Benifits of FDI in Telecom Sector

Benefits of FDI in Telecom Sector
Benefits of FDI in Telecom Sector
Prof. A.K. Gupta1
Amit Kumar Sharma2
Abstract
The growth of telecom sector of India in last decade attracts foreign
investor to invest their money in this sector. Privatisation, liberalisation
and globalisation have increased foreign investment in India. With the
entry of foreign investors, competition within the industry sharply
increases, contributing to substantially lower telephoney tariff in the
country, which dramatically attracts massive subscribers in the country.
India’s telecom sector over the last decade due to which many
corporations have entered; the labour market has increased significantly.
Telecom sector in providing employment in India keeps its leading
position. The telecom sectors is not only an increase in employment but
also have made a significant contribution to the development of human
resources. Foreign direct investment in telecom received not only capital
but also has advance technology which facilitate many sector such as
trade, manufacturing, entertainment, defence etc. To conclude, foreign
investment in telecommunication has much greater impacts on the
Indian economy.
Keywords: Foreign Direct Investment, Economy, Telecom Sector.
1 Professor, Department of A.B.S.T., University of Rajasthan, Jaipur
2
Research Scholar, Department of A.B.S.T., University of Rajasthan, Jaipur

Professional Panorama: An International Journal of Management & Technology
Benefits of FDI in Telecom Sector 49
1. Introduction
Foreign direct investment (FDI) is an investment in a business by an
investor forms another country for which the foreign investor has control
over the company purchased. The organisation of Economic Cooperation
and Development (OECD) defines control as owing 10% or more of the
business. Businesses that make foreign direct investment are often called
multinational corporations (MNCs) or multinational enterprises (MNEs).
A MNE may make a direct investment by creating a new foreign
enterprise, which is called a Greenfield investment, or by the acquisition
of a foreign firm, either called an acquisition or Brownfield investment.
In the name of foreign direct investment, India’s name comes under most
attractive destination. India is the world's 10th largest economy and is
currently the fastest growing market. Foreign Direct Investment in the
telecom sector in the country in terms of achieving third place in terms of
cumulative FDI approved from 2000 to Jan 2015. India received
cumulative FDI inflow of US $ 243106.84 million during out of this,
telecommunication sector receive an inflow of US $ 16994.68 million
which is approximate 7% of the FDI inflow during 2000 to January 2015.
Indian telecom sector is the world’s 2nd largest telecom sector Telecom
sector one of the key sectors responsible for India’s economic growth.
This sector generated $34.3 billion in revenue for the 2013-14 financial
year, according to the government figure. Sector revenue accounted for
1.93% of India’s total GDP for the financial year.

2. Objective of the paper
The purpose of this paper is to reel the importance of foreign
direct investment in the telecom sector, and is aware of the
benefits derived from this.
3. Methodology
This study base on the secondary data which are collected from
the following sources:
v Annual report published by TRAI & DoT
v Publication of Government of India
v Publication of Reserve bank of India
v Various FDI related journals have also been referred to.
Tools used
In order to study the specific objectives, statistical tool like year-
wise percentage of market share of different service provider,
annual growth rate and percentage were calculated.
4. Review of Literature
Annual reports of TRAI & DoT (2009-2014), to study the annual
reports issued by the department of telecommunication received
important information such as the tele-density status in the
country, information related to wireless and wire line subscribers,
and data related to broadband services. According to department
of telecommunication, Today in India, the telecommunication
service is one of the lowest in the world. The consumers in the
domestic market have immensely getting the benefits from such

lower tariffs which is major reasons for explosive growth in this
sector, related to tariff-setting; TRAI had issued its first directive
for re-balancing tariffs. Consequently, it conducted periodic
reviews to make changes in the tariff levels whenever found
necessary.
Kumar and pardhan, 2001, FDI has emerged as the most
important source of external financing resource for countries like
India and has become a significant part of economy in the
developing.
Baruah,Papori.,telecom (2014).,the growth and development of
Telecom sector of India has made it a major contributor in India’s
social up gradation. Every functional division and services
provider of the telecom sector of the country is trying to provide
world class telecom infrastructure in its area of operation to give
services to its customers and helping the nation to progress in the
global platform.
5. Benefit of FDI in Telecom Sector
FDI play very crucial role in telecom sector here we discuss the
benefits of FDI in telecom sector in following points.
v Increased in competition
v Reduction in tariff
v Growth in Subscriber Base
v Labour market Augmentation
v Technology advancement

1. Increased Competition
Allowing greater participation of foreign investment has helped
fostered competition in the industry. Currently, there are more
than a dozen telecom service providers who operate in the wire
line and wireless segment, primarily 11 GSM and 5 CDMA
operators providing mobile services in 22 telecommunication
circles, covering more than 2000 towns and cities across the
country. The number of firms has been boosted compared to a
decade ago when the entire market had been shared by two major
SOEs. Among leading mobile operators in India today showed in
table 1 include foreign invested Bharti Telecom with 22.7%
market share, followed by Vodafone with 18.40%, Idea Cellular
with 15%, Reliance with 12.30%, state owned BSNL with 10%,
Aircel with 7.8%,TATA with 7% and all others accounting for the
rest 6.3% of market share. The more equally market share at
present is in sharp contrast with the 1990s when the duopoly
state owned companies, BSNL and MTNL, dominate the market.

