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MICROECONOMICS PROJECT

INDIAN TELECOMMUNICATIONS
INDUSTRY

TEAM MEMBERS:
Tarun Daga
1
Uma Balakrishnan

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CONTENTS
TITLE PAGE
Telecom In India 4

Evolution of Indian Telecom Industry 5

• Timeline 6
Current Market Scenario 8

• Size, Players and Trends 8
• Tele-density 10
• Market Players 11
• When the Prices Decline 15
Economic Indicators 16

• Concentration Ratio 16
• H Index 17
• Synopsis of Demand and Supply Situation 18
Conclusion 24

Bibliography 26

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TELECOM IN INDIA
The Indian telecommunications market has been displaying sustained
high growth rates. Riding on expectations of overall high economic
growth and consequent rising income levels, it offers an unprecedented
opportunity for foreign investment. A combination of factors is driving
growth in the telecom market, promising rich returns on investments.

Over the past 10 years, India has registered the fastest growth among
major democracies, having grown at over 7 per cent in four years during
the 1990s. It represents the fourth largest economy in terms of
Purchasing Power Parity. According to a recent Goldman Sachs report,
over the next fifty years, Brazil, Russia, India and China - the BRIC
economies- could become a much larger force in the world economy. It
reports, “India could emerge as the world’s third largest economy and of
these four countries; India has the potential to show the fastest growth
over the next 30 to 50 years”. The report also states that, “Rising
incomes may also see these economies move through the ‘sweet spot’ of
growth for different kinds of products, as local spending patterns change.
This could be an important determinant of demand and pricing patterns
for a range of commodities”. The share of the services sector as a
percentage of total GDP is also predicted to rise from the current 46 per
cent to about 60 per cent by 2020. The boom in the services sector is
slated to come from India, emerging as a chosen destination for software
and other IT enabled services, tourism etc. According to a Nasscom-
McKinsey & Co. Study, by 2008, the Indian IT software and services sector
will account for US$ 70-80 billion in revenues; it’ll employ 4 million
people, and account for 7 per cent of India’s GDP and 30 per cent of
India’s foreign exchange inflows.

Population projections from the Planning Commission of India suggest
that the share of the working age population (15-64 years) in total
population will grow from the current 59 per cent to about 65 per cent,
translating into 882 million by year 2020.According to the Vision 2020
document for the Planning Commission of India, the country will witness
continued urbanisation. The urban population is expected to rise from 28
per cent to 40 per cent of total population by 2020.Future growth is likely

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

EVOLUTION OF THE INDIAN TELECOM
INDUSTRY
Until the 1980s, the Department of Posts and Telegraphs (under the
Ministry of the same name) had the mandate of regulating and offering
telecommunications services. It was governed by the Indian Telegraph
Act 1885 and the Wireless Act of 1933. In 1985, the Department of Posts
and Telegraph was split up into the Department of Telecommunications
(DoT) and the Department of Posts. The DoT was established as the state
operator, regulator and licensor. It was only in October 1999 that the
activities of the operator and licensor were somewhat separated, by the
creation of the Department of Telecommunications Services (DTS). This
separation, however, was a largely artificial one.

Although the DoT had been charged with operating telecommunications
services, its efforts were seen as insufficient. Initial steps towards
corporatisation saw the creation of Mahanagar Telephone Nigam Limited
(MTNL), which started offering basic fixed services in Mumbai and Delhi in
1987. MTNL still holds a monopoly in those cities, where DoT/DTS is not
present at the local level. MTNL is wholly owned by the Government of
India and the DoT. Videsh Sanchar Nigam Limited (VSNL) was set up in
1986 as the monopoly operator for international gateway services.

On May 13, 1994, the government opened local basic and value-added
telecommunications services to competition. Mobile services were
introduced on a commercial basis in November 1994. India was thus
divided into 21 "Telecom Circles". Circles correspond approximately to

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states and are categorized as either "A", "B" or "C" according to size and
importance. Category A includes the heaviest volume areas such as
Delhi, Uttar Pradesh, Maharashtra, Gujarat, Andhra, Karnataka and Tamil
Nadu. Licenses for mobile services were also issued for the four metros
(Delhi, Mumbai, Chennai, Calcutta). As part of the license conditions,
traffic could be routed to VSNL's international gateway only by passing
through DoT/DTS's network. In 1986, the Telecom Commission was set
up with the mandate to accelerate the deployment of telecommunications
services and to implement new telecommunication policy.

