By CAROLINE DANIEL

If proof were needed that the Indian mobile telecoms sector is in the midst of upheaval, it comes in the words of Shyamal Ghosh, secretary, department of telecommunications: "It is so exciting, my hair has turned grey!"

His premature greying comes against a background of growing unrest from private cellular operators about their prospects for making money from selling mobile phones across India.

On the surface, that unease seems surprising. In January, the latent demand from urban Indians for cheap mobile phones was underlined when the New Delhi offices of MTNL, the majority state-owned telecoms operator, were besieged by thousands of prospective subscribers, eager to get application forms for a new, cheap-rate phone service. Demand was so great, photocopies of the form had to be handed out instead.

The queues are not the only evidence of the latent hunger for mobile communications. The growth potential of the Indian market is also plain from the statistics. There are now just 28m landline phones and 3m mobile phones for a population touching one billion - an extremely low proportion compared with the Swedish market where more than 65 per cent of the population have mobiles.

But making comparisons with European take-up has already landed Indian mobile phone operators, which were awarded licences in 1996, in financial trouble.

"The process of auctioning went off-target because calculations of the market size did not meet expectations. So licence fee defaults started, and the whole situation practically came to a standstill," says Mr Ghosh.

That mis-reading of the market has put cellular operators under financial pressure. According to HSBC, the investment bank, as of March 1999, cellular operators in the main cities had accumulated losses of Rs10.6bn, while those in outlying regions had losses of Rs76.2bn. These would have increased a further 20 per cent during 2000. Overall HSBC, estimated average revenue per user fell by 15 per cent during 2000.

So the Indian government is faced with a complex task: how to get more mobiles to the masses - it has a target of 50m mobile phones by 2005 - while improving the economics of offering mobile phone services in India.

Its attempts to resolve these twin needs, however, have run into controversy. In January, the Telecom Regulatory Authority of India (TRAI), put forward proposals to allow fixed line operators to offer "limited mobility services" on their networks through the Wireless Local Loop (WLL).

The WLL has been dubbed by some Indian commentators "the poor man's mobile phones". These phones would operate only within about a 50km band, and could not be used by business people travelling outside the local region.

Even so, most Indians would not need a phone they could use across India. And they could prefer the WLL service because it offers a cheaper wireless service than normal GSM phones: costs of about Rs1.2 per minute, have been proposed against about Rs4 for GSM phones. That is peanuts compared with the usual call charges in Europe.

The proposals, says Sudershan Banerjee, chief executive of Hutchison-Essar, a joint-venture in Delhi, "change the entire balance for mobile operators. Populism has taken over, compared with the national

interest."

That view is widely held by private operators. Anil Mayar, president of mobility at the Bharti Group, whose partners include BT, says: "It is an initiative of the political system. To my mind, they need to really look at the foreign investors.

It is like dumping them, then moving in a different direction."

The reason for this opposition is not so much the threat of new competition, but that fixed-line operators may be let into the market on less onerous licence fee terms. They also benefit from different rules governing interconnect revenues for long-distance phone calls.

Mobile phone companies also point out that they already face increased competition. Reforms set out in 1999 extended licences from 10 to 20 years and increased the number of operators in each state from two to four.

This has already prompted a price war - reflected in MTNL's new aggressive tariffs set out in January for Delhi and Bombay. These plans have helped prompt a swift price cut from private operators, even as they privately gripe that MTNL is engaging in predatory pricing, and is charging below cost.

Mr Ghosh argues that the licence fee arrangements will be adapted to ensure a level playing field, and that greater competition will drive down prices and bolster volumes. "There's enough space for everyone. No-one should feel threatened."

In spite of the public grumblings, most operators admit they are re-evaluating their business plans but have no immediate plans to pull out of India.

That is not so surprising: HSBC is forecasting mobile phone usage to overtake fixed-line by 2008. That translates into a 47 per cent rise in subscribers per year for the next ten years to hit 86m subscribers. That

growth will be driven by a rise in pre-paid customers - rising from 15 per cent to 59 per cent of subscribers in ten years' time. Revenues in the same period could rise on average 43 per cent a year.

But not all operators will be around to enjoy that. HSBC expects six or seven to survive. To do so, operators will require both deep pockets and an innovative approach to marketing phones. "Many customers have not even used a land-line phone, so there is still a big technology jump to a GSM

To persuade them, Escotel has drawn on the local dealership networks of one of its shareholders, Escorts, a maker of motorbikes, tractors and harvesters. This association with a traditional brand has helped foster

awareness in rural areas.

The company has also experimented with ways to work with Indian rural mores. For example, it has chosen "people with social stature" to become franchisees for the company, "so they are able to convince the customers".