Budget to spur telecom growth

The Indian Budget 2001-2002 will be largely favorable to the Indian telecom sector. There are several positive aspects of the budget, the major issue being related to the cut in interest rate in investment, which in turn is expected to spur investment into this sector.

The second issue is related to the reduction of customs duty on telecom and IT products which will go a long way in the expansion of telecom networks. The third issue is related to the extension of the deadline from March 2000 to March 2003 to telecom service providers including ISPs to get the five year tax exemption as infrastructure providers.

Telecom being a capital-intensive sector with long-term returns, most telecom players are happy about the government cutting interest rates in investment. Said SC Khanna, Secretary General, Association of Basic Telecom Operators, "The sector will now witness the much-needed flow of investment." Added Sudarshan Banerjee, CEO, Essar Cellphone, "What we need now for the cellular industry is to see to it that the next phase of growth is at a lower cost of money."

Other decisions related to investments that are expected to help the sector include easing of norms for listings abroad and procedural norms for acquiring companies. Sunil Mittal, Chairman, Bharti Telecom, said that he was delighted with the Finance Minister's commitment to develop the infrastructure in the country which is the only way to set the country into the growth path.

In keeping with his commitment of IT and telecom being the focus areas, the Finance Minister kept unaltered the customs duty on finished IT and telecom products at 15 percent. Here, however, we have a mixed reaction from the industry. The service industry is happy about this since it will reduce the cost of acquiring infrastructure equipment and help in the expansion of networks.

Cellular and basic operators as well as ISPs stand to benefit from this duty reduction. While cellular operators are into their next phase of expansion, most basic operators are in the process of rolling out their networks. ISPs also welcome this reduction since the industry has been going through difficult times of late. The cost of base stations, satellite equipment, switching apparatus, network management systems, cellular repeaters, etc which had duty structure in the range of 25 to 35 percent will all come down to 15 percent.

On the other hand, the telecom manufacturing sector has been crying foul as it will further hurt the growth of the domestic manufacturing sector. SK Khanna, Executive Director, Telecom Equipment Manufacturing Association (TEMA), was not yet clear about the duty structure on components but said that most of the components that go into making cables, for instance, will remain on the higher side.

The range of duty on components that go into cable vary from 15 percent (fibre) to 35 percent (various chemicals). "In such a scenario, most telecom equipment manufacturing vendors will be reduced to traders," he added. For instance, the manufacturing of WLL base stations and antennas, which had become so lucrative with the allowing of limited mobility by basic operators will now be imported. Currently, companies like HFCL, Shyam Telecom and ITI manufacture CDMA-based WLL equipment in the country.

The basic and cellular sector have more reasons to feel happy. Operators who begin services now up to March 31, 2003 will also be entitled to the five year tax holiday. Earlier, the deadline was March 31, 2000. However, with the impending entry of the fourth cellular operator and most of the basic operators having just begun or about to begin services, this has been well received by the sector.

Another important aspect of the budget has been the inclusion of ISPs into this tax exemption. This is really going to spur the growth of the ISPs since it will be easier for them to find financing. Lured by the infrastructure tag, investors will now find ISPs an attractive proposition. Smaller ISPs can now heave a sigh of relief as experts have been hinting about imminent consolidation within the industry. An upbeat Amitabh Singhal, President, ISPAI, said, "The benefit extended to ISPs will have a snowball effect in the IT industry as well, since everything is dependent on ISPs."

Simplification of excise duty which has been brought down to a uniform rate of 16 percent will go a long way in creating a favorable business environment. This, according to Mittal, is the best feature of the budget and at the same time he suggested more simplification in procedural norms in company affairs.

Other issues, which could have been addressed in the budget, include the reduction of duties on cellular phones to nil. Currently the total duty on handsets is 26.67 percent including customs duty at five percent and the CVD at 16 percent.

However, since no domestic manufacturing takes place, this could have been reduced. It was more pertinent in view of the fact that 80 percent of the cellular handset are sold in the gray market. "This was not expected considering that telecom was a focus area of the Finance Minister," said Banerjee.