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ForewordIndia is amongst the fastest growing telecommunications markets across the globe. The average monthly mobile subscribergrowth over the past year has been 15-17 million customers. Currently, the mobile subscriber base is approximately 671 million (as

of August 2010). The overall teledensity for India has already surpassed 60 percent and the market continues to exhibit unabatedgrowth1.

With the successfully concluded auctions of the 3G and BWA spectrum, this growth is set to become even more aggressive.Indian telecom operators have very effectively worked with rest of the telecom ecosystem to enable India emerge as the countrywhich offers the lowest mobile tariffs across the globe2. All these achievements have helped India emerge as one of the mostattractive investment destinations for all international players looking to win a share of the second largest mobile market in theworld3. These players can also look at leveraging on the successful low-cost model that India has pioneered.

During the past year, several telecom players in India have made tremendous efforts to establish themselves on the globallevel through cross border mergers and acquisitions. These strategic alliances are a step towards the globalization of the Indiantelecommunication industry.

The credit for the growth witnessed by the sector has to be attributed to the well-defined regulatory provisions designed by thegovernment. The government has been instrumental in making key policies to drive the rural growth which is expected to keepthis bullish phase going strong over the next decade. Within the rural area, there is additional focus to enhance the penetration ofbroadband and data usage. The aim is to wirelessly connect villages and remote areas through broadband and provide access tobasic facilities for health, education, banking and others.

On the occasion of India Telecom 2010, the 5th International Conference and Exhibition, the Department of Telecommunicationsis pleased to release this report on Indian Telecom Success Story Broadband for All. Developed by KPMG in India and FICCI,it provides an overview of the Indian telecommunications sector and will serve as a useful reference manual for all stakeholdersincluding regulators, policy makers, telecom operators and the general public.

R. Chandrasekhar

Secretary

Department of Telecommunications & IT

Government of India

New Delhi

1 Monthly Telecom Scenario August 2010, DoT, October 2010

2 Mobile tariffs in India to decline by 25 percent, Silicon India, May 2009

3 India becomes 2nd largest mobile market in the world, The Hindu Business Line, April 2008

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

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The Federation of Indian Chambers of Commerce and Industry (FICCI) and KPMG are proud to present this report on IndiaTelecom 2010 Broadband for All, in association with the Department of Telecommunications (DoT).

The present phase is extremely exciting for the telecommunication industry which is looking forward to 3G and BWA rollout tohelp re-invigorate the aggressive growth that the industry has witnessed in the past two years. Rapid swelling in the subscribernumbers has resulted in urban teledensity exceeding 100 percent. The rural market is expected to drive the next round of growthfor the voice-based services, while data services will create the much needed churn within the maturing urban markets.

This report highlights the importance of broadband and data services market in India. Our aim has been to highlight the keyecosystem requirements and strategies that telcos may follow in order to achieve the government targets of broadbandsubscriptions. This report provides the reader an insight into how the telecom industry has evolved over the last decade. The reportalso highlights the growing importance of broadband and how it has the potential to contribute to the overall socio-economicdevelopment of rural India

We are extremely grateful to the Department of Telecommunications (DoT) for providing us with this opportunity to work withthem for the India Telecom 2010 event.

Amit Mitra

Secretary General

FICCI, India

Sean Collins

Global Chair

KPMGs Communicationsand Media practice

Romal Shetty

National Head

Telecom

KPMG in India

Arpita Pal Agrawal

Head - Telecom

Risk & Compliance

KPMG in India



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1 Ministry of Finance

2 Monthly Telecom Scenario August 2010, DoT, October 2010

3 Consultation Paper on National Broadband Plan, TRAI, Business Line, June 2010

ExecutivesummaryRanked amongst some of the fastest growing economies ofthe world, India has registered steady growth over the last fewyears, especially in comparison to the OECD and other similaremerging economies1. The strengthening domestic market andenhanced domestic consumption helped India to successfullyweather the global economic turmoil.

