Raising FDI Limits in Telecom or Rewarding Law Breakers?

THE government’s policies on vital sectors such as telecom have less to do with actual policies for the sector and much more on how to look at financing needs of private capital. If we look at the priorities that the telecom sector should have, we would have thought the priority should be for expanding telecom network coverage and correcting the growing rural urban telecom divide. The other area that requires focus is the withering away of telecom manufacturing, particularly at a time when India offers the second largest market for telecom equipment in the world. Instead, the finance ministry’s response to the Left party’s note has little to offer except that unless we help the private licensees to sell their cellular licensees to foreign companies, these companies will not be able to expand. And for this, the finance ministry believes that the Foreign Direct Investment (FDI) limits should be lifted.

Before we get into the details of the finance ministry’s response, let us address one issue that the finance ministry has raised from the beginning and the media has echoed: the need for FDI to expand the telecom network in the country. We will also address the other issue that FDIs will come into the country only if FDI limits are lifted.


The finance ministry has stated that the requirement of capital in the telecom sector is to the tune of $28 billion, a figure which, according to the finance ministry, can be only met by FDI flows. The finance ministry also claims that if such FDIs do not come into the country for the telecom sector, then it will have to be financed out of our savings, leaving other sectors of the economy starved of capital. The interesting omission from the finance ministry’s calculations is what is the actual surplus that the telecom companies are currently generating. Surely the question of foreign capital and loans arise after we take into account the surplus of these companies. After all, no company takes loans or parts with equity if they can invest from their own surplus.

If we look at the current surplus that the Indian telecom companies are generating, BSNL alone has invested $14.7 billion in the last five years, almost entirely from its internal surplus. If we also add MTNL’s surplus and take the next five years estimated investments of BSNL and MTNL, it is of the order of $ 28 billion. In other words, the public sector telecom companies from their own resources can invest the entire $28 billion that the finance ministry talks about. In addition to this, there is also the surplus of the private players, who have an average surplus of at least Rs  10,000 crore ($2.2 billion) for the next five years.

VSNL alone has a surplus of about Rs 4,000 crore. Certainly, Reliance, Bharati and the entire set of cellular companies would generate another Rs 6,000 crore. And this is not all. The USO levy is 5 per cent of the revenue of the telecom companies. The current total revenue of the telecom sector is Rs 66,500 crore. If we take the rate at which it is growing and consider that 5 per cent of this will go into the USO Fund, we are talking of another $1 billion which is to be invested in the telecom sector. Totalling up these additional amounts, we have, in addition to the public sector companies, an investment potential of $3.2 billion per year, i.e., another $16 billion in five years that can be invested in telecom expansion. This means that the finance ministry is completely underestimating the amount of investments that the telecom sector can make out of its own resources. The total amount including public sector companies, the private players and the USO levy is to the tune of $44 billion. And the finance ministry need not worry, it will not starve any other sector of capital, this is all from what the telecom subscribers will finance.

The above figures are not surprising. Earlier, the Department of Telecom had financed the entire telecom expansion without any budgetary support from the government. In the last 5 years, the private and the public sector has invested an estimated Rs 100,000 crore in the telecom sector. While the private companies had to make an up-front investment initially, with a healthy and a fast expanding customer base, they are now also generating significant surplus. The figures are only surprising if somebody does not know the telecom sector. If the earlier NDA government had not handed over VSNL to the Tatas, more money would have been available for the public sector telecom companies to focus on the crucial areas in telecom: rural and broadband connectivity.


Even though capital is not a constraint on telecom expansion, we can still lift FDI limits if we believe that it would bring additional capital and allow the sector to expand faster. The catch here is that there is no correlation between receiving foreign investments and FDI limits. For example, in India, with a 49 per cent cap in place in 1994 and 1995, we had initially 32 joint ventures for mobile telephony and 16 joint ventures for fixed telephony with some of the world’s largest and best-known telecom companies, bidding for mobile and fixed line licenses. Most of them have left, not because of FDI limits, but due to the regulatory mess that we have described often enough in these columns, as well as bursting of the Internet bubble.

