The telecom sector is the third largest sector in terms of foreign direct investment (FDI) inflows in India. According to data released by the Department for Promotion of Industry and Internal Trade (DPIIT), the sector registered cumulative FDI inflows amounting to $38.33 million between April 2000 and March 2022. Further, the sector accounted for 7 per cent of the total FDI inflows at the end of fiscal year 2022.
The huge influx of FDI can be attributed to various government initiatives focused on enabling easy market access to telecom equipment and ease of doing business in the sector, a favourable and proactive regulatory environment, and a positive investment climate.
Policy and regulatory landscape
The government’s favourable policy regime and the prevailing robust business environment have ensured the consistent flow of foreign capital into the country. The government has taken several initiatives, including the relaxation of FDI norms across sectors. The government liberalised FDI norms in 2013, allowing up to 100 per cent FDI in the sector. Of this, FDI of up to 49 per cent was allowed under the automatic route. Any FDI beyond this required the permission of the Department of Telecommunications (DoT).
Subsequently, the government approved structural and process reforms in the sector in September 2021 to promote healthy competition, encourage investments and reduce the regulatory burden on telecom service providers, as well as to generate employment opportunities.
Further, in October 2021, the DPIIT notified 100 per cent FDI under the automatic route in the sector, up from the previous 49 per cent. All telecom services, including telecom infrastructure providers, such as basic, unified, cellular, national/ international long distance, commercial VSAT, public mobile radio trunked services and global mobile personal communications services, as well as all types of internet service provider licences, voicemail/audiotext/unified messaging service, resale of international private leased circuits, mobile number portability services and providers of other services have been allowed 100 per cent FDI under the automatic route. The policy is also applicable to infrastructure providers offering dark fibre, right-of-way, duct space and tower services.
Besides liberalising FDI norms, the government has undertaken several policy measures to accelerate the growth of the sector and attract foreign investment. For instance, in August 2021, the DoT initiated discussions with banks to address the financial stress in the sector. Other key policy moves include the implementation of the PM GatiShakti plan, single-window clearance and geographic information system-mapped land banks. Moreover, reforms such as rationalisation of adjusted gross revenue, spectrum reforms, rationalisation of penalties and interest payments, and rationalisation of bank guarantees are expected to catalyse liquidity infusion into the sector, boosting investor confidence.
Trends in FDI inflow
As per DPIIT data, FDI equity inflows in the telecom sector consistently increased till 2017-18, and stood at $6.21 billion at the end of the fiscal year. However, the figure slumped to $2.67 billion in 2018-19, a year-on-year decline of nearly 57 per cent, primarily due to financial stress in the sector.
In 2019-20, equity inflows rose to $4.45 billion, followed again by a sharp decline of nearly 91 per cent to $0.39 billion in 2020-21. The fall was mainly attributed to the severe effects of the Covid-19 pandemic on international investment flows, investor confidence, global value chains and inflationary pressure.
However, the pandemic bolstered global demand for telecommunication, and digital infrastructure and services. Additionally, financial and business stability in the sector, coupled with recovery stimulus packages, foreign investment programmes, and a positive near-term outlook, is driving foreign investments. As per DPIIT data, FDI equity inflows registered an increase of about 72 per cent to $0.67 billion in 2021-22.
Recent foreign investments in the industry
There has been a massive influx of foreign capital in the sector. For instance, Google announced an investment of $1 billion in Bharti Airtel in January 2022. This included an equity investment of $700 million for a 1.28 per cent stake in the company and $300 million for potential future projects in smartphone access, networks and the cloud. Further, Dixon Technologies announced plans to invest $26.69 million under the telecom production-linked incentive scheme in October 2021. Meanwhile, the Carlyle Group has acquired a 24.04 per cent stake in Airtel’s data centre subsidiary, Nxtra Data Limited, for Rs 17.88 billion. CA Cloud Investments (Carlyle) now holds a 24.04 per cent stake in Nxtra.
The way forward
FDI is not only a crucial non-debt financial resource, but also a channel for the transfer of technology, intellectual capital and access to international management from leading investors.
The Indian telecom sector has grown substantially in recent years and has facilitated the growth of other sectors through the diffusion of ideas and information. It is poised for such opportunities as new and evolving technologies, increasing broadband penetration, rising automation, the launch of 5G and growing revenue opportunities. Tapping these opportunities will require massive and sustained investments.
Since the industry is capital intensive and heavily dependent on technology, FDI in this sector holds the promise of accelerating its growth. A conducive regulatory environment and government support to encourage FDI inflow would create a positive outlook for foreign investments in the sector.