The Indian telecom sector particularly, witnessed aggressivegrowth during the last two years, emerging as a globalbenchmark for other developed countries as well. All majorinternational operators are exploring opportunities to make

inroads into the Indian telecommunication sector, both forthe vast customer base as well as to leverage on the lowcost outsourcing model which India has been successful inpioneering.

As of August 31, 2010, the countrys subscriber base (wireline+ wireless) stood at 707 million2, with the overall teledensityreaching 60 percent. With increasing maturity of urban markets,the next round of growth is expected to be generated from therural areas in the form of increased uptake of voice and data-based services, as well as broadband services.

The penetration of broadband in India has not been asaggressive as the wireless communication services. Asof August 2010, the broadband subscriber base in India isapproximately 10.08 million. The government, in recognitionof the potential of broadband as a key enabler in furthering itsgrowth agenda, has taken a strong stance to address the issueof low penetration and enhance broadband coverage acrossthe country. The recently concluded 3G and BWA auctions arelikely to be the catalyst that furthers the governments agendaof providing broadband connectivity to the remotest parts ofIndia. The government as well as other telecom stakeholdersbelieve that these wireless technologies will help overcome thebarriers of expensive wireline infrastructure, especially in thelow revenue generating zones.

The primary aim of the Broadband for All movement is toensure that all Indians are able to connect with the worldand are able to remotely access basic facilities like health,education, banking, commerce, entertainment, utility ande-governance services to enhance their quality of life.



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4 An IIT, IISc-designed laptop for just INR 1,500, Times of India, July 2010

5 Special purpose vehicle planned for broadband push, Hindu Business Line, July 2010

The government, along with TRAI and DoT, has been makingtremendous efforts to achieve the desired results. TRAI isconsidering plans to roll-out a national optical fiber cable networkwhich will act as a backbone to broadband services acrossthe country. The funding for this project is likely to be routedthrough the Mahatma Gandhi National Rural EmploymentGuarantee Scheme (MGNREGS) for non-skilled work and fromthe Universal Services Obligation Fund (USOF) for materialand equipment cost3. The Indian government has unveileda prototype tablet computer that would sell for a mere INR1,500 or USD 354 thus increasing affordability of the end userdevice which is essential to access the broadband services. Thegovernment is considering making broadband connections alongwith other equipments such as computer, printer and telephonemore affordable to every gram panchayat. These initiatives,which are intended to provide universal broadband access tothe rural residents of the concerned gram panchayats, are likelyto be funded through the Universal Services Obligation Fund5.All these steps are clear indicators of the efforts that are beingdirected towards achieving strong broadband growth in India.

The private telecom players are also expected to play animportant role to achieve the objective of Broadband for All,by covering the key aspects of relevant content, seamlessconnectivity and affordable end user device by introducinginnovative business models for their broadband serviceofferings. Due to the rich diversity in India, locally relevantcontent is essential to make an impact and enhance penetrationof telecom services, especially in the rural areas.

The regulatory environment in India has been extremelysupportive for the telcos to have achieved such phenomenal

growth in the past years. The industry is now eagerly awaitingthe roll-out of 3G and BWA which is expected to have asignificant impact on the sector and its growth in the next fewyears.

The Indian telecommunication industry is at the brink of enteringa fresh round of growth, to be stimulated by the launch ofwireless data services. The policy makers and the privateplayers have successfully come together with various initiativesto ensure that the industry continues to remain a shining star forIndia.



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Table of ContentsMacro-economic view of India 1

Global telecommunications market 7

Indian telecommunications market 13

Regulatory and policy environment 19

Broadband for all 25

Broadband infrastructure 34

Broadband - catalyst for convergence 39

Value added services in India 43

Connecting rural India 51

Telecom manufacturing 59

Telecom research & development 65

Emerging trends and technologies 69

Green telecom 73

Investment opportunities after broadband rollout 79

International best practices 83

Conclusion 89

About KPMG in India 91

About Department of Telecommunications (DoT) 92

About Federation of Indian Chambers

of Commerce and Industry (FICCI) 92



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Macro-economicview of IndiaIndia is one of the fastest growing economies across the globe. The economic sizeof the country, at the end of the fiscal year 2010, is expected to be worth INR 49trillion (GDP at market prices). It is also the fourth largest economy in PPP termsafter USA, China and Japan1.

