As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), where I is investment or foreign investment, FDI in short refers to the net inflows of investment which is outflow minus inflow to acquire a management interest in an enterprise which is operating in an economy other than that of the investor. It is the total of equity capital which is shown by balance of payments. It is the movement of capital, technology, production, goods and services from one country to another country.
Foreign direct investment can be induced in a country by the following methods:
By acquiring shares of an enterprise in the target company.
By establishing a new enterprise or company in the target company.
By providing technology to the companies in the target country.
Through merger or acquisition.
By establishing a wholly owned subsidiary of a company in the target company.
By joint ventures of the companies in equity capital in the target company.
TELECOMMUNICATION INDUSTRY IN INDIA
The word telecommunication is derived from the Greek work “tele” which means “far off” and the Latin word “communicare ” which means “to share”. Or in other words it refers to transmission of signals to different places with the help of telecom or telecommunication. In old days, communication between two people take place with the use of drum, letters, flags and smoke signals. And now it means high speed sophisticated submarine optical wires laid on ocean floor and by satellites which is in covering on the whole earth.
The modern system of telecommunication starts with the help of telegraphs networks. In old days, India seen increasing number of telephone wires connections. When the wireless telephone connections in the form of handsets or cell phones, it was not accepted widely by the Indian masses because of the high prices that can’t be bought. And with the reduced tariff of connections as well as the handsets of phones there is a huge demand. and now almost everyone is having at least one wireless connection with them. Now the telecom industry is witnessing low tariff telecom tariff globally.
Telecommunication was started as a state monopoly in 1980’s. in the early 1990 the telecom sector was freed from the state or government monopoly and was liberalized and there was huge private sector participation from then.
The main objective of the liberalization was:
Availability of affordable and efficient telecom services.
Creation of good telecom infrastructure in the country.
To provide the customers with more good quality services.
To increase the growth of the sector with the help of private payers.
To make the telecom industry according to the standards of the telecom services with the standards of other countries.
INDIAN TELECOM AUTHORITIESINDIAN TELECOM AUTHORITIES
Telecom commission DoT TRAI WPC TEC
Telecom commission – the telecom commission mainly helps in the formulation of the policies, strategies, decides budget, promotes investment, promotes standardization, R&D in telecom, licensing coordination matters, international matters etc.
DoT – it is department of telecommunication. Some of the important functions of DoT are it performs licensing and regulations, international coordination matters with international companies, promotes private investment, promotes standardization and R&D in telecom.
Telecom Regulatory Authority of India – it is an autonomous statutary body which comes into force with Telecom Regulatory Authority of India Act, 1997. The important powers are recommendations regarding the time and need of entering new telecom industry in the market, grant of telecom license, revocation of license.
WPC – wireless planning and co-ordination wing. It was created in 1952 and a wing of DoT. WPC is divided into – (i) licensing and regulation, (ii) new technology group, (iii) standing Advisory Committee on Radio frequency allocation. It is the central agency ehich represents India.
TELECOM SECTOR PRIOR TO FDI (the history)
Prior to 1991, there was limited scope of the telecom sector. At that time FDI was not permitted in this industry however, FDI already entered at that time. In 1991, India witness a huge deficit in the balance of payment which is a huge crisis and foreign exchange reserves was very low. So the government of India decided to implement a strategically plan or adjustment for balancing the BOP and sustain growth in the economy. There was then decided to reduce the role of public sector in the telecom industry and to widen up the market of telecom industry by opening the doors for the foreign players to come in India. Privatization was introduced and the licensing and huge tariffs were eliminated.
DETERMINANTS OF FDI & INDIAN MARKET TRANSITION
There are many factors which influence the capital induction by FDI some of the are:
Level of education & literacy level – the level of education is influenced by labor pool. Foreign firms wanted to invest in that countries in which the labor could grasp complicated process and maintain high standards of quality. Skilled and productive labor can induce effective manufacturing.
Legal environment – the legal environment can play an important role in the induction of FDI in a country as tax exemptions, tariff bracket etc are also very important for the host country for their low cost.
Economy of host economy – it also play major role in the amount of FDI to be flowed in the host country as things like interest rates, low inflation, stability in the economy plays a major role.
Political stability – political stability related to the degree of corruption, war prone countries etc. it was seen in the study that the amount of corruption and the inflow of FDI have negative relationship with each other.
Physical infrastructure – plays a very important role in the inward flow of FDI. Level of telecom services, transport facilities, electricity, water, sanitation etc is very important factors. Low accesses to these factors attract no or low FDI.
Tax regime – also play a important role, a stable tax brackets of the country attract easy and more FDI than the unstable tax regime.
NEW TELECOM POLICIES FOR FDI
In 1994 India realizes the importance of investment and decided to introduce a new policy for the same which was known as 1994 New Telecom Policy (NTP). The policies contain all the features which are required for improve the competitiveness and the state of the economy. The objective was to provide:
Quality telecommunication services to all the Indian masses.
Covering all the areas of the country the access of telecommunication.
Give a viable base for the telecommunication services.
Many of the goals were attained by 1997. The NTP goals to have 7.5 millions phone lines and it exceed to 8.73 million phone lines.