Table -1: Operator’s Market Share
This heightened competition is largely due to the expansion of
foreign invested companies, like Hutchison-Essar, Bharti Tele-
Ventures, Escotel, Idea Cellular, BPL Mobile, Spice
Communications etc. Responsively, the private Indian owned
companies, like Reliance Infocom and Tata Teleservices, also
enhanced their investment simultaneously. Investment in
telecoms with private participation has witnessed substantial
acceleration in the recent years.
2. Tariff Reduction
The intense competition of Indian telecom industry has led to
price wars between the operators. The race between the telecom
service providers to capture the market, which led to substantial
tariff reduction, has proved beneficial for the consumer. Currently,
S.No. Operator’s Name Market Share
1 BhartiAirtel 22.7%
2 Vodafone 18.4%
3 Idea Cellular 15%
4 Reliance 12.30%
5 BSNL 10%
6 Aircel 7.8%
7 TATA 7%
8 Other 6.3%

the charges for outgoing local telephone calls have dropped to
below Re 1/min and there is no charge for incoming calls. In fact,
a leading telecom operator has recently announced a scheme
where the CDMA subscribers will be charged Re 1 for all local calls
and Rs 3 for long distance calls, regardless of the duration. The
charges for national long distance calls and international long
distance calls have also experienced significant reduction since
1999. A 1-minute call between Delhi and Mumbai that cost more
than Rs 37/- in pre-TTO 1999 period can be currently made for
almost at the price of a local call. Similarly, the tariff for a call to
American continent from India has come down from Rs 75 to less
than Rs 7 per minute within the same span of time.
Moreover, humble tariff schemes have been made available by
various service providers to suit the usage profile of a wide range
of customers in India to stay ahead of competitors. Among them,
most operators offer schemes with assured lifetime connectivity
without having to pay any recurring fixed charges. Besides,
intense competition and the resultant reduction in tariff levels
induced the TRAI to gradually move towards a regime of tariff
deregulation. The intensified business competition stimulated by
massive inflows of FDI has made Indian telephony tariff level one
of the lowest in the world.

3. Growth in Subscriber Base
One major consequence of the sharp tariff reductions has been the
exponential growth of the total subscriber base. The subscriber
base of the industry grew from under 20 million in 1998 to almost
429.72 million in January 2015. It has been predicted that India's
mobile subscriber base will grow from 898 million in 2013 to
1145 million subscribers by 2020. The density of mobile and
fixed-line telephone subscribers was below 5% in the 1990s but
suddenly boom to over 30% in India thanks to the significant
indirect impact of massive FDI inflows. (See below chart)
Table -2: Telephone Subscribers
S.No. Years (31 march
ending )
Subscriber in
million
1 1998 18.7
2 1999 22.8
3 2000 28.5
4 2001 36.3
5 2002 45
6 2003 54.6
7 2004 77.6
8 2005 98.4
9 2006 140.8

Source:
Department of Telecom (DoT), Government of India
4. Labour Market Augmentation
Due to the rising popularity and huge market of
telecommunication industry in India, a major influence of FDI has
been creating various job opportunities for the domestic workers,
because India’s labour market is still heavily depended on multi-
national corporations to outsource work here. Employment rate
in the telecommunication sector grow significantly over the years,
absorbing large amount of India’s cheap labour. Concurrently, with
the transfer of technical and managerial knowledge from western
countries (e.g., United States), workers in the industry get
acquainted with globally valued skills, which enhanced the
development of human capital in India.
10 2007 205.8
11 2008 300.5
12 2009 429.7
13 2010 795
14 2011 846.33
15 2012 965
16 2013 898.02
17 2014 933.01
18 Up to 31
Jan 2015
979.21