The country experienced rapid economic growth between 2003 and 2007,registering an average annual GDP growth rate of 8.8 percent. In fiscal 2009, thecountry weathered the global downturn successfully and registered a GDP growthof 6.7 percent, which is significantly higher than the performance of both the OECDcountries and emerging Asian economies. This performance was primarily drivenby the services sector, which posted a year-over-year growth of 9.7 percent. For2010, the country is expected to post a GDP growth of 8.5 percent2. By 2020, theeconomy is expected to quadruple its current size driven by nominal annual growthof 13 percent3.

Progressive liberalization of government policies, rapidly expanding services sector,FDI growth, rising global competitiveness and increasing domestic demand haveall contributed to a strong economy. India ranks as the number one FDI destinationamong non-financial investors4.

1 CIA World Fact Book 2009, The World Bank2 Ministry of Finance

3 GDP to quadruple to $ 4.5 trillion by 2020: Edelweiss, Financial Express, March 20, 2010

4 A.T. Kearneys 2010 Confidence Index



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GDP Mix of India and developed economies

Key features of the Indian

economy

Favorable demographics: Currently the median age in Indiais 24 years and the country possesses a working populationof close to 340 million5. This young and dynamic workingpopulation of India is one of the biggest factors having apositive impact on the consumption and investment patternof the country. For instance, in 2009-10, India became thesecond fastest automobile market in the world, registering agrowth of 26.4 percent6.

Rising urbanization: Currently, India has 42 cities with apopulation base greater than one million7. Widely believed tobe the centres of economic activity and wealth generation,these cities are estimated to contribute 60-80 percent of thetotal output in India8. Urbanization adds about one percenteach year, through productivity gains. The benefits from

urbanization to the economy come from the clustering offirms and businesses which allow them to learn from eachother and attract workers. Examples include the clusteringof software firms in Indias Silicon Valley (Bengaluru) or autocomponent firms in Gurgaon9.

High savings ratio:The country has one of the highestnational savings ratio of 32.4 percent (2010E) as against 22.9percent for Japan and 10 percent for USA10. Higher domesticsavings has resulted in higher investment, making India lessvulnerable to global situations.

2010P2010P Agriculture

Industry

Services18%

28%

54%

2005

81%

IndiaUSA Japan

71%

18% 27%

1% 2%

28%

58%

14%

Source: EIU

5 World Population Prospects: The 2008 Revision Population Database, United Nations Population Database6 India India car sales are No. 2 in world, Financial Express, April 09, 2009

7 LIMITS OF PEOPLES WAR- Naxalism faces serious hurdles that can be used against it, The Telegraph, January 21, 2010

8 Indias urbanization bonus, Mint, August 16, 2007

9 National Productivity Council

10 EIU



3

Shift from an agrarian to a services-led economy: Overthe years, the Indian economy has transformed itself froman agriculture-dependent economy to a services-driveneconomy. The share of agriculture, which comprised morethan half of the GDP in 1950-51, is now gradually shifting infavor of the services sector, which has currently got a shareof 58 percent of GDP. The growth of the services sectormarks a watershed in the evolution of the Indian economyand takes it closer to the fundamentals of a developedeconomy.

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Though the growth momentum of the Indian economy was

substantially impacted with the onset of the global economicslowdown, the severity of the impact was considerably lessas compared to emerging Asian economies. The fiscal andmonetary stimulus announced in the latter part of 2008 helpedthe economy to recuperate from the slowdown phase.

After witnessing deceleration in GDP growth for fiveconsecutive quarters, a notable turnaround in Indias real GDPgrowth took place during April-June 2009 quarter, with theGDP registering a growth of 6.0 percent (y-o-y) as against 5.8percent during the previous quarter. The rise in GDP growth inthe third quarter of 2009 to 8.6 percent, which was viewed asan initial sign of recovery in the economy, was primarily due tothe slow impact of increase in government spending and theimproved performance of the industrial sector12.

