With more than 270 mn connections, India's telecommunication network is the third largest in the world and the second largest among emerging economies of Asia. The telecom sector continued to register significant growth in the last fiscal and emerged as one of the key sectors responsible for India's resurgent economic growth, and industry associations were lobbying hard to make this statistics visible to the finance minister before the budget. We predicted in our previous issue that it would be difficult for P Chidambaram to overlook an industry that contributes about 7-8% to the GDP. But he has. He presented a budget that has nothing significant for the IT and telecom industry. And it's strange to see that industry stalwarts are actually praising the budget even while feeling left out.

A Budget for All?
This year's budget was the UPA government's last budget in its 5-year tenure, and there were two options before the finance minister. The first, to concentrate more on the future of India's growth story and, accordingly, provide a budget that will have a clear vision for the industry and the common man. The other was to present a budget that would be a conversation point over many lunches and dinners. A budget that every citizen will feel attached to, no matter how it impacts the economy-not a populist budget but one that makes a statement.

But amid the mounting pressure of the upcoming parliamentary elections, we can understand Chidambaram's plight. And the industry, not wanting to be anti-social, going against the common man because this is where the business comes from, had no option but to accept.

At the Confederation of Indian Industry (CII), New Delhi, there were loud cheers when Chidambaram spoke about automobile, agriculture loan waiver, and raising the income tax barrier. Sunil Bharti Mittal, CMD of the Bharti group and president of CII, congratulated the finance minister and said, “The finance minister has managed to address the challenge of growth inclusiveness and sustainability very astutely. The Budget proposals would go a long way in building people and India. The beneficiaries of the budget vary from farmers to the industry to an average salary earner, and all this without making the budget fiscally irresponsible.” When we asked him about the telecom sector being ignored in the budget, he said he was not disappointed. Wasn't he?

Tax Burden Continues
While the Prime Minister in his speech at India Telecom 2007 had announced that the government would develop a forward-looking policy regime, it was taken as a possible reduction in the excise duty on manufacturing in the forthcoming budget. But the telecom manufacturers' dream ended soon after the budget speech. The association of telecom equipment manufacturers, TEMA, had recommended the excise duty reduction from 16% to 8%, but there was no mention of the same in the budget speech. The finance minister has further imposed a 1% National Calamity Contingent Duty (NCCD) on mobile phones. “Though unexpected, it is not going to affect the momentum of growth in the Indian mobile market,” said Sunil Dutt, country head, Mobile Business, Samsung.

Apart from this, the imposition of 12% service tax on custom software will increase the cost of local software procured by telecom companies. This will further hit Indian telecom software companies, already troubled by dollar depreciation. In the pre-budget recommendations, industry associations had demanded several reliefs such as reduction in revenue sharing license fee, abolition of USO, and waiver of interconnect usage charges.

For the BPO sector, the silence on STPI came as a shock as they were expecting an extension in the tax holiday for STPI units for twenty more years. The industry had also recommended the withdrawal of MAT for the initial 5-10 years for upcoming BP units. There was also a demand for abolition of FBT on ESOPs as these would discourage the BPO industry in extending staff welfare benefits. The FM has not paid any attention to these demands. “The sector is already facing significant challenges in the form of rupee appreciating and the budget has contributed in adding to these challenges,” says Sam Chopra, president, BPIAI. “While we say that the Indian domestic BPO segment will touch some Rs 30,000 crore (contributing a $30 bn export opportunity) by 2010, at a growth of 52%, we now need to re-look and reconsider it,” he added.

The Positive Side
The focus of the Union Budget on rural India and inclusive growth will have some positive effects on the telecom sector. “The vision to drive inclusiveness through technology gets a definite impetus with the proposal to set up 100,000 broadband-enabled common services centers in villages, connecting knowledge bodies and providing broadband services to major universities,” says Naresh Wadhwa, president and country manager, India and SAARC, Cisco.

Col HS Bedi, MD, Tulip IT Services, welcomes this decision by saying, “We hope this will not be given as a grant to PSU telecom companies but will be rolled out on a competitive basis, so that the government can derive maximum benefits from its investment.” Similarly, the increased outlay of Rs 450 crore for SWAN projects will help achieve greater penetration in smaller towns, villages. “This is also aligned with our strategy of rural focus and we intend to pass on the benefits to customers,” says Manoj Kohli, CEO and president, Bharti Airtel.

Kumar Anshuman
anshumank@cybermedia.co.in