SPECIAL ARTICLEEconomic & Political Weekly January 19, 200837Growth of India’s Telecom Services (1991-2007): Can It Lead to Emergence of a Manufacturing Hub?Sunil Mani The phenomenal growth of the information technology(IT) industry in India has brought to the fore the growing im-portance of the country as a knowledge powerhouse. But this competitiveness is restricted to the services sector. In fact, it is the sector that is increasingly contributing to the high growth rate recorded in the country. Despite showing a good growth performance over the last three or four years, the manufactur-ing sector is still a relative non-performer although three indus-tries, namely, auto parts, cotton textiles and pharmaceuticals are showing much dynamism in terms of exports. However India’s exports have now diversified to encompass services. The service sector in general has come to occupy pre-eminent position in India’s economy in terms of its contribution to overall GDP, exports and as a destination for foreign direct investments (Table 1, p 38). Manufactured exports are still domi-nated by low and medium technology products although, earlier some hi-tech products such as pharmaceuticals and certain types of machine tools have crept into India’s export basket. But the growth ofITexports and the evidence of moving up the value chain inIT, the emergence of other high technology industries such as biotechnology, aerospace, etc, is enabling India to be in the league of high technology producers from the developing world. The recent growth of research and development (R&D) out-sourcing is yet another illustration of the country’s prowess in high technology activities. An interesting dimension of high technology production in India is that this capability is largely in the realm of services. However, there are indications that this capability is slowly percolating into hi-tech manufacturing. And an industry where it is very clearly visible is telecommuni-cation where a revolution of sorts is taking place [Mani 2007]. In the context, the purpose of the present paper is understand the technological implications of the phenomenal growth of this industry. 1 IntroductionThe paper is structured in five sections. The first section traces the contribution of the telecommunication services sector to the overall growth performance of India’s economy and in that process to the catching up of her economy. The second distils out the various dimensions of the telecom services industry. Seven dimensions of the growth performance are identified and dis-cussed here. The third section identifies at least three disquiet-ing features of this growth performance in terms of the growing digital divide, the increasing dependence on imported equipment for providing these services and the low diffusion of the internet. This paper addresses a number of issues arising from the growth of telecom services in India since the mid-1990s. It also discusses a number of spillover effects for the rest of the economy and one of the more important effects is the potential to develop a major manufacturing hub in the country for telecom equipment and for downstream industries such as semiconductor devices. The telecom industry in India could slowly become an example of the service sector acting as a fillip to the growth of the manufacturing sector. Earlier versions of this paper were presented at seminars at Centre for Development Studies, Thiruvananthapuram, at IIM-Bangalore and at Georgia Institute of Technology, Atlanta, US. Comments received at these occasions were very useful. Research assistance provided by K Jafar and Riju Prakash J S is gratefully acknowledged with the usual disclaimer.Sunil Mani (mani@cds.ac.in) is at the Centre for Development Studies, Thiruvananthapuram.

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SPECIAL ARTICLEJanuary 19, 2008 Economic & Political Weekly40gains for this rather monopolistic firm which has had a previous history of being completely impervious to the demands of consumers. (b) Competition in Mobile Services Industry: Compared to the fixed services, the mobile services industry has a number of distinguishing features. First, the industry started as one domi-nated by private sector enterprises and the government religiously followed a policy of “managed com-petition” by licensing more than one service provider in a telecom circle. In fact majority of the 28 circles have at least four services providers and in a number of cases there are six service providers well. In short, right through inception the government envisaged an oligopolistic form of competition. Second, most of these private sector enterprises had some of foreign equity holding of sorts. Third all of them are based on new technologies that were state-of-the art. Fourth, the conduct of the industry was, relatively speaking, more regulated by the newly created independent regulatory agency, the Telecom Reg-ulatory Authority of India (TRAI).Fifth, it is the rapid growth of this industry that has catapulted the com-munications sector into one of the major growth-contributing