A bill passed in 1995 envisaged the creation of an independent and
autonomous agency for the regulation of telecommunications, the
Telecommunications Regulatory Authority of India (TRAI). Set up in 1997,
the TRAI is responsible facilitating interconnection and technical
interconnectivity between operators, regulating revenue sharing,
ensuring compliance with license conditions, facilitating competition and
settling disputes between service providers. The TRAI cannot grant or
renew licenses and this remains the DoT's responsibility. The TRAI may
also set the rates for telecommunications services. Its decisions can only
be challenged by the High Courts or Supreme Courts of India.

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TIMELINE:
Mid 1980s Department of Telecommunications set up

Mar 1986 VSNL incorporated to provide international telecom services

Apr 1986 MTNL incorporated to provide fixed-line telephone services in
Mumbai and New Delhi

Dec 1991 DoT invites bids from Indian companies for cellular licenses in
the four metropolitan circles

May 1994 Government announces the National Telecom Policy, opening
up the basic service sector to private players

Sep 1994 Entry guidelines for basic services announced

Nov 1994 Licenses were issued to cellular operators in the four metros

Mar 1995 Paging services by private operators commence

Oct 1996 Licenses for 20 cellular circles issued

Jan 1997 Telecom Regulatory Authority of India established by
government

Nov 1998 ISP business opened up to operators other than DoT and VSNL

Mar 1999 Government announces NTP 1999

Jul 1999 DoT announces Migration Package for existing operators'
licensing costs, subject to compliance with certain conditions

Aug 2000 Government announces guidelines for opening up domestic
long distance telephony for carrying both inter-circle and
intra-circle traffic, with no restriction on the number of players
TRAI issues the first tariff order and cuts domestic and
international long distance telephony charges.

Jan 2001 The Department of Telecom opens up basic services to
unlimited competition and allows basic operators to provide
WLL services on a restricted basis.

Aug 2001 Opening of National Long Distance Service to competition

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

Apr 2002 ILD sector opened to competition. End of VSNL monopoly.

May 2002 Bharti offers ILD services with sharp cuts in tariffs

Sep 2002 TRAI decides to 'forbear' from regulating cellular tariffs

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

Mar 2007 9 distinct operators had been allocated GSM spectrum. Out of
these, only Bharti has a pan-India presence.

Aug 2007 Subscriber thresholds were revised by TRAI as operators
could support more subscribers with lower spectrum as
compared to WPC allocation

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

Jun 2009 TRAI plans to introduce MNP (Mobile Number Portability) on a
pan-India basis

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CURRENT MARKET SCENARIO

SIZE, PLAYERS AND TRENDS:
India boasts of 300 million telephone subscribers today and has become
the second largest telecom network in the world, after China. Also, the
number of new mobile subscribers is growing by 8.5 to 10 million every
month, making it one of the fastest growing telecom markets of the
world.

In 2006-07, the telecom industry also saw an estimated $8.5 bn in
investment flow, out of which 6% or $550 million was in the form of
foreign direct investment (FDI). According to a report by RNCOS, a market
research consulting Services Company, mobile phones account for 80.2%
of the subscriber base in India, at the end of March 2007.

The growth of telecom in India can be attributed to liberalization, reforms
and competition. The telecom policy of 1999 envisaged a tele-density of
15 percent by the year 2010. The overall tele-density of the country is
already over 26 percent now. Out of 300 million telephone subscribers
today, 13% are wire-line subscribers. These developments in telecom
sector have resulted in massive investments and explosion in supply,
which are signs of a vigorous, competitive and fast-growing sector.

The major players in the Indian telecom industry, excluding Reliance and
Tata Teleservices, are operating in the GSM market. After the release of
TRAI recommendations in September 2007, there was a flood of
applications for UASL (Unified Access License Seekers). This was probably
because of the hope of pan-India start-up GSM allocation at a very
economical price (US$240m). The armed forces are expected to vacate
20MHz of GSM spectrum. This would be around 70% of average GSM
allocation currently.

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All India GSM Cellular Subscriber Base-Circle Wise

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

All-India GSM Cellular Subscriber Base

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GSM Industry Indicators for 2007

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

MARKET PLAYERS:

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No. Service Total Market Trends
Providers sub share
figures (%)

1. BHARTI 580379 25.40 Integrated Telco, with presence in
AIRTEL 20 all sectors - Cellular, Basic, National
Long Distance (NLD) &
International Long Distance (ILD).
Currently offering only GSM based
cellular services. No CDMA based
cellular services being offered.

2. RELIANCE 525400 22.99 Operating GSM wireless services in
COMMUNICATI 00 7 circles and subsequently
ONS acquired Madhya Pradesh circle
from RPG. Reliance is currently
focusing on rollout of CDMA based
wireless services.

