A government body has recommended that state-run BSNL should merge its counterpart MTNL and telecom equipment manufacturer ITI with itself, a move that will help turn around the loss-making telecom giant.

"The board strongly recommends the merger of ITI Ltd with BSNL, or its takeover by BSNL as a separate subsidiary, thereby ensuring strategic vertical integration. This should enable BSNL to combine service-providing with manufacture of products," the Board for Reconstruction of Public Sector Enterprises (BRPSE) said in a note.

The BRPSE has been constituted to advise financially troubled state-run companies.

The panel said BSNL can claim tax breaks if it merges with a loss-making ITI and suggested BSNL can also merge MTNL with itself. "There is no reason for MTNL to continue as a separate entity," it added.

BSNL provides telecommunications and related services in 20 of the country's 22 telecom service areas, while its peer MTNL provides similar services in two circles -- Delhi and Mumbai. ITI is a state-owned telecommunications equipment maker.

"With these initiatives of increasing revenues and reducing cost, it is expected that BSNL will turnaround in the next two years," the note added.

The proposal to merger these government entities comes at a time when all three companies are facing fierce competition from private telecom operators and are causing huge losses to the exchequer.

MTNL posted a net loss of Rs 2,611 crore on revenue of Rs 3,781 crore during the financial year ended March 31, 2010.

ITI posted a net loss of Rs 459 crore on revenue of Rs 4,596 crore during the same period.

BSNL informed the panel that it expects to turn profitable in the year through March, 2013, but projects a net loss for the just-ended fiscal year and the ongoing year that began on April 1.

The company expects to post a net loss of Rs 2,725 crore on revenue of Rs 31,738 crore in the fiscal year that ended March 31, 2011, and the loss is expected to narrow to Rs 623 crore on revenue of Rs 36,569 crore in the current fiscal year (FY2011-12).

BSNL, once the country's flagship telecom company, posted a net loss of Rs 1,823 crore on revenue of Rs 32,046 crore in 2009-2010.

The panel advised the DoT and BSNL to submit a cogent revival/restructuring plan for BSNL, within a period of four months for consideration of the BRPSE. The proposal needs to be approved by the Department of Telecommunications.