sector of India’s economy. Sixth, the mobile communica-tions industry, especially the equipment part of the industry is the second largest in the world (next to China) and there-fore has attracted considerable FDI in the manufacture of handsets leading to the employment of skilled manpower. Seventh, India is supposed to be having the cheapest mobile telecom tariffs in the world. The early part of the industry was of course riddled with much controversy pertaining to the terms and conditions under which the licences were issued and the spectrum allocated between various kinds of service providers [Desai 2006]. Since all the services providers were new and had the same vintage of technology, their competition was more in terms of price and conditions of sale and of late these two aspects are much in public scru-tiny thanks to the timely intervention, on various occasions, by the regulator. If one computes the H-Index for the industry, at the national level (which is not exactly a meaningful as some of the providers are only at specific tele-com circles), it shows a mild increase: the H-Index for the industry increases from 0.1370 in 2002 to 0.1593 in 2007. However, this increase hides considerable variations at the circle level (Table 6). Most of the service providers have focused on specific regional markets, with the exception of Bharti (the largest mobile service provider). In fact, there are only four service providers who have a presence in at least 20 of the 29 circles. It is also interesting to see that the circles where BSNL has a monopoly position are also those with very low revenue potential. In other words, the private sector providers have positioned themselves in the most revenue earning circles. Also it is seen that it is the circles with high revenue earning potential where there has been an increase in the intensity of competition – in the metros of Delhi, Mumbai and Chennai for instance.Competition between Mobile Standards: It was seen above that mobile phones were introduced in the country towards the latter half of the 1990s and specifically in 1997. Ever since that year and until the end of 2002, the market was dominated by just one technology, namely, GSM. But in December 2002, a Reliance Info-comm launchedCDMA services across 17 circles on a countrywide basis. CDMA has since been growing faster thanGSM, although there are some year-to-year variations (see Figure 3, p 41). Most Indian consumers are unaware of the nitty-gritty of the two technologies. So the deciding factor between the two technologies is often based on price and other conditions of offer such as the cov-erage of the service, ease of obtaining a new connection and whether a handset is available at a reduced price as part of the deal. Given this sort of a possibility of perfect substitution between the two types of technologies, the existence of the two standards has made both the markets for GSM andCDMA services verycompetitive. This is especially so when the market forCDMA services is highly concentrated with just two serv-ice providers accounting for almost the entire output. This is further indicated by the higher Herfindhal Index for CDMA services. What is being argued here is that despite being highly con-centrated,CDMAservice providers have to compete with GSM service providers and this has prevented the CDMA service providers from wielding any excessive market power. One of the most important institu-tional requirements for competition to emerge and sustain is the introduction of number portability. Number port-ability allows a customer to move from one mobile service to another within GSM, and also betweenGSM andCDMA, while retaining the same number.TRAI had recommended in March 2006 to the Table 6: Degree of Competition in Mobile Telephone Services (as on May 31, 2007)Telecom Circle Number of Herfindhal Dominant Supplier Service Index (with Market) Providers Share in %)1 Andaman and Nicobar 3 0.49 Bharti (42)2 Andhra Pradesh 4 0.29 Reliance (59)3 Assam 4 0.28 Aircel (31)4 Bihar 5 0.30 Bharti (38)5 Chennai 6 0.19 Aircel (26)6 Chhattisgarh 1 1 BSNL (100)7 Delhi-NCR 6 0.19 Hutchison Essar (21)8 Gujarat 6 0.22 Hutchison Essar (38)9 Haryana 6 0.23 Reliance (27)10 Himachal Pradesh 6 0.24 BSNL (30)11 J and K 4 0.45 BSNL (55)12 Jharkhand 1 1 BSNL (100)13 Karnataka 6 0.23 Bharti 329)14 Kerala 6 0.20 BSNL (29)15 Kolkata 5 0.21 Hutchison Essar (25)16 M P 5 0.24 Reliance (32)17 Maharashtra 6 0.18 Idea (23)18 Mumbai 6 0.18 Hutchison Essar (25)19 North-east –I 4 0.28 BSNL (35)20 North-east–II 1 1 BSNL (100)21 Orissa 5 0.25 Bharti (31)22 Punjab 7 0.20 Bharti (30)23 Rajasthan 7 0.20 BSNL (27)24 Tamil Nadu 6 0.20 Aircel (28)25 UP (east) 6 0.22 Hutchison Essar (22)26 UP (west) 6 0.18 Hutchison Essar (22)27 Uttaranchal 1 1 BSNL (100)28 West Bengal 6 0.21 Hutchison Essar (29)India as a whole 12 0.16 Bharti (23)Source: Telecom Regulatory Authority of India.Table 5: Telecommunications Services according to Ownership (percentage shares as on May 31, 2007) WirelineWirelessPublic 9119Private 981Total 100100Source: Telecom Regulatory Authority of India (2007a).

