Two for the bulls

BEATING THE STREET

Two big policy decisions came through this week. One was the PSU-crossholding selloff. The other was the relief package to GSM cellular operators.

Between them, these two announcements will be enough to maintain the bullish tempo through the next quarter.

The crossholdings game was a cynical exercise even by Third World standards. The energy PSUs all had huge cash reserves and by ordering them to buy stakes in each other, the government bled off reserves without changing control one iota.

It cheated the minority shareholders and offered nothing in return for leeching reserves. It also created accounting entries that disingenously suggested that "disinvestment" had taken place, when nothing of the sort had occurred.

By selloffs, those PSUs can realise some value. This also releases stocks into a buoyant market with excellent timing. Perhaps this is the best we can expect in terms of disinvestment in an election year.

The sops to the cellular industry clarify a less black-and-white situation. The telecom sector has seen many flipflops in policy between 1996, when the first GSM circle bids were made, and the unified licensing regime earlier in 2003.

Once the unified licensing regime became reality, it was also clear that GSM operators would need to be compensated in some fashion for the decision to allow CDMA-based roaming.

The GSM operators bid and invested on the reverse assumption and tariff structures were also formulated on an assumption of CDMA-roaming exclusion.

Once CDMA roaming was made available at much lower licence costs, prospects of profitability across the GSM sector reduced and the market changed unfavourably.

The GSM lobby has developed a fair amount of clout during its seven years of dealings with the Babu-Neta nexus. It could and did demand several pounds of flesh to counter-balance the impact of unified licensing.

In circumstances where projections suggest that 55 million voters will be GSM/CDMA subscribers by the time the Lok Sabha elections are held, it is entirely in the government's interests to devise acceptable solutions. It's done that.

As a result of this, Indian telecom may be finally achieving policy maturity. You have unified licensing, which means that the government no longer cares which technology is used to deliver what services.

The bigger GSM and CDMA players now have approximately the same cost structure. They will all be in a position to swallow smaller players and grow into national entities offering mobile, wireline, broadband Net and ISD/NLD services seamlessly.

The dips in pricing in ISD/STD and the cuts in roaming charges are a pointer to what could happen to the market given healthy competition. From being one of the most expensive telecom markets, India is becoming one of the cheapest.

The elasticity of telecom demand is why the market is growing at breakneck pace. By November 2003, there were approximately 25 million mobile subscribers and that number will be 55 million by next December. By 2005-end, there will probably be well over 100 million mobile subscribers.

Such a jump in teledensity must mean an automatic push for quicker GDP growth. As the logicians would say, it's an essential but insufficient condition for higher growth. Maybe a few other conditions will be met over the next few years?