I. Increase in Employment
The telecommunication industry comprises numerous areas and
hence includes a variety of occupations. Generally, these jobs are
related to the development and maintenance of devices, lines,
systems and networks used to facilitate communication. Workers
are committed to application or product development, application
testing, system administration, network planning, data
networking, mobile application development and value-added
services, etc. Most pleasant is that telecommunication companies
did recruit large amount of fresher’s with limited background
skills, and managed to equip them with essential knowledge as
well as adapting to the working environment through a series of
mentoring system and orientation programs. The impact of
foreign direct investment on employment in telecommunication
sector has been remarkable, especially around 2005 when
government adopted more liberalised policies on FDI approval.
Total employment for telecommunication, transport and storage
industries as a whole has increased from 14.61 million in 1999-
2000 to 18.47 million in 2004-2005, a net increase of 3.86 million
into the labour force. And in 2009-2010, employment reached
19.36 million, which accounts for 4.2% of total employment in the
Indian labour market. Consequently, telecommunication becomes
the fourth largest contributor to employment following service,

construction and agriculture and the top contributor among all
non-manufacturing sectors. It is also estimated that
telecommunication sector would generate an additional 8.5
million jobs from 2009 to 2015, and continue to be the engine of
Indian economy in the next 5 years.
Table 3: Employment Growth in Telecommunication,
Transport and Storage
Year Employment
(in millions)
Absolute
Increase in
Employment
(Million)
Share of
Employment (%)
1999-00 14.61 0.71 1.8
2004-05 18.47 3.86 3.7
2009-10 19.36 0.89 4.2
Source: NSSO 61st and 66th round survey (2009-10) working group on twelfth
plan- employment, planning and policy, data book for DCH, 3rd June, 2014
II. Human Capital Development
India has the second largest population in the world, as well as a
growing labour market with millions of workers competing for job
positions. Foreign direct investment not only ensured a number of
employment opportunities by aiding the establishment of
telecommunication corporations over various cities of India, but
also introduced advance and professional skills to local industry
workers through outsourcing. Therefore, the overall competence

of telecommunication workforce increases and India can develop
and utilise its human capital more effectively.
Technology transfer and knowledge diffusion improve the quality
of India’s labour pool substantially. Basically, the
telecommunication sector can be classified into two categories of
companies, one that provide telecom services, such as Airtel and
Reliance, and other companies that develop products for the
telecom sector, such as Alcatel Lucent and Cisco. Both types of
companies have high demands on the worker’s capabilities.
Therefore, training and hands-on experience are widely available.
To start off, fresher’s will acquire fundamental technical skills like
proficiency in at least one programming language (e.g., C/C++,
Java), basic understanding of embedded systems, operating
systems and software testing. Other analytical skills include
thorough knowledge of data structures, design patterns, system
analysis, and superior numeric abilities. In addition, it is very
important to have excellent “soft skills”, for instance, inter-
personnel communication skills, ability to work under pressure,
multi-tasking, quick learning and strong team cooperation. In
previous decades of economic liberalisation, massive cheap labour
was the comparative advantage and major determinant of
attracting FDI to India. However, as multinational corporations
have facilitate the development of human capital in Indian
telecommunication sector, contributing to the considerable

increase in quantity and quality of the labor force, India is able to
shift its advantage to both size and talents of the working
population gradually. As a result, India can attract more foreign
investment with a skilled and productive workforce; thereby
sustain its rapid development in telecommunication industry for
the near future.
5. Technology Advancement
For both developed and developing countries, they have to tackle
the problem of developing telecommunication sector and making
it more diversified. However, for those less developed ones, like
India, they are facing more stress since there are less financial,
technical and operational resources, particularly in terms of basic
infrastructure. Attracting foreign direct investment is the best way
to resolve the problem. Technology transferred from foreign
investment projects will improve the efficiency of local firms as
well. Knowledge transferred through FDI in telecom sector
apparently helps the technology development for the whole
country, in terms of appearance of new services and technologies
along with telecom booming, fast technology diffusion from urban
to rural areas and huge impact on other sectors needing
technologies.
I. New Services and Technologies
The Indian telecommunication technology has changed from
former manual and Electro-mechanical systems to the digital

systems. Now, India has established a new milestone by
possessing 100% electronic switching system. New services and
new technologies have been emerging nowadays. Innovative
services include cellular mobile services, voice mail services, card
payphones, Internet services and Intelligence network services.
Apart from new services, new technologies are also appearing
quickly, such as Asynchronous Transfer Mode (ATM), Managed
Leased Data Network (MLDN), Customer Access Network, and
Satellite Based Systems for Village Public Telephones.
II. Technology Diffusion
Since the significant policy decisions about FDI taken between
November 2005 and February 2006, the telecom industry has
witnessed great changes in technology. These changes can be
easily observed by several indicators, including ratio of wire line
vs. wireless subscribers, teledensity, and Internet and broadband
subscribers. The huge amount of FDI made the diffusion of
wireless technology very fast. As clearly shown in Table 3, the
wire line telephone increased to 41.42 million in March 2005 but
then started declining largely after the policy was launched. At the
same time, wireless telephone segment doubled every year since
2003. Actually it contributed a lot for the growth of the telephone
network. Teledensity is a measurement of how many telephones is
available, expressed as the number of telephone lines for every
100 people in a country. It is a significant indicator of economic