3. VODAFONE 441262 19.31 Pure play GSM mobility player
ESSAR 43 offering cellular services in 16
circles. Has been working on a
model of being associated with the
high ARPU subscribers

4. BSNL 342513 14.99 Incumbent operator, virtual
34 monopoly in the basic services.
Very strong NLD operator; and, has
been able to quickly ramp up GSM
subscribers due to nationwide
network reach. Pan country
presence in both basic (except
Mumbai and Delhi) and cellular
services.

5. IDEA 240015 10.50 A 3 way GSM mobility joint venture
73 between Tatas, Birlas and AT&T
Wireless offering cellular services

in 11 circles.

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6. AIRCEL 680506 2.98 Operates only in Metro(Chennai)
6 and Circle A(Tamil Nadu)

7. SPICE 421066 1.84 Pure play GSM based mobility
9 player offering services in 2 circles
– Punjab and Karnataka.

8. MTNL 324185 1.42 Integrated incumbent operator also
1 offering GSM based mobility in
Delhi and Mumbai.

9. BPL 129476 0.57 Pure play cellular operator along
2 with Spice and Aircel.

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Total Future Projections (Mobile Subscribers)

As can be seen from the figure of demand graph, the demand in the
telecom industry in year 2007 is around 230 million now we will see does
the main players in the industry has the capacity to fulfil the appetite of
the demand side.

Here we are considering only the top 4 companies which almost consist
80% of the market shares.

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

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

Wireless Penetration

The Indian market remains one of the few telecom Markets to exhibit
continued growth, and the industry is expected to achieve the
government's target of 330 million telecom subscribers by end 2008.
Further impetus is expected from the introduction of Mobile Number
Portability (MNP) and the possible 3G rollout in the end of year 2008,
coupled with expansion in value-added services (VAS).
Industry operators have substantial investments ahead of them, owing to
the sustained high growth phase of the industry. For the next financial
year, all major operators have significantly increased their capex plans.
FY08 industry capex is likely to exceed USD18bn, approximately twice the
level for FY07. On account of their heavy capex, most operators would
continue to be free cash flow negative (FCFN) during FY08,
notwithstanding strong growth in operating cash flow.
While debt would remain the primary source for funding these
investments, equity through IPOs for some of the unlisted entities could
also emerge as an option. BSNL has already announced its IPO, to be
commenced during late 2008. Hutchison International has also sold its
stake to Vodafone which used the existing subscriber base of Hutchison
Essar to gain a strong foothold in the already vibrant Indian
telecommunications market.
GSM players in India added 101 million new subscribers in FY08. The
public sector BSNL has registered negative growth in five of the 21
telecom circles where it offers services. Overall, the PSU has added just
29.86 mn new subscribers in FY08 compared to 50.69 mn by Bharti Airtel
and 38.53 million by Vodafone-Essar. This also implies that the PSU,
which had lost its position as the second largest GSM player in the
country to Vodafone Essar in May 2007, has slipped further down.
Vodafone Essar now has a total of over 44.13 million subscribers and a
market share of 19.31% when compared to 29.86 mn and 16.41% for the
PSU.

As per the latest data compiled by the Cellular Operators Association of
India (COAI), the industry association representing all GSM operators, the
GSM subscriber base has touched 188.72 mn as of March, 2008. The
growth witnessed was lead by Bharti Airtel, which took its subscriber base
to 58.03 mn. The PSU BSNL/MTNL has not undertaken any major

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expansion contract since October 2005. This has witnessed even regional
players like Idea Cellular and Aircel Cellular have overtaken the PSU in
terms of subscriber addition over the last year.

As the Indian market is growing at an accelerated rate, the economy is
witnessing new players entering the market, with more trying to get a leg
in. The market has turned from a monopolistic market held by BSNL and
MTNL, to a market close to perfect competition where the customer is
King and prices and other factors are decided by competitive forces
acting in the market. Even though the growth of the Telecom industry is
exponential, the growing number of players, their size and consolidation
among existing players show that they can in fact satisfy the ever-
growing demand of Indian consumers, providing not just competitive
prices, but more value for money and value-added services to the
customer.

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

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

• Perfect competition, with a very low concentration ratio,
• Monopolistic competition, below 40% for the four-firm
measurement,
• Oligopoly, above 40% for the four-firm measurement, (Example
automobile manufacturers)
• Monopoly, with a near-100% four-firm measurement.

