The Hindu : National : 'Telecom sector needs huge infusion of capital'

Online edition of India's National Newspaper
Thursday, Oct 14, 2004

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National

'Telecom sector needs huge infusion of capital'

By Our Special Correspondent

NEW DELHI, OCT. 13. The Government feels that the telecom sector needs a huge infusion of capital and this cannot be met by just tapping domestic savings.

Addressing the objections from the Left to raising the foreign direct investment cap in the telecom sector, the Union Finance Minister, P. Chidambaram says the constraint to growth in the sector is indeed lack of capital.

The Left stand is that growth can be ensured by bringing down the cost of services, which can be adequately addressed through an appropriate regulatory environment.

Quoting a report, he says that an investment of Rs. 1,60,000 crores was required during the Tenth Plan. Even if domestic capital of this magnitude is available, it will be at the expense of those sectors where foreign capital may not come about as readily.

Though telecom growth is possible by bringing down the cost of services, the Government feels this could not be achieved by regulation alone. In the long run, the prices will come down only if the cost of delivering the services also reduces.

This requires upgrading in technology and capital infusion as well as cheap capital — all arguments in favour of FDI. Moreover, the debt equity ratio of the Indian industry is 1.6:1 and, in rare cases, goes up to 2:1. This implies that a huge amount of equity would have to be invested before it is leveraged to raise debt.

The Left parties say that the argument for increasing FDI is being put forward by the cellular lobby as they want to exit after making profits. The Government accepts the contention but says that it then becomes imperative to allow FDI to prevent the market from being captured by one or two large players.

Chinese model

Responding to the Left's suggestion to emulate the Chinese model by first investing in domestic manufacturing by forcing the telecom majors to enter into collaborations with the Chinese state-owned companies and thereafter leveraging the price advantage to capture the foreign markets, Mr. Chidambaram says this is an "infant industry argument" and there are substantial costs to providing such protection.

Unlike China, India's growth strategy relies heavily on the service sector and the BPO (business process outsourcing) model and India would be frittering away its advantage in the service sector by slowing down growth in telecom.

Besides, according to available information, the majority holding in two international long distance companies operating from China is with foreign companies.

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