IMPACT OF FDI ON INDIAN TELECOMMUNICATION
India is the second largest telecom sector in the emerging economies after China. The Indian telecommunication sector received about 99.5 billion rupees (approx $ 2.3 billion ) through FDI from August 1991 to March 2004. India is seeking more inflows from FDI in this industry. Indian tele density was very low compared to other nations GDP and population. India’s teledensity is 30 % at present. India has more than 285 millions phones presently. But the teledensity at rural places are very low now as well due to low towers or signals there. Tele density is increasing. Foreign Direct Investment focuses more on mobile phone and manufacturing. From April 2004 to March 2005 there were about 18.6 millions phone connections. Recently, the Indian government realized that telecom sector needs about 68.6 millions rupees for further expansions.
There were about 100% FDI in many sectors but in India in telecom sector is allowed only at 49% only. Recently, on 14th of September 2012, government decide to allow FDi in telecom sector upto 74%.
Growth in FDI in India in telecom sector from the beginning.
FDI in INR (in crores)
Telecommunication sector account about 41.03% from the total FDI in India. With a total amount of 1, 33,064.91 crores till March 2009.
About 32 companies entered during 1995 by the way of FDI. Among them AT&T, British telephone, France telecom, Swisscom, and Telstra. Presently there are six major foreign telecommunication companies which are from Hong Kong, Malaysia, and Singapore which form the part of Asia- pacific group. The telecom sector has received tax incentives as well due to the New Telecom policy. These incentives includes relaxation in license fees, tax exemptions, loans etc.
FDI in the telecom sector has serve significantly to the growth of the telecom sector which indirectly also contributes to the growth of the economy as well. FDI reduces or eliminated all the hindrances which were their prior to the inward flow of FDI. FDi provide following benefits to the telecom sector:
Increase the market of telecom sector all over the world.
Make an adequate infrastructure for telecom.
There has been tremendous increase in the growth in telecom sector.
Provide high quality and large variety of products.
There was healthy competition among the players.
Low range of products are thee to reach all the Indian masses.
ISSUES WITH FDI AND INDIAN TELECOM SECTOR
India has shown a tremendous growth with the help of FDI like stable economy, stable government, large market base, and access to Asia-pacific region and much more. FDI provides the access to India to provide its customer a huge market in telecommunication services, without FDI this couldn’t be possible.
There are also many barriers to growth in telecom sector by FDI. These barriers include cost of mobile phone services, tax policies, legal climate, rules & regulations under FDI, high cost of infrastructure, status of rural area and corruption. The cost of mobile service and handsets are high for the produces a handset cost about $ 66 and mobile services cost about $5 per month which is not affordable for a average Indian to pay as the salary are not too high at that time. And talking about the rural areas they have more low income and about &2% of the population resides there (1995 scenario). The average monthly revenue dropped down by $8 in 2004. And asia-pacific region generate about $17 million revenue per month.
The conditions of roads, unstable economy may drive FDI to other countries. Only 57.52 % of the Indian roads were adequate in 1999 if we compare to other countries the condition in our India is worst as in South Korea (74.5%), Malaysia (79.99%), and Thailand (98.8%). The share of GDP in our country by tax revenues was about 8-9% in 2000, which is very low as compared to other countries Indonesia(13-16%), Malaysia (14-20%). This is also due to the underground economy which provides no tax.
Number of underground activities were going on which pollute the economy and restrict the FDI in telecom sector. Large numbers of scams, sting operations are unveiled only in India. Due to this the reputation of the country get polluted, which induces the other or foreign companies to think number of times before coming in to India.
Tax policy has a major implication in the amount of FDI. Indian states have implemented number of individual taxes which is a disincentive to the movement of the goods. Tax laws are very unclear or it can be said that it is not only tax at the individual level but also at the company level. Although many tax policies are eliminated from this sector still company have to pay high tax to the government and due to the low selling price of handsets and mobile services their profits are already low.
The legal and regulatory environment is transparent but very slow. Litigation and settlement of cases take years to settle in India. This is because of the inflow of foreign companies which are under the clause of foreign arbitration. This includes longer time.
India has suffered from corruption to a large extend as well which tarnish the image of Indian legal environment and culture in the eyes of foreign companies. Transparency International, an agency which keep a track on the corruption activity of all the countries and rate them on the basis of high danger, low danger corruption of the countries. Currently India has been assigned at the rating level of 2.3 as compared to 2.8 in 2004. An index rating below 3 indicate high corruption and prone to danger countries from corruption.
Foreign Direct investment has significantly increased after the 1990s. Much proportion of this growth is due to the foreign companies which entered in the Indian market, some of them have collaborations with the local service provider and provide the Indian masses. Some proportion of the growth is attributed by the establishment of the foreign companies in India to serve their own product to the masses or customers and manufacture them on their own as well.
However, telecom sector which is influenced by FDI, FDI as in all other sectors in India have seen some barriers an unclear legal framework, regulatory environment and inadequate physical structure. As a result of which many international companies entered and then exited from the Indian market within few years.
Indian rural areas were the main areas for the growth. However, this growth was limited by the extreme poverty. Where the focus is on the basic necessities of life like food, shelter, clothing etc and not on internet and mobile usage.
Foreign direct Investment in the telecom sector has to increase further due to the till now efficient working of this sector. The future of FDI is shining in this sector to grow more .