SPECIAL ARTICLEJanuary 19, 2008 Economic & Political Weekly42After a detailed review of its functioning during the ear-lier period (1997-2000), Mani (2002) referred to theTRAI as a “muddled regulator”. This is because during this phase,TRAI’s functions were poorly articulated, and it was generally viewed as driven by the well-organised and vociferous lobby of private phone service operators. TRAI did little to hide its pronounced contempt for the DoT and the state-owned providers,BSNL and MTNL. At the same time, it failed to ensure that private operators adhered to their licence conditions. Its authority and credibility were undermined by court rulings that clearly exposed its lack of power. Its reputation suffered even more when it allowed the private operators to fight its court battles. In short, it would not be incorrect to state that there was “regulatory capture” during this first and initial phase of its operations. The governmental admission of the ineffectiveness of TRAI resulted in the reinvention of the regulator and a redefinition of its functions. This takes us to the second phase inTRAI’s history and this thinking manifested itself in the form of the issuance of an ordinance to replace TRAI with an appellate tribunal with ju-dicial powers and a reconstituted regulator that lacked one of the most important functions of any telecom regulator, namely the power to settle disputes between the various stakeholders. This function was vested in a newly created Telecom Dispute Settle-ment and Appellate Tribunal(TDSAT). However, this was fol-lowed up with a strengthening of TRAI’s role in a number of other areas. But it can be shown that although the amendment clarified the precise role of the regulator by considerably reducing the grey areas, it effectively reduced the power of the regulator. TRAI’srecommendations to the government are binding only with respect to the non-compliance and efficient use of the spectrum. On the crucial issues of timing and licensing of new service pro-viders, TRAI’s recommendations are not binding. In sum, the TRAI has been reduced to a tariff-setting body empowered only to fix tariffs and inter-connection charges and to set norms on quality of service. And on these two and espe-cially on the tariff issue, TRAI’s role is generally considered to be very satisfactory. (vii) Growing R&D Outsourcing: It is gen-erally held that India has emerged as a major R&D hub. The Technology Information and Forecasting Assessment Council(TIFAC) (2007) study confirmed this commonly held proposi-tion: R&D investment worth of $1.13 billion has flowed into India during the five-year period 1998-2003. The total receipts ofR&D services have doubled from $ 221 million in 2004-05 to $ 519 million in 2005-06 [Reserve Bank of India 2006, p 1355]. Telecom along with the pharmaceutical industry is a major recipient of these investments. The innovative perform-ance of this segment can be gauged from the fact the number of the US patents issued to inventors from India (including MNCs having operations in India) in the area of telecom technologies has increased from just one in 2001 to 13 in 2005 (Table 8, p 41). 3 Three Disquieting FeaturesIn the previous section I have outlined several dimensions of the growth of the industry. All these were positive features – the phenomenal growth of the industry, significant reductions in the waiting time to get a telephone connection and indeed in the price of telecom services. However, this growth has also been with some disquieting features. Three such disquieting fea-tures of the growth of the industry have been identified. They are: (1) the growing digital divide; (2) increased dependence on imports as far as the equipment are considered; and (3) the relatively low penetration of the internet in India. (i) The Growing Digital Divide: Several commentators, notably Desai (2006), had referred to the growing inequali-ties in the availability of telephones especially between states and indeed between the rural and urban areas within a state. This is so severe that the national picture that I presented above is only representative of the urban areas of some of the states. This growing digital divide, as it is usually referred to, is of course a reflection of the growing divides within the country as far as income and wealth is considered. The ratio of urban to rural tele-density, which was falling until 2002 has started rising