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India's Expanding Telecom Sector Witnesses Price War

  • Anjana Pasricha

India's rapidly expanding telecommunication sector has been hit by a raging price war. India is the world's second largest wireless communications market after China.

India's rapidly expanding telecommunication sector has been hit by a raging price war. India is the world's second largest wireless communications market after China. But the competition among domestic and international companies for new phone subscribers is digging into profit margins.

India adds more than 10 million new mobile phone connections every month. The lucrative business has attracted domestic and international companies to the Indian market.

But at the same time as more companies have entered the market, the booming sector has been hit by a tariff war. Call rates, already among the lowest in the world, have been driven down further by companies wanting to attract new phone subscribers.

The intense tariff war was triggered when telecommunications company, Tata DoCoMo, introduced an innovative offer to lower rate charges by billing customers on a per second basis for calls instead of on a per minute basis. Since then, several other operators have offered price cuts, offering rates as low as a fraction of a U.S. cent per second.

But the lower call charges have resulted in falling revenues and lower profits in the sector.

Rajat Mukherji, a senior official at a leading telecom company, Idea Cellular Limited, says the downward spiral in phone tariffs is a cause for concern.

"But I think at these prices, they may not be sustainable in the long term, because they already seem to be approaching cost if not below cost," he said.

India's top mobile phone operators have already reported a significant decline in profits.

The price war comes as companies try to grab a larger share of the telecommunications market, which still has huge room for growth. India has approximately 500 million phone users - but that only adds up to one-half of the country's one billion plus population.

Mukherji of Idea Cellular says although urban markets are saturated, smaller towns and rural areas offer good growth opportunities.

"In some of the smaller towns, the teledensity is as low as 12 to 15 percent, meaning thereby there is plenty of room for growth in some of these smaller towns, and that is where the second wave of the telecom revolution in India is going to be seen," said Mukherji.

Analysts say competition to grab new subscribers is intensifying ahead of the entry of four new telecom operators in the coming months.

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