Notably, FDI in India remained resilient during the crisis. Withmost of the countries witnessing a downfall in the growthof FDI between 2007 and 2009, India displayed a CAGRgrowth of 16.5 percent for the same period13. India weatheredthe global crisis comparatively well, in part due to thegovernments quick response in the form of stimulus whichencouraged foreign investors.

Economic indicators

GDP growth

From survival to revival

The Indian economy, much like its global counterparts,witnessed a substantial deceleration in growth in 2008,consequent to the global financial and economic turmoil.Towards the end of 2008, corporate profits deteriorated,

consumption and investment demand shrank, and there wasa shrinkage in employment opportunities. The manufacturingsectors slowdown was slightly more pronounced with growthin the manufacturing output turning negative in December,200811.

9.6 9.3 9.49.7

8.57.8 7.5

6.1 5.8 6

8.6

6.5

8.6 8.8

GDP (%)

Mar-0

7

Jun-0

7

Sep-0

7

Dec-0

7

Mar-0

8

Jun-0

8

Sep-0

8

Dec-0

8

Mar-0

9

Jun-0

9

Sep-0

9

Dec-0

9

Mar-1

0

Jun-1

0

Quarterly Net FII Inflows (USD Millions)

-236

407

4017

1417

-27

-2359-1807

357 114824

3811

2199

4372

2272

5428

6421

Mar-

07

Jun

-07

Sep

-07

Dec

-07

Mar-

08

Jun

-08

Sep

-08

Dec

-08

Mar-

09

Jun

-09

Sep

-09

Dec

-09

Mar-

10

Jun

-10

Sep

-10

14.8

8.9

7

8

5.5 5.4 6

-0.2 0.3

8.39.3

17.614.5

5.8

5.6

Quarterly IIP (%)

Mar-

07

Jun

-07

Sep

-07

Dec

-07

Mar-

08

Jun

-08

Sep

-08

Dec

-08

Mar-

09

Jun

-09

Sep

-09

Dec

-09

Mar-

10

Jun

-10

Aug

-10

Source: Bloomberg, CSO

Source: Bloomberg, CSO

11 D&B Outlook, Q2 201012 Bloomberg

13 OECD



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Strong industrial and manufacturing performance, stimuluspackages by government and growing confidence of foreigninvestors was well-supported by high-performing capitalmarkets, indicated by growing market capitalization of theBombay Stock Exchange (BSE).

Domestic industrial activity also witnessed a sustainedimprovement during April-December 2009, as evidentfrom the strong IIP growth figures. While this can partly beattributed to the low base effect; restocking by manufacturers

following the earlier cutbacks in factory output and drawdownof inventories also aided the industrial production in the latterhalf of 2009. The other positive aspect of this rebound inthe industrial activity was that it was broad based. As manyas 14 out of 17 major manufacturing sectors witnessed apositive growth during January-December 2009, therebystrengthening the prospects of faster recovery in thedomestic industrial activity. The fiscal and monetary stimulusmeasures announced earlier played a major role in stimulatingconsumption and investment demand in the economy during200914.

OutlookThe Indian economy is at its initial stages of economicprogress, as compared to some of the other emergingeconomies. The growth prospects of the economyare expected to improve significantly in FY 2011 as thedomestic demand driven by rising private consumptionand investment - begins to gain momentum. However,the government consumption demand is expected toremain moderate on account of fiscal consolidation planand expected steady withdrawal of stimulus packages.Nonetheless, the focus of government spending oninfrastructure sector would continue to support growth.

