telecom Operators Access deficit charge Adjusted Gross Revenue Average Revenue Per User Association of Unified Telecom Service Providers of India Base Station Controllers Base Transceiver Stations Broadband Wireless Access Broadband Wireless Consortium of India Compound annual growth rate Cut-out Distance Band Center of Excellence in Wireless Technology Cable Landing Station Commercial Mobile Radio Spectrum Cellular Mobile Service Providers Cellular Mobile Telephone Service Cable Modem Termination System Cellular Operators Association of India Customer Premises Equipment Calling party pays Caller Ring Back Tones Canadian Radio-television and Telecommunications Commission Common Services Centers Commercial Spectrum Enhancement Act Countervailing Duty Distributed Antennae Sharing Department of Telecommunications Digital Subscriber Lines

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E&PSS FCC FDI FICCI FY G2B G2C G2E G2G GBT GMPCS GoI GST HMCP IAMAI IBA ICASA ICNIRP ICRIER ICT IDI ILD IMEI IPF IP-I IPLC IP-VPN ISPAI IT ITeS ITU

Emergency & Public Safety Services Federal Communications Commission Foreign direct investment Federation of Indian Chambers of Commerce and Industry Financial Year Government-to-business Government-to-citizen Government-to-employee Government-to-government Ground-Based Towers Global Mobile Personal Communications Services Government of India Goods and Services Tax Hardware Manufacturing Cluster Parks Internet & Mobile Association of India Independent Broadcasting Authority IBA Independent Communications Authority of South Africa International Commission on Non Ionizing Radiation Protection Indian Council for Research on International Economic Relations Information and Communications Technology ICT Development Index International long distance International Mobile Equipment Identity Infrastructure Provisioning Fee Infrastructure Provider-I International Private Leased Circuit IP-based Virtual Private Network Internet Service Providers Association of India Information Technology IT-enabled Services Sectors International Telecommunication Union

90

KADO kbps KYC MARR MCD MMDS MMS MNP MNREGA MoD MoU MPLS MSCs MTNL NCAER NDMC NeGP NFAP NLD NRAs NTCIP NTP OFC P2A P2P PAN PCOs PMRTS POPs PPP PSU PTT RCP RCV RIOs

Korean Agency for Digital Opportunity and Promotion kilobit per second Know Your Customer Multi Access Radio Relay Municipal Corporation of Delhi Multichannel Multipoint Distribution Service Multimedia Messaging Service Mobile number portability Mahatama Gandhi National Rural Employment Guarantee Act Ministry of Defense Minutes of usage Multiprotocol Label Switching Mobile Switching Centers Mahanagar Telephone Nigam Limited National Council of Applied Economic Research New Delhi Municipal Council National e-Governance Plan National Frequency Allocation Plan National long distance National Regulatory Authorities National Telecom Critical Infrastructure Policy National Telecom Policy Optic fiber communication Person-to-application Person-to-person Permanent Account Number Public Call Offices Public Mobile Radio Trunked Services Point of Presence Private-public Partnership Public Sector Undertakings Posts, Telephone and Telegraph Rural Community Phones Recharge Coupon Voucher Reference Interconnect Offer

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RKM RNC ROW RPM RTT SACFA SATRA SIM SRF TCOE TDSAT TEC TEMA TESEPC TRAI UAS UID UIDAI UKFAT UMTS USOF VAS VoIP VPNs VPTs VSNL WMO WPC WTO

Route Kilometer Radio Network Controllers Right of way Rate per minute Roof-top tower Standing Advisory Committee on Radio Frequency Allocation South African Telecommunications Regulatory Authority Subscriber Identity Module Spectrum Relocation Fund Telecom Centers of Excellence Telecommunications Dispute Settlement and Appellate Tribunal Telecommunication Engineering Center Telecom Equipment Manufacturers Association Telecom Equipment and Services Export Promotion Council Telecom Regulatory Authority of India Unified Access Service Unique identification number Unique Identification Authority of India UK Frequency Allocation Table Universal Mobile Telecommunications System Universal Service Obligation Fund Value-added services Voice over Internet Protocol Virtual Private Network Village Public Telephones Videsh Sanchar Nigam Limited Wireless Monitoring Organization Wireless Planning & Coordination Wing World Trade Organization

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Notes

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Enabling the next wave of telecom growth in India

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Notes

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96

About Federation of Indian Chambers of Commerce and Industry (FICCI)
FICCI, set up in 1927, is the largest and oldest apex organization of Indian business. With a nationwide membership of over 1,500 corporates and over 500 chambers of commerce, FICCI espouses Indian businesses and speaks directly and indirectly for over 250,000 business units. FICCI maintains the lead as the proactive business solutions provider through research, interactions at the highest political level and global networking. FICCI organizes a large number of exhibitions, conferences, seminars and meets for promoting business.

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Ernst & Young’s Global Telecommunications Center
Telecommunications operators are facing the challenges of growth, convergence, business transformation, technological change and regulatory pressures in increasingly difficult economic conditions. Operators choose Ernst & Young because they value our industry-based approach to addressing their assurance, tax, transaction and advisory needs. They know that they have much to gain from our clear understanding of the opportunities, complexities and commercial realities of the telecommunications industry — wherever in the world they’re operating. What gives us this understanding is our Global Telecommunications Center. Operating from Paris, Cologne, Johannesburg, Riyadh, Delhi, Beijing and San Antonio, the Center brings together people and ideas from across the world, to help our clients address the challenges of today — and tomorrow. Our clients benefit from our insights on key trends and emerging issues. These may relate to the economic downturn, next-generation services, infrastructure sharing, outsourcing, revenue assurance, operational efficiency, regulations, future growth markets or mergers and acquisitions. We help our clients react to trends in a way that improves the financial performance of their business. Learn more about our approaches and services by visiting our website: www.ey.com/telecommunications

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Contacts
Vincent de La Bachelerie

Global Telecommunications Center
Global Telecommunications Leader vincent.de.la.bachelerie@fr.ey.com

Jonathan Dharmapalan

Global Deputy Telecommunications Leader jonathan.dharmapalan@ey.com

Marc Chaya

Global Telecommunications Markets Leader marc.chaya@fr.ey.com

Adrian Baschnonga

Global Telecommunications Senior Analyst abaschnonga@uk.ey.com

Steve Lo

Global Telecommunications Center — Beijing steve.lo@cn.ey.com

Holger Forst

Global Telecommunications Center — Cologne holger.forst@de.ey.com

Prashant Singhal

Global Telecommunications Center — Delhi prashant.singhal@in.ey.com

Serge Thiemele

Global Telecommunications Center — Johannesburg serge.thiemele@ci.ey.com

Wasim Khan

Global Telecommunications Center — Riyadh wasim.khan@sa.ey.com

Mike Stoltz

Global Telecommunications Center — San Antonio michael.stoltz@ey.com

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Enabling the next wave of telecom growth in India

Enabling the next wave of telecom growth in India

100

Ernst & Young Assurance | Tax | Transactions | Advisory
About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com © 2011 EYGM Limited. All Rights Reserved. EYG no. EH0091
In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member firms.

About Federation of Indian Chambers of Commerce and Industry (FICCI)
FICCI, set up in 1927, is the largest and oldest apex organization of Indian business. With a nationwide membership of over 1,500 corporates and over 500 chambers of commerce, FICCI espouses Indian businesses and speaks directly and indirectly for over 250,000 business units. FICCI maintains the lead as the proactive business solutions provider through research, interactions at the highest political level and global networking. FICCI organizes a large number of exhibitions, conferences, seminars and meets for promoting business.

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