We have allowed 100 per cent FDI in Internet companies, yet we have no takers from foreign investors. Even worse, the 100 per cent FDI limits have not helped in fashioning a suitable broadband policy. Korea, in the same period, has converted its almost all the Internet connections to broadband. Their costs are also 60 times lower than similar broadband connections in India. In India, instead of a thrust on broadband connectivity, the NDA government handed over the public sector Internet company VSNL to Tatas for milking and hoped that 100 per cent FDI limits would automatically see broadband penetrate into India. A picture, which has not changed radically, even after the announcement of the new broadband policy by the ministry of communications.


NTP 94 had argued that we need private capital for providing additional resources for connecting all the villages by 1997 and provide telephone on demand. Even after 10 years of NTP 94, which allowed private capital to come into telecom, there are 70 thousand villages without telephones. The waiting list, concentrated almost entirely in smaller semi-urban and mofussil towns is still of the order of 4 million. The rural-urban divide is growing wider, with Teledensity of 1.7 per 100 in rural areas as opposed to 19.7 in the urban areas. The private players who were supposed to have brought in additional capital for rural telephony have in fact preferred to pay the miniscule penalties prescribed in the license than provide rural telephones. The private players have provided only about 14,000 Village Public Telephones (VPTs) and met only about 10 per cent of their license commitments.

The existing telecom network coverage is concentrated on metros and larger towns, with coverage of only about 20 per cent of the country. If we want to provide rural telephony, the alleged purpose of NTP 94 and all subsequent telecom policy documents, obviously we need to strengthen BSNL and provide a rapid disbursement of the USO Fund. And we need to add some teeth to forcing the private players to adhere to their license terms and conditions. Instead, the policy is to focus on how to help the private players who have no intention of going to rural areas.


While the finance ministry is deeply worried of the impact on the capital formation in the country if FDI is not allowed to be lifted in telecom, it seems to be quite comfortable with the virtual demise of the telecom manufacturing sector in the country. To the finance ministry, any attempt to support manufacturing in the country is tantamount to protection, which will drive cost of services high. What seems to have entirely escaped the finance ministry’s attentions is the huge balance of payments that the telecom sector will create if all the equipment for this sector – from handsets to telecom switches – are imported. A simple back of the envelope calculation will show that and additional 150 million subscribers as the ministry is projecting means handsets of the same number and outflows to the tune of $ 24 billion. If we add to this the cost of switches etc., required for expanding the sector, we are talking about an investment of another $14 billion. While the finance ministry is worried about how to bring an inflow of about $ 11 billion from abroad, it is completely oblivious to this huge projected outflow.


There are other consequences of not supporting manufacturing. The only long-term way to bring down costs in the country is to provide incentives to manufacture locally. Instead, we have high taxes for raw materials and intermediate goods and low taxes on the finished products, very much in the colonial mode. This is an incentive for de-industrialisation, which is precisely what is happening. Currently, while the telecom market is booming, the premiere telecom manufacturing company, ITI, in the country has turned sick. The finance ministry dismisses the Chinese telecom model, which has based itself on indigenous manufacture and is now storming the global market as “infant industry” protection model. While the Chinese infant has now grown and taking on the global telecom MNCs, the Indian infant seems to have entered old age and terminal decline without stepping into adulthood! It is time we take a more holistic look at the telecom sector and not just of the needs of a few licensees.

We will not repeat here the issue of national security and telecom, which we have dealt with earlier. Suffice it to say, the finance ministry has virtually not given any response to the Left’s Note on this except to assert that security concerns are now obsolete. It has not responded to Left’s question on who should be the better judge of nation’s security, the finance ministry or the security agencies. And if the security agencies are wrong, we need to be told why. Just blanket assertions to the contrary carry no conviction.

Finally, the finance ministry has yet to explain why a violation of the 49 per cent limit on FDIs, which both Hutch and Airtel seem to have done, should be encouraged by changing the law. If either the letter of law or its spirit is violated, the violator needs to be punished or the loopholes tightened. If instead, we legitimise such violations, it sends the signal that the government itself is not serious about law. In other words, break the laws that you do not like and ask for regularisation later. The government will then argue that since the law has been subverted, the right course, in order to make law breaking more transparent, is to change the law!