Growth would largely be driven by:

Favorable demographic profile

Indias high population growth has had a positive impacton productivity gains over the last 10 years a trend likelyto continue over the coming decades. It is expected thatthe working age population will continue to grow to peakat roughly 70 percent by 2040, in contrast to much of thedeveloped world and regional peers, such as China andSouth Korea (which are already in de-growth phase)15. Therecent years have also seen considerable development in theeducation systems of the country, marked by the presenceof world-class universities and management schoolsincluding the Indian Institutes of Technology (IIT) and IndianInstitutes of Management (IIM). This is expected to furtherstrengthen India as a breeding ground for knowledge andconsequently innovation. The country scores 4.4 (where1= Not Well, 7 = very Well) on the Quality of EducationalSystems Index performing close to Japan (4.5) and leavingbehind outsourcing competitor China (3.8) as per the GlobalCompetitiveness Report 2009-201016.

FDI inflows in selected countries

Source: OECD

2007 2008 2009 CAGR

Japan 22,548 24,418 11,939 (27.2)%

Korea 1,784 3,311 1,506 (8.1)%

Russia 55,073 75,002 37,134 (17.9)%

Brazil 34,585 45,058 25,949 (13.4)%

China 138,414 147,791 78,200 (24.8)%

India 25,483 41,315 34,577 16.5%

The fiscal stimulus

Impact(INR Billion)

Comments

Duty cuts 500Cenvat Cut 4%:Excise duty to 8%

Additionalexpenditure

1000 Increased allocation toflagship programmes

Sixth paycommission

157 A consumption kicker: tocontinue in FY10

Farm loanwaiver

600 Indirect impact

% of GDP 4.0%

12 Months returns as on March 2010

MSCI India 113.6%

MSCI EMF 77.3%

MSCI EM Asia 70.0%

MSCI Europe 48.3%

MSCI Asia Pacific 72.3%

BSE Sensex 80.5%

Dow Jones 42.7%

NASDAQ 56.9%

Government impetus

Indian equity markets outperform EM

Source: Report on India Strategy, IDFC-SSK, May 17, 2010

Source: Morgan Stanley Research

14 D&B Outlook, Q2 2010

15 The Reawakening of Domestic Demand, Business Monitor International, Q22010

16 The Global Competitiveness Report 2009-2010, The World Economic Forum



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Labor costs

Source: Economist intelligence Unit; Data for 2010(Estimated); *Efficiency of labour measured in terms of output per worker (real GDP per person employed)

India China Japan US France Germany UK

Labor Force (million) 478.3 815.3 65.6 154.9 28.2 43.4 31

Labor Costs per Hour (USD) 2.5 2.2 25.3 27.0 29.0 38.1 28.3

Labor Productivity Growth (%)* 6.5 9.5 3.7 2.3 1.7 2.8 -0.2

Improvement in private consumption

With rapidly waning uncertainty on employment andexpected increase in disposable income due to measureslike broadening of overall income tax slabs for individualswith consequent reduction in effective individual tax, as

announced in the Union budget of FY11, private consumptionis expected to improve. Improvement in private consumptionwill also result in increase in resumption of capital expansionplans by Indian corporations.

Infrastructure development

The Government has put significant emphasis on developingcore infrastructure including roads and power with expectedinvestment of over USD 500 billion from the public as well asthe private sector over the next five years. This is expected toresult in enormous productivity benefits for the economy17.

Low labour cost

In recent years, the country has positioned itself as apreferred manufacturing and production centre owing tothe abundance of skilled, cheap and English speaking labor,a factor that helps India distinguish itself from its Asian

contenders in the global outsourcing market. India has thelowest labor costs (per hour) and the highest availabilityof engineers and scientists (after Japan) in the world18.NASSCOM estimates that an approximate 400,000 diplomaand degree engineers graduated in the year 2009 alone19.

17 XIth Plan Documents, The Planning Commission

18 Global Competitiveness Report 2009-2010, The World Economic Forum

19 www.osec.ch



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Globaltelecommunications

marketTelecom services will continue to be one of the key growth sectors havinggenerated revenues of roughly INR 67 trillion in 2009. Global wireless subscribersreached 4.6 billion1 in 2009 with a CAGR of 22 percent over 2004-20091. Thisoccurred despite some carriers experiencing marginal declines or flat trendsin revenues with enterprises and consumers exercising cut backs on telecomspending during the global economic slowdown.

1 International Telecommunications Union database, June 2010



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