Killing the Golden Goose
The Supreme Court’s verdict on Adjusted Gross Revenue (AGR) could potentially cripple two of the country’s three private mobile telecom operators: Vodafone India and Bharti Airtel. That would leave Indian mobile phone consumers at the mercy of Reliance Jio and the likely BSNL-MTNL merged entity. The government’s own revenues from stressed telecom operators could meanwhile plummet.
Recognising the peril, the government has announced a two-year moratorium (for 2020-21 and 2021-22) on spectrum dues. That will give Vodafone Idea and Bharti Airtel a cash flow breather of Rs. 23,920 crore and Rs. 11,746 crore respectively. With both carriers declaring humongous losses for the quarter ending September 30, 2019, to provide for the Supreme Court’s AGR order, these benefits, however, will serve only as a band-aid.
The decision by the three principal private mobile operators to increase tariffs on December 1, 2019, is a more sustainable strategy. Every rise of Rs.10 in ARPU (average revenue per user) could increase the three operators’ cash flow from their combined base of over 900 million (90 crore) subscribers by Rs. 900 crore per month or nearly Rs. 11,000 crore annually. An Rs.20 increase in monthly ARPU will raise an additional Rs. 22,000 crore a year. Regular but modest tariff hikes in a country with the world’s lowest mobile phone tariffs could return the struggling Indian telecom industry -- sagging under a debt burden of Rs. 7,00,000 crore -- to health.
Vodafone Idea is currently the most vulnerable. It is bleeding both money and subscribers. Bharti Airtel is financially better placed with its Africa-wide mobile business turning a profit. In the July-September 2019 quarter, Bharti Airtel’s net profit from its Africa operations rose 78 per cent to $96 million (Rs. 700 crore). Its subscriber base in Africa is now over 100 million.
At stake though for the domestic telecom sector is the incipient 5G network rollout. With spectrum prices still sky-high despite a reduction from earlier stratospheric levels, only Jio will be in a position to bid. And even Jio has sought a delay in G5 auctions while it restructures its own debt through multiple corporate devices. One telecom major said bluntly: “The 5G auctions may get delayed by another two or three quarters at least.”
While Vodafone and the Aditya Birla Group, which jointly own Vodafone Idea, have deep pockets, neither is in the mood to invest further in a losing proposition. Meanwhile, a weakened Bharti Airtel and heavily debt-laden BSNL-MTNL may not provide Jio with the robust competition a thriving mobile industry needs. With data and video content usage surging on smartphones, competition is obviously in consumers’ interest.
The telecom imbroglio has wider ramifications on India’s emerging digital ecosystem. An EY India consultancy report put the issue in perspective: “The (AGR) demand will dampen the sentiment of telecom operators, and raising funds for broadband, network expansion and Digital India will hit a significant roadblock. The impact is not limited to telecom operators but will have a domino effect on the larger digital value chain. This requires immediate intervention by all stakeholders to get the sector back in shape.”
With the Narendra Modi government focusing on digital technology to deliver welfare benefits to farmers and the rural poor, robust mobile telecom industry is imperative. Recent controversies over data breaches on WhatsApp and allegations of spying on subscribers along with disputes around rules governing foreign-owned e-commerce marketplaces like Amazon and Walmart-Flipkart have led to a knee-jerk reaction from the authorities. The government is considering setting up an e-commerce regulator to settle thorny issues between giant foreign digital e-commerce marketplaces operating in India with predatory pricing and small retail traders which are losing customers owing to heavy discounts.
A government official, reacting to mounting complaints by small retail traders – a key BJP vote bloc – told Bloomberg News: “We are examining the need for a regulator to look into e-commerce issues once the policy (under discussion) is implemented. We plan to implement the policy within this financial year.”
Why is this a knee-jerk reaction? In a liberalised economy, the only thing worse than a Licence Raj is a Regulation Raj. While regulations are obviously necessary across a swathe of sectors, over-regulation is a bane. The best regulatory regime follows a firm but light-handed approach. In recent years, the opposite has often been the case. The Telecom Regulatory Authority of India (TRAI) and the Reserve Bank of India (RBI) are two examples of regulators imposing heavy-handed orders that damage sectors rather than empower them. The RBI, for example, was notoriously slow to monitor non-performing assets (NPAs) of banks. It stubbornly kept interest rates high even when inflation had long been tamed. That increased companies’ borrowing costs, lowered corporate profits and curtailed private investment. When it needed to be tough (on NPAs, for instance), it wasn’t. When it needed to be accommodative (on interest rates), it again wasn’t.
Much the same can be said about the Securities and Exchange Board of India (SEBI). The stock market regulator took a long time to pass orders on the co-location software scam that enabled certain software mercantilists to game the system by doing stock trades seconds before individual share prices were officially announced on the Bombay Stock Exchange (BSE). Action against these software pirates – including some well-known academics – has not led to the strictures it should have. Appellate tribunals are a favourite refuge for those wishing to bury such white-collar crimes.
For the telecom industry, meanwhile, the Supreme Court’s AGR order could disrupt what should be a competitive marketplace. The Department of Telecom (DoT) and TRAI have a responsibility to mitigate the punitive effects of the apex court order. A Committee of Secretaries (CoS) was set up to decide how the Supreme Court’s AGR verdict can be complied with – without imperilling the telecom industry’s future. The CoS asked mobile operators to file a review petition in the Supreme Court to either stay the AGR order or seek a waiver of penalties and interest as well as staggered payments over several years.
The digital ecosystem – and public interest – demand a quick and sensible resolution to the mobile telecom industry crisis. Killing the goose that lays the golden egg can only leave a big hole in the government’s exchequer.