again since 2003 and in 2005 was much higher than what was in 1996, when the mobile revolution was just about to begin. To illustrate, the ratio of urban to rural teledensity increased from 14 in 1996 to nearly 20 by the end of 2005 [Department of Tele-communications 2006]. A yet another dimension of the digital divide is the variation in teledensity across the various telecom circles (Table 9). Teledensity (in 2005) ranged from as high as 60 per 100 people in the national capital region to just two in the back-ward state of Chhattisgarh. The urban divide within each of the telecom circles is presented in Table 9. It shows that Kerala, Tamil Nadu (excluding Chennai) and Punjab have one of the lowest urban-rural divides, while Uttar Pradesh, Bihar and Assam have the highest digital divides. The table also shows that rural teledensity is significantly below the urban one across all the circles and even for the nation as whole it has remained at a very low level. This confirms the oft-expressed view that the telecom revolution spearheaded by the mobile phones has remained largely an urban phenomenon. The government has put in place an insti-tutional arrangement for bridging the digital divide. Specifically, the National Telecom Policy of 1999 envisaged implementation of the Universal Service Obligation (USO) Fund Table 9: Digital Divide within Telecom Circles(as on March 31, 2006) Urban Rural Ratioof U to RAndaman and Nicobar 22.49 9.15 2.46Kerala 47.619.744.89Tamil Nadu (-) Chennai 23.1 2.86 8.08Punjab 51.575.349.66Haryana 29.212.910.07Uttaranchal 17.051.6810.15Maharashtra (-) Mumbai 27.71 2.59 10.70Gujarat 30.122.6311.45Himachal Pradesh 78.11 6.82 11.45North-East-II 14.211.2111.74Karnataka 31.262.4912.55Andhra Pradesh 30.19 2.37 12.74North-East-I 15.931.2412.85Chhattisgarh 7.180.4615.61Rajasthan 22.941.4515.82Kolkata 25.09 Mumbai 45.81 Chennai 48.03 Delhi 52.09 National Average 28.25 1.74 16.24West Bengal (-) Kolkata 17.14 1.05 16.32Jharkhand 8.560.5116.78Orisa 21.35 1.0520.33Jammu and Kashmir 19.87 0.78 25.47Madhya Pradesh 17.15 0.67 25.60Assam 18.22 0.67 27.19Bihar 19.71 0.57 34.58Uttar Pradesh 18.89 0.52 36.33Source: Department of Telecommunications (2006).

SPECIAL ARTICLEEconomic & Political Weekly January 19, 200845and opened the sector for provisioning of services by private operators. To date there are 389 ISP licensees, but only 135 are operational. Public sector providers dominate with 56 per cent of the market (2006). Five ISPs account for 83 per cent of the mar-ket with the leading provider alone accounting for 42 per cent. Approximately 60 per cent of the users still use dial-up internet access. Broadband access was introduced in October 2004, but its diffusion remains low. According to TRAI estimates (Table10, p 43), there were 9.27 million internet subscribers as of end March 2007 and 2.34 million broadband subscribers.4Only about a quarter of the internet subscribers have changed over to broadband access technologies. Majority of the subscri-bers use the older dial-up technologies for accessing the inter-net. According to a recent study on internet in the country by the internet and Mobile Association of India (2006), almost 76 per cent ofPC users have taken internet connections. This means that the two technical reasons militating against the higher internet diffusion in the country is the lack of ownership of PCs and not having a fixed telephone for accessing the internet. Although it is possible to access internet over a mobile phone, the current gen-eration of mobile technology that is common in the country is 2 G and 2.5 G. Of course, it is generally held that whenever the coun-try moves over to 3G phones, accessing the internet over mobile phones is easier. But given the much higher prices of 3G handsets, it is not very likely that its diffusion will be high in the initial years. So the low internet diffusion in the country is a direct con-sequence of the country becoming too reliant on mobile phones. 