Is Reliance misplacing its hopes on rural India?

With a profit increase of more than double in the last quarter of its fiscal year ending March 2007, India's second largest telecoms operator Reliance Communications has announced that it would spend over INR100bn in expanding its infrastructure. It has also launched a new range of low-cost handsets. Net profit increased by 154% and reached INR10.2bn for the quarter whilst revenue increased by a third to INR39.4bn. At the same time, leading Indian mobile operator Bharti Airtel almost doubled its quarterly profit to INR13.5bn.

Most of the operator's investment will be channeled towards the enhancement of its network across the rural regions of India where growth is at its fastest pace. With approximately two-thirds of the population situated in rural India, penetration is just 2%. The potential for growth is massive. Other carriers to pledge investment towards the extension of their networks are Bharti Airtel, BSNL and Hutchison Essar. However, aside from its infrastructure building, Reliance has also launched a range of new handsets - the Classic range. These handsets will mainly be distributed in metros, small cities and rural India, where Reliance is looking to augment its 28mn customer base.

In such a fragmented market as India's, competition is widespread and a key competitor for Reliance is Hutchison Essar. Already, during the recent sale of Hutchison's 67% stake in the joint venture operator, which Vodafone won, Reliance failed in its acquisition attempt. Having announced its successful acquisition in February 2007, Vodafone had to wait until the end of April 2007 before India's Foreign Investment Promotion Board approved the deal. Decision on regulatory approval had been deferred by the FIPB on grounds that the UK company had breached India's tough FDI legislation. There was some controversy after it was alleged that the 15% of the company owned by local partners was indirectly held by Hutchison, which would have meant Vodafone breaching India's FDI legislation. The FIPB ruled, however, that this 15% stake was held by resident Indians, and not by foreign players.

The huge potential of the rural market aside, what are the other factors that Reliance should consider while making its colossal investment in rural India? Would fierce competition from Bharti and Hutchison thwart Reliance’s plans to break into the rural market with new infrastructure and handsets?