India’s Telecom Turmoil: Who’s responsible for it?
India’s telecommunications sector that was teeming with a sizable number of operators nationwide just a few years back, now has only three players standing, two of them barely. A sector that promised a lot not just to the government and public but also millions associated with it, has been ruined to say the least within a pretty short time. A disgraceful scam, recurring policy changes from the government, exorbitant charges, never-ending tax insistence from an indifferent administration, disruptive entry of a new player and the government’s clear bias towards it etc. have driven most of them aground. The industry has become the latest providence tale for investors in India, showing why despite scaling the global rankings for ease of doing business, the flourishing $2.7 trillion economy with a mammoth consumer base remains an intractable, unpredictable place for certain businesses. Let us discuss and discern the primary factors responsible for the tangle, the industry finds itself today.
2G Scam: – India is divided into 22 telecommunication zones with 281 zonal licenses. In 2008, 122 new licenses were granted to a number of telecom companies during the UPA regime under telecom minister A. Raja, some of which were first timers. Although the modus operandi of granting these licenses was on a first-come-first-served basis as introduced during former prime minister Atal Bihari Vajpayee’s regime, it was later established that the minister had tweaked several rules and violated laws to favor certain firms. It did however help in opening up the market where the stranglehold of a few companies like Reliance Communication & Airtel was conspicuous till then. But the skeletons of the shady deal began surfacing pretty soon as corruption charges were labeled and cases filed against the minister and others. The multiple players including the new entrants couldn’t thrive and reap the benefits of a free market for long. In 2012, the Supreme Court gave its judgement on the case quashing all the 122 licenses awarded in 2008. The CAG estimated a whopping Rs.1.76 trillion loss to the national exchequer for the misdoing. A subsequent auction was held for the spectrum of the canceled licenses. However, due to the reduced number of players, it didn’t fetch money even close to what the government had anticipated. Only the dominant players who were already there, participated in it taking the telecom space back to an oligopolistic state. Thus, began the fall of the telecom sector.
Exorbitant spectrum costs and greedy administration/telcos: – The new telecom policy of 1999 underlined the creation of a robust framework for the development of telecommunications in the country. Although that remained in theory, the policy makers also realized that the auction of airwaves and sale of licenses could well be a potential tool to cover the budget deficit as it fetched them billions of dollars in revenue. The cost of spectrum in the country is one of the highest in the world. The Cellular Operators Association of India (COAI) in collaboration with the key players could have tried to negotiate better rates with the DoT and help rationalize the prices. But in their madness to outbid each other and be ahead of competition, the companies took billions of dollars in debt that eventually dried up profits and drove up their costs, spectrum prices albeit never came down.
Disruptive entry of Reliance Jio: – And then came Reliance Jio in Sep, 2016. Backed by the deep pockets of billionaire Mukesh Ambani’s textile-to-petrochemicals empire, Reliance Jio entered the telecom sector offering free voice calls and data. Its pricing was predatory and the free scheme it offered for seven successive months to customers, derailed not just its competitors but the industry as well. Why and how it was allowed to extend its free offer beyond the regulated three months period raised several questions and screamed of government’s clear bias towards it. And by the time it stopped doling out freebies, it had added more than 100 million subscribers to its base that sounded the death knell for other operators.
Telcos’ negligence & lack of foresightedness: –When a company announces its foray into a new business domain that’s already ripe, the only way it can create an impact is by bringing in something very distinctive that can have far-reaching effect. Jio did just that. The companies struggling to stay afloat today have themselves to blame for the fiasco as well. Jio’s ambitious plans were announced in 2012, four years prior to its launch. That all their network would be IP based and plans heavily data-centric was known to all. The operators should have anticipated a paradigm shift because of the brutal competition that’s always been synonymous with the sector. Jio’s new voice over LTE (Volte) technology and dirt-cheap data plans compelled the incumbents Airtel, Vodafone & Idea to launch Volte services and offer low-cost tariffs and free voice thereby eroding profits and upsetting revenues for the first time. The carriers totally failed to predict the massive demand for data in the Indian market. Nobody prevented them from altering their business model with a more data-focused outlook, enterprise business or content, investing in technology to take on Jio’s all-IP network. It was a misjudgment on their part to have not vaticinated that voice alone wouldn’t be enough for them to survive in this hostile trade.
The telecom companies owe an astonishing 1.4 lakh crores to the government over past license fees and spectrum usage charges (SUC) as on date. The Supreme Court’s verdict directing the operators to clear the dues within 90 days and upholding DoT’s definition of Adjusted Gross Revenue (AGR) looked to be the final nail in the coffin for the floundering companies. The dues of the two flagging operators Airtel & Vodafone-Idea stand at Rs.21682.13/- crores & Rs.19823.71/- crores respectively. The decision came at a time when the sector was already under severe financial stress. Shares of Vodafone-Idea have nosedived 83% and with the on and off news of their exit doing the rounds, it could well lead to a duopoly which is not the healthiest market structure after all.
Finally, as a much-needed initiative, the Union Cabinet headed by PM Modi has offered a Rs.42000/- crore relief to the debt-laden sector by giving a moratorium of two years to the telcos on spectrum payment dues. This 2-year payment holiday will accrue an estimated benefit of Rs.11746/- crores to Airtel and Rs.23920/- crores to Vodafone-Idea respectively and is expected to significantly reduce cash flow of the stressed operators.
Lives of millions are associated and dependent on these companies for a living and it’s sad to see the once booming industry struggling for survival. Their revival is extremely crucial from various aspects. Not only will it provide a boost to employment and economic growth but will ensure maintenance of quality of services to consumers. The recent step by the government seems to be one in the right direction.