4 The SilverLining The silver lining is that India is becoming a major manufactur-ing hub especially for mobile handsets. This has the potential of increased demand for semiconductor devices, like for instance Digital Signal Processors(DSP), and this increased demand can catalyse the domestic manufacturing of semiconductor devices. However, all the players are expected to beMNCs as no local companies are available as of now. The government responded to this prospect by announcing a semiconductor policy in 2007. (i) India Emerging as a Manufacturing Hub:The New Telecom Policy of 1999 had envisaged the country becoming a major manu-facturing and export hub for telecom equipment.5 But for a long time this sounded more like an empty statement not backed by reality where, as noted above, the country was depending heavily on imports. This was reflected in the rates of self-sufficiency pre-sented earlier showing a declining trend. However, this situation has been changing very rapidly, specifically since 2006. The more proximate cause of this change is the large size of the domestic market for mobile communication. With a monthly sale of over five million pieces since July 2006, India has now become the second largest market for mobile handsets in the world, which all the major mobile handsets and other equipment manufacturers have begun manufacturing locally since 2006 (Table 13). Domestic output of telecom equipment, although fluctuating, has shown some significant increases over the last two years (Figure 5, p 44). Also, although the numbers of data points are few, one can see an almost perfect positive correlation between the growth of the services sector and the equipment sector (Table 11, p 43). My argument is that this correlation is bound to become more significant in the future, given the present trends. However, the industry is going to be dominated by affiliates of MNCs. In fact, the telecom industry has been one of the major recipients ofFDI in the country since 1991 (Table 12). Although much of these investments (over 50 per cent) are in the services segment, increasingly (since 2001), the equipment sector has received about a quarter of the total investment. In short the domestic manufacturing industry will be dominated by foreign enterprises (Table 13). Further, the import dependence of the industry will in all probability continue to be high for a few more years as the local manufacturing of mobile equipment is at present based largely on fully knocked down (FKD) and semi-knocked down(SKD) kits. But as the domestic manufacturing of electronic components and semiconductor devices increase, the import dependence is sure to come down. In this way the experience on this count will be similar to the Indian automotive industry. This growth of the manufacturing sector has several spillover effects besides direct employment. One of the more important ofthese is the demand for electronic components and specifi-cally semiconductor devices, which are used in the manufacture of these equipment. According to estimates by the Indian Semiconductor Association (formed in 2004), the total avail-ablemarket (after taking into account imports) is bound to in-crease from $ 0.91 billion to over $ 16 billion by 2015. Mobile handsets and equipment will be one of the larger markets. Consequent to this thinking, a number of proposals and projects for the semiconductor manufacturing industry have been announced.6If all the projects announced materialise, India will soon be safely in the “bus” that it had missed several years ago as far as electronic hardware is concerned. The government has responded to these private initiatives by announcing on March 21, 2007 a special financial incentive Table 13: India as a Manufacturing Hub for Mobile Telecom Equipment (c2007)Name of Manufacturer Facility and Location1 Ericsson GSM Radio base Station facility–Jaipur R&D Centre in Chennai2 Elcoteq ContractManufacturer–Bangalore3 Nokia MobileHandsets–Chennai4 LG Electronics Mobile Handsets–Pune5 Flextronics ContractManufacturer–Chennai6 Foxconn ContractManufacturer–Chennai7 Motorola Mobile Handsets R&D centres8 Sony Ericsson Mobile Handsets through Flextronics and Foxconn9 ITI GSM facility with Alcatel at Nainital and Manakapuri UP CDMA with ZTE, China at BangaloreSource: Own compilation.Table 12: FDI Inflows into India’s Telecoms Industry(1991-2007, in Rs million) Year-wise FDI Inflow Cumulative FDI Inflow: August 1991- March 31, 2007 Total FDI Inflow in Share of Telecom Cumulative Cumulative FDI for Share of Telecom FDI Inflow Telecom Industry FDI in Total FDI FDI Telecom Industry FDI in Total FDI2003-04 1,21,170 5,320 4.39 11,96,600 107,250 8.962004-05 1,71,380 5,880 3.43 13,67,980 1,13,130 8.272005-06 2,46,130 30,230 12.28 16,14,110 1,43,360 8.882006-07 7,06,300 23,550 3.33 23,20,410 16,6,910 7.19 Source: Department of Telecommunications (2007), p 12.

