India’s telecom revolution has earned the world’sadmiration. At one stage, it was the fastest growing, lowest cost sector in theworld, providing inclusive development to all. In airlines or electricityusually the government has to make it compulsory, and impose a universalservice obligation (USO) to provide outreach to remote rural areas. Not so fortelecom. The USO fund to subsidise rural outreach remained un-utilised, becausethe telecom industry did not need any subsidy or compulsion to reach out to theremotest areas of the country. That fund has now been used to provide fiberoptic links to all villages as part of the Digital India initiative. Thetelecom revolution of India is truly a breath-taking case study for policymakers and business schools. Since the early 1990’s it has been powered mostlyby private sector investment, entrepreneurial energy and risk taking. This wasdespite some critical mistakes made in the sequencing of the liberalisationpolicy. The two prominent mistakes in the 1990’s was to sequence private entryinto fixed line telephony before long distance and mobile telephony. This wasincorrect sequencing and had to be corrected. The other “mistake” was notreally a mistake but a consequence of wildly optimistic bidding for spectrumleading to winners’ curse and near bankruptcy of the sector. Hence in 1999, theNDA government led by Prime Minister Vajpayee made a bold policy correction ofswitching from fixed fee (for spectrum) to a revenue share model. Suddenly theindustry became more viable, and literally took off. For almost the next tenyears it exhibited a fantastic, record breaking growth of subscribers,investments, and sharply declining tariffs.
Unfortunately, the end of that decade of a dream run wasmarred by a major scandal, with allegations that spectrum and licenses had beengiven away unfairly and in a corrupt fashion. Of course, the infamous 2G scamdid not lead to any final indictments, although two prominent politicians didspend time in jail. In 2010, India had its first auction of 3G spectrum whichlead to a bounty of fiscal collection for the government. The promise of thecontinuance of the golden phase of telecom continued.
However, the present situation in telecom is far from rosyand financial health. It has three major private sector players (Reliance Jio,Airtel and Vodafone Idea), and two public sector players (BSNL and MTNL). Threebig telecom players have shut down (Aircel, Tata Docomo, RCom). Nearly ahundred thousand jobs have been shed in the past year and a half. The combinedsector debt is nearly 7.5 lakh crore. At a conservative estimate, the annualinterest burden for the entire sector is more than 80,000 crore. This is morethan the current earnings (EBITDA). With such a high interest burden, notsupported by adequate revenues is a cause for great worry. The sector needslarge investments, especially in the light of the upcoming fifth generation 5Grollout. That needs healthy profitability. But the average revenue per user(the best sign of profitability) has fallen from 121 rupees per month inSeptember 2016 to 70 rupees in December 2018, a fall of more than 40 percent.Even Bangladesh and Pakistan have much better revenue per user in their telecomindustry. Of course, as a consequence of very low tariffs for voice and data,India’s rank in internet usage has jumped from below 100 to being one among thetop three in the world. Nearly 40 percent of the 1.1 billion subscribers accessthe internet through their phone.
But the sector’s financial woes means that not only is thereinadequate profits to fund future investment, but the share of the government’sfiscal benefit is also dropping sharply. The revenue share paid to government(since it depends on total gross revenue) has dropped from nearly 1 lakh crorein its heyday to less than 30,000 crore now. The goose which laid the goldeneggs for the government is very sick. Recognising the precarious nature of theindebtedness of the sector, the Reserve Bank of India warned all commercialbanks to not increase any debt to the telecom companies, fearing the creationof non-performing assets (NPA’s). Without access to debt and other funding, thesector will have to cut costs, investments, services and perhaps subscriberstoo. The sector has certainly suffered from hyper-competition, but thecutthroat price competition is now jeopardising the very future of thiscritical industry.
Telecom is the bedrock of Digital India. The entirefinancial services (banking, capital markets and insurance) sits atop theunderlying architecture of telecom. Other crucial services like entertainment,e-governance, tele-medicine, online e-commerce, all of these depend on a robusttelecom sector. It has the exalted status of a crucial utility, not unlikeelectricity or water. Indeed, in many countries, access to internet has beenaccorded the status of being an essential service.
So, against this backdrop, it is essential that we don’tallow the sector to go to the brink, or fall off the cliff. The government saysit is expecting 6 lakh crore from the auction of 5G spectrum. If it is planningto collect such handsome revenue from the auction, then it must not double tax,by insisting on revenue share and other steep taxes, even after the auction.The sector has a high GST rate of 18 percent, and large unutilised input taxcredit of nearly 30,000 crore. The overall cumulative taxation on telecom isalmost on par with cigarettes! This is not the kind of treatment to be given toa sector of such critical importance to the economy.
As India marches to become a 5 trillion dollar economy inthe coming years, an increasing proportion of the economy will be coming fromthe digital economy. The emergence of Internet-of-Things means there will beincreasing digitalisation of the manufacturing and services sectors. Video anddata will dominate our lives more than ever. All this requires a robust andprofitable bedrock of telecom. The government, regulator, policy makers andfinanciers must ensure that there is a reasonably healthy path from today’shyper-competition, and cut-to-the bone tariffs, to profitable growth.Otherwise, the telecom success of India will only be a distant memory andconfined to history books.
(The writer is an economist and Senior Fellow, TakshashilaInstitution) (Syndicate: The Billion Press)