and scientific development. An analysis of teledensity in India has
shown that the overall teledensity grew from 3.58% in 2001 to
77.58 % at end of the December 2014.
There is an impressive growth of the teledensity of India. Also, the
rural teledensity, which used to be smaller than 1% in 2001, has
gone up to 41.85% in 2013. Especially, it grew much faster since
2005. The impressive increase in rural telephones is a great proof
of huge technology diffusion of telecom industry.
The Internet and broadband services benefit individuals to access
knowledge an Opportunities worldwide. These technologies are
considered significant for both the government and individuals.
After announcement of much more open policy regarding FDI, the
broadband subscribers have grown spectacularly. The broadband
subscription has flown from 0.18 million in 2005 to 18.70 million
in end of September 2014.
Table -4
Broadband Subscriber’s Growth
S.No. Years Broadband
(in millions)
1 2005 0.18
2 2006 1.32
3 2007 2.2
4 2008 3.80
5 2009 6.22

Source: Department of Telecommunication
3. Impact on Other Technology Sectors
Reliable and low-cost telecommunications also provide an
important base for other Sectors such as information technology
and computing, which are highly dependent on
telecommunications. Early 2000 witnessed a huge rise in those
industries based on the dramatic decrease in telecommunication
costs and commercialisation of the Internet. The annual growth
rate varies between 20-22% in IT services and nearly 55% in IT-
enabled services (ITES) such as call centers, Business Process
Outsourcing (BPO) and other administrative support operations.7
What’s more, the fact that telecommunications cut across the
boundaries among many other industries including manufacture,
entertainment and communication, it plays an important role
both as a traded product and a facilitator of trade of other
products. The improvement of telecommunications does provide
progress in the quality of other services.
6 2010 8.77
7 2011 11.87
8 2012 13.79
9 2013 15.05
1 0 2014(up to
Sep.)
18.70

Conclusion
FDI growth has played a crucial role in shaping the structure of
the Indian telecom sector. With the entry of foreign investors,
competition within the industry sharply increases, contributing to
substantially lower telephoney tariff in the country, which
dramatically attracts massive subscribers in the country.
Moreover, the growing market and increasing number of telecom
companies create more job opportunities in the labour market,
leading to higher employment in the labour force while absorbing
large amount of India’s working population. Furthermore,
multinational corporations not only transport investments but
also diffuse advanced technology and skills that help to improve
telecommunication services, increase telecommunication
coverage over both urban and rural areas, and upgrade
application production process. Simultaneously,
telecommunication workers become better equipped with
technical skills and achievements in developing human capital can
be reached. To conclude, the positive effects brought by foreign
investments in telecommunication sector are noteworthy and
have much greater impacts on the Indian economy than its cost.
Therefore, we expect to perceive a trend of more favourable
approval of FDI from the Indian government.

References
1. Annual report 2009-10,Department of Telecommunications, Ministry
of Communications &Information Technology, Government of India,
New Delhi, Retrieved from: www.dot.gov.in
6. Annual Report 2009-10, Telecom Regulatory Authority of India, New
Delhi,Retrieved from: http://www.trai.gov.in
Delhi,Retrieved from: www.trai.gov.in
Delhi, Retrieved from: www.trai.gov.in

Delhi,Retrieved from: www.trai.gov.in
Delhi, Retrieved from: www.trai.gov.in.
11. Baruah, Papori.(2014),Telecom Sector in India: Past, Present and
Future,International Journal of Humanities &Social Science Studies
(IJHSSS), Vol.-I, Issue- III.
12. kumar,N., and J.P. Pradhan (2002). Foreign Direct Investment,
Externalities and Economic Growth in Developing Countries: Some
Empirical Explorations and Implications for WTO Negotiations on
Investment.RIS Discussion Paper 27, Research and Information
System for the Non-aligned and Other Developing Countries, New
Delhi.
13. Chatterjee, Sumana(2009), An Economics Analysis of Foreign Direct
Investment in India,
14. Ibrahim, M. Syed, (2014). Role of FDI in India’s Economic
Development-An AnalysisJournal of International Relation and
Foreign Policy, Vol.2 (June), pp.101-113.
15. www.coai.in
16. info.shine.com/tag/telecom-infrastructure.html
17. www.academia.edu

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