Digital India’s bedrock is telecom, it’s in bad shape

Digital India’s bedrock is telecom, it’s in bad shape

Telecom

India’s telecom revolution has earned the world’s admiration. At one stage, it was the fastest growing, lowest cost sector in the world, providing inclusive development to all. In airlines or electricity usually, the government has to make it compulsory and impose a universal service obligation (USO) to provide outreach to remote rural areas. Not so for telecom. The USO fund to subsidise rural outreach remained unutilised because the telecom industry did not need any subsidy or compulsion to reach out to the remotest areas of the country. That fund has now been used to provide fibre optic links to all villages as part of the Digital India initiative.

The telecom revolution of India is truly a breath-taking case study for policy makers and business schools. Since the early 1990s, it has been powered mostly by private sector investment, entrepreneurial energy and risk-taking. This was despite some critical mistakes made in the sequencing of the liberalisation policy.

The two prominent mistakes in the 1990s was to sequence private entry into fixed line telephony before long-distance and mobile telephony. The other ‘mistake’ was wildly optimistic bidding for spectrum, leading to winners’ curse and near bankruptcy of the sector. Hence, in 1999, the Vajpayee government made a bold policy correction of switching from fixed fee (for spectrum) to a revenue-share model. Suddenly, the industry became more viable, and literally took off. For almost the next 10 years, it exhibited a fantastic, record-breaking growth of subscribers, investments, and sharply declining tariffs.

Unfortunately, the end of that decade of a dream run was marred by a major scandal, with allegations that spectrum and licences had been given away unfairly and in a corrupt fashion. Of course, the infamous 2G scam case did not lead to any final convictions, although two prominent politicians did spend time in jail. In 2010, India had its first auction of 3G spectrum, which led to a bounty in fiscal collection for the government, and it looked like the golden phase of telecom would resume.

However, the present situation in the telecom sector is far from rosy. It has three major private players — Reliance Jio, Airtel and Vodafone Idea, and two public sector players (BSNL and MTNL). Three big telecom players — Aircel, Tata Docomo, RCom — have shut down. Nearly one lakh jobs have been shed in the past year and a half. The combined sector debt is nearly Rs 7.5 lakh crore, with an annual interest burden of over Rs 80,000 crore. This is more than the current earnings (EBITDA) of the sector. That is a cause for great worry.

The sector needs large investments, especially in light of the upcoming 5G rollout. That needs healthy profitability. But the average revenue per user (the best sign of profitability) has fallen from Rs 121/month in September 2016 to Rs 70 in December 2018. Even the Bangladeshi and Pakistani telecom industries have much better revenues per user.

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 among the top three in the world. Nearly 40% of the 1.1 billion subscribers access the internet through their phone.

But the sector’s financial woes mean that not only is there inadequate profits to fund future investment, but the share of the government’s fiscal benefit is also dropping sharply. The revenue share paid to government (since it depends on total gross revenue) has dropped from nearly Rs 1 lakh crore in its heyday to less than Rs 30,000 crore now. The goose that laid golden eggs for the government is now sick.

Recognising the precarious nature of the indebtedness of the sector, the Reserve Bank of India warned all commercial banks to not increase any debt to the telecom companies, fearing the creation of non-performing assets (NPA). Without access to debt and other funding, the sector will have to cut costs, investments, services and perhaps subscribers, too. The sector has certainly suffered from hyper-competition, but the cut-throat price competition is now jeopardising the very future of this critical industry.

Cut down taxes

Telecom is the bedrock of Digital India. The entire financial services (banking, capital markets and insurance) industry sits atop the underlying architecture of telecom. Other crucial services like entertainment, e-governance, tele-medicine, online e-commerce, all depend on a robust telecom sector. It has the exalted status of a crucial utility, not unlike electricity or water. Indeed, in many countries, access to internet has been accorded the status of being an essential service.

Against this backdrop, it is essential that we don’t allow the sector to go to the brink, or fall off the cliff. The government says it is expecting Rs 6 lakh crore from the auction of 5G spectrum. If it is planning to collect such handsome revenue from the auction, then it must not double-tax the industry by insisting on revenue share and other steep taxes, even after the auction. The sector has a high GST rate of 18%, and large unutilised input tax credit of nearly Rs 30,000 crore. The overall cumulative taxation on telecom is almost on par with that on cigarettes! This is not the kind of treatment to be given to a sector of such critical importance to the economy.

An increasing proportion of the economy henceforth will be the digital economy. The emergence of Internet-of-Things means that there will be increasing digitalisation of the manufacturing and services sectors. Video and data will dominate our lives more than ever. All this requires a robust and profitable bedrock of telecom. The government, regulator, policymakers and financiers must ensure that there is a reasonably healthy path from today’s hyper-competition, and cut-to-the bone tariffs, to profitable growth. Otherwise, the telecom success of India will only be a distant memory and confined to history books.

(The writer is an economist and Senior Fellow, Takshashila Institution)

(The Billion Press)

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