Number Name of the % Market
company share

1. BHARTI AIRTEL 25.4

2. RELIANCE 22.99
COMMUNICATION

3. VODAFONE 19.31
ESSAR

4. BSNL 14.99

Total =
82.69%

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

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

VALUE IMPLICATION

1 Absolute monopoly

0 Absolute
competition

0-0.5 Monopolistic

0.5-0.75 Oligopoly

0.75-1.0 Monopoly

Number Name of Market
the share(Si)
Si^2
company

1. BHARTI 0.254 0.064516
AIRTEL

2. BSNL 0.1499 0.02247

3. VODAFON 0.1931 0.037288
E ESSAR

4. RELIANCE 0.2299 0.052854
COM.

5. BPL 0.0057 0.00003249

6. SPICE 0.0184 0.000339

7. AIRCEL 0.0298 0.000888

8. IDEA 0.105 0.011025

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9. MTNL 0.0142 0.000202

Total =

0.18961336

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

SYNOPSIS OF THE DEMAND AND SUPPLY
SITUATION:
This part provides a simple picture of the demand and supply situation in
India to illustrate some of the conditions prevailing in the market. The
main points that emerge here are:
• Excess demand in the form of network congestion implies that the
customers are not on the aggregate demand curve for the telecom
service in question. Also, it is not clear which price will bring the
customers to the desired demand curve. Hence, it would not be
appropriate or easy to rely on pricing or mark-up based on demand.
• The fluctuations in prices are unlikely to affect overall demand,
except in areas where the supply constraint does not apply.
• Since supply rather than demand is the main constraint, it would be
useful to focus on increasing the supply of the network. This can now be
feasible due to increased deregulation and increased FDI in the industry.
• Such a focus on investment is even more meaningful in a situation
with excess demand in the form of a waiting list for connections, and
where considerable additional demand is anticipated to arise in the
future. For instance, in the next five years, the anticipated demand will be
more than double the current network size. This could be met with the
allocation of further 2G and 3G spectrum. This revolution has already

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

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

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

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EXCESS DEMAND AND CONGESTION:

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

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

OVERALL EXCESS DEMAND:

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

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

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

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

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Even if the customer is not subject to the supply constraint, it may not
be feasible to apply the Ramsey rule as long as the desired price is to the
right side of the supply constraint. Moreover, when the link to the
network is increasing as rapidly as 20 per cent per annum, and excess
demand still continues to prevail, it is very difficult to estimate demand
characteristics accurately or to use the demand curve for pricing
telecom.

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

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CONCLUSION
In our opinion, instead of taking a short-term view of paying capacity, the
telecom companies should focus on a long-term game. There is one word
that telecom companies are hearing a lot these days-“Volumes”. They
need volumes to sustain the network and the large employee base they
have enrolled. In this regard, companies like Reliance and Tata’s have
been aggressive over the final rollout of connections to PCO owners.
Reliance is giving upto 30% commission on each call. How they market
and distribute these connections is a tough battle indeed. If and when the
carrier access codes are introduced, there could be a tough fight among
these outlets, as far as prices are concerned. Yet, prices can go down
further by almost 40% of the present structure. Part of the price cuts
could be because of tax exemptions, if and when these companies can
lobby for the same. The other part could be earning through volumes.
New players like Virgin Mobile, which already has an international
presence in close to 17 countries are entering India. It is doing so in
collaboration with Tata Teleservices. The target market for Virgin Mobile
is the youth, which in India is around 54% of its population.
Mobile Number Portability (MNP) is to be introduced by June 2009. A
neutral third-party operator is likely to be licensed to provide an end-to-
end MNP solution. MNP could well be a catalyst in the realignment of
subscriber market share in favour of strong players with better service
quality. There are challenges like porting time, allocation of capital and
operational porting costs among participants, and other interconnect
issues. Yet, the atmosphere around the MNP issue looks positive and will
be set once the committee submits its final report on the same.

The telecom sector is attracting significant domestic and global
investment. The capital investment made by the telecom service industry
during 2006-07 was around $8.5 billion, out of which $550 million was
foreign direct investment. The margins and profits of almost all the
telecom companies have been increasing. In fact there are cases where a
significant portion of profit of international telecom companies have been
from their operations in India.
India is well prepared for the introduction of NGN (Next-Generation
Networking). Being a late starter in the telecom scenario, India has the
advantage of using the latest technology and so it is in a better position
when compared to many other countries as far as introduction of NGN is

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concerned. Besides, the TRAI has identified introduction of NGN as a
priority area.

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

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BIBLIOGRAPHY
• www.trai.gov.in

• www.coai.com

• www.dot.gov.in

• Google search engine

• PriceWaterHOuse Coopers

• Motilal Oswal Securities Ltd.

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