SPECIAL ARTICLEJanuary 19, 2008 Economic & Political Weekly46package to attract investments for setting up semiconductor fabrication and other micro and nanotechnology manufacturing industries in the country. The incentives are in the form of capital subsidies to the tune of 20 per cent of the total investment expen-diture incurred by a fab or eco-systems units during the first 10 years, provided that these units are located within a special economic zone (SEZ) and 25 per cent if they are located outside a SEZ. In addition the units are also exempted from counter-vailing duties. Further they will have to be established before March 31, 2010. In response to this incentive package, the government is expecting $ 10 billion worth of investment. It remains to be seen whether or not such an investment will fructify. Such an incentive-induced investment strategy is sometimes criticised as the government is essentially taxing the citizens of a country and passing on the benefits to a few private sector individuals. Overall, the growth of the telecom services industry seems to be leading to the emergence of not just the telecom equipment industry, but also the electronic components and semiconductor devices that are required for the manufacture of these equip-ments. Thus, the Indian telecom industry is an excellent example of the growth of the services leading to the emergence of an attendant manufacturing industry as well. 5 Conclusions The telecom industry is a fine example of what can be achieved by easing governmental regulations with respect to production, imports and exports and focusing more on tariffs and other con-ditions of sale. The growth of the services segment of the indus-try appears to be spawning a manufacturing industry. In order to sustain this high growth, the government ought to be very seri-ous about examining various proposals for bridging the digital divide through the support of private sector service providers as well. But unlike the Chinese case, the colour of one part of this industry is largely foreign.The policy focus of the government should be to maximise the spillovers of this activity to local Indian companies especially downstream industries such as components and semiconductor manufacturing. A beginning towards this has been made. The formation of a Telecom Equipment Export Forum and the an-nouncement of the Indian Semiconductor Policy 2007 are steps in this direction. Success crucially depends on the response of the private sector to these incentives. Given the importance that a regulatory agency can play in this crafting, no effort should be lost in strengthening the powers of theTRAI. The benefits to the Indian economy from having both a strong services and manu-facturing segments in the telecom sector cannot be undermined. Notes 1 BSNL’s sales revenue emanate from two major segments: basic services and cellular services. Of the two, although the share of basic services has gone down even in 2005-06, its share was over 80 per cent of the total. So the performance of BSNL depends to a large extent the way it manages fixed telephone services although with the growth of mobile services the relative importance of fixed telephone services is likely to come down over time. See the Annual Report 2005-06 of BSNL at http://www.bsnl.co.in/company/results2005-06/resultcomplete_06.pdf (accessed on August 25 2007) 2 In working out the ideas contained in this subsec-tion, I have relied on my own writings on the topic in Mani (2002) and also Desai (2006) and TRAI (2007c). 3 An Ordinance was promulgated on October 30, 2006 as the Indian Telegraph (Amendment) Ordinance 2006 to amend the Indian Telegraph Act, 1885 in order to enable support for mobile services and broadband connectivity in rural and remote areas of the country. Subsequently, an Act has been passed on December 29, 2006 as the Indian Telegraph (Amendment) Act 2006 to amend the Indian Telegraph Act, 1885. 4 It may be pointed out that there is no consensus on the number of internet and indeed broadband subscribers in the country. There are a plethora of estimates widely diverging from each other. For a detailed account of these various estimates, see Chandrasekhar (2006). 5 The policy had stated, “With a view to promoting indigenous telecom equipment manufacture for both domestic use and export, the government would provide the necessary support and encour-agement to the sector, including suitable incen-tives to the service providers utilising indigenous equipment”. See the New Telecom Policy of 1999 at the DoT web site: http://www.dot.gov.in/ntp/ntp1999.htm (accessed on August 27, 2007) 6 These proposals are: SemIndia promoted by Vinod Agarwal – $ 3 billion (12” fab) at Hyderabad; (ii)NANO-TECH Silicon India (NSTI) promoted by Jun Min – $ 0.6 billion (8 fab) at Hyderabad; (iii) Hindustan Semiconductor Manufacturing Co (HSMC) promoted by Deven Mehta – $ 4.5 billion (8 fab) – location to be confirmed; (iv) India Elec-tronics Manufacturing Corp IEMC promoted by Rajendra Agarwal – $ 3.0 billion (12 fab) – loca-tion to be confirmed; (v) A number of chip compa-nies from around the world have established re-search centres in India. Qualcomm Inc, the larg-est chip design house by revenue and a major US mobile chip company, has also opened a software and chip development lab in India. The company uses it as a base for research and development as well as a place from which to promote its CDMA according to its web site; (vi) The state-owned semiconductor complex at Chandigarh (which has been taken over by the the department of space), is drawing up a road map for a new project. It expects to rejuvenate SCL and put India on the 0.35-micron map in the foreseeable future; (vii) The Indian Semiconductor Association has close to 100 members (2007).ReferencesCentral Statistical Organisation (2007): National Accounts Statistics 2007, Ministry of Statistics and Programme Implementation, New Delhi. 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