The Telecom Sector Crisis

From Riches to Rags

The Telecom Sector Crisis
The Telecom Sector Crisis

The telecommunication market of India has registered an immense growth in the past one and half decade. Presently, it is the second largest in the world with 1.20 billion subscribers, out of which 40% access the internet through mobile phones and this will definitely increase in days to come. In 2017, India had surpassed USA and became the second largest market in respect of number off apps downloaded. Moreover, the country is recognized as the fastest growing market of the world in respect of Google Play downloads in the 2nd & 3rd quarter of 2018. The rapid growth in the sector is expected to contribute substantially to the country’s GDP. It has already contributed 6.25% to the GDP and is expected to increase its contribution up to 8.2% in another three years.

However, the telecom sector is in dire straits and is on the brink of collapse. The sector is currently facing a massive debt burden of $ 29 billion (Vodafone Idea – $14 billion; Airtel – $15 billion). If the operators could not pay back their debt, this crisis have all the possibilities of spilling on to the banking system and increase the NPAs of the banks. Maintaining a robust financial health for this sector is essential as ambitious plans of the government like Digital India & Smart cities are highly dependent on it. But why the crisis suddenly is in the limelight?

The Crisis

On 24th October 2019, the Supreme Court of India upheld the definition of AGR (Adjusted Gross Revenue) as interpreted by the DoT (Department of Telecom). This was big blow for the service providers of the telecom sector. The telecom industry says that the AGR should only include the revenues generated from core telecom operations whereas DoT says that AGR must include both the revenues generated from core & non-core operations. As per the verdict, the telcos have to repay the dues to the government, amounting to 1.4 lakh crore within three months. Several players of industry as well as analyst have argued that this huge pay-out amount could be the ultimate straw for the already distressed telecom sector. Both the companies have warned that unless government offers them relief on the demand of repaying their arrears of revenue share along with interest & penalty, their very existence in the market will be in doubt. Vodafone Idea has clearly mentioned that they will be left with no other option other than quitting from India.

Additionally, intense competition over providing customers free voice service & cheap data packs have resulted in reduction in the gross revenues for the telcos. The average revenue earned from a user in a month has declined significantly between 2014-15 and 2018-19. The average price of data packs is ₹8/ GB – cheapest in the world.

Importance of AGR

AGR’s definition has been under litigation for past 14 years. The AGR have direct impact on the outgo from the pockets of the telecom companies to the DoT as it is used for calculating the levies payable by the operators. Presently, 8% of the AGR is paid as license fee by the telecom operators while 3 to 5 % of AGR is paid as Spectrum Usage Charges (SUC).

Since AGR is under litigation for past 14 years, the relatively smaller amount of ₹23189 crores has now turned into an enormous sum of ₹1.4 lakh crores. The due sum is inclusive of four things:-

Out of this 1.4 lakh crore, ₹92640cr are license fee dues & ₹46000cr are SUC dues. Initially the due amount was owned by 15 telecom operators but with insolvencies or consolidations over the years, presently there are only four players in the market – Vodafone Idea, Bharti Airtel, Reliance Jio & MTNL/BSNL. As, Reliance Jio is a new entrant, Bharti Airtel & Vodafone Idea owns the significant proportion (estimated dues on Bharti Airtel – ₹42000cr; Vodafone Idea – ₹40000cr). BSNL & MTNL’s combined dues are less than ₹5000cr while Reliance Jio owes the government approximately ₹14cr. Hence, the Supreme Court’s verdict is a huge blow for the debt laden telecom industry.

Why is the Industry Saddled with Debt?

  • Cancellation of 2G Licenses In the year 2007, Government of India gave out 122 2G spectrum telecom licenses without conducting any auctions. The licenses were given on first-come-first-serve basis with throw away prices indexed in 2001. This led to the origin of 2G scam with the government preferring a few players. Five years after, in 2012, the Supreme Court of India arbitrarily cancelled the licenses & decreed fresh auctions. This verdict of the court forced many mobile operators (almost 10) to shut down their operations overnight after having invested billion in the market. Instead of cancelling the licenses, it might had been better to go after the people who were involved in the scam.
  • Reliance Jio’s entry The advent of Jio led to intense competition and price wars in the telecom industry. Subsequently we saw a rapid consolidation where only 4 among the others were able to survive the wave.

Was there no way for avoiding this crisis?

The crisis could had been avoided if there was a provision for liability in balance sheet of the companies. Conservative accounting standard says that a provision must be kept for contingent liabilities. Had this provision been there then this sudden financial pressure from the adverse verdict might been avoided.

Recent Challenges

There are several challenges being faced by the telecom sector. Starting with the poor financial health due to drastic decline in the revenue because of intense competition & tariff war that surfaced with the entrance of Reliance Jio into the market, followed by lack of advanced infrastructure especially in semi-rural & rural areas, the industry has been hit hard. As discussed above, the average price of data packs are cheapest in the world, therefore the percentage of revenue generated is also very low from per user compared to other nation around the world. Moreover, the availability of spectrum is also very limited in the country. The companies find very hard to afford the exorbitant cost charged by the government in the auctions. This hinders the operators from providing high speed services. Further it is also seen that the state governments charges high amounts for giving permission on laying of fibres. Additionally, there are always problems in finding trained personnel who could maintain & operate the cellular infrastructure, poor fixed line & broad band penetration in the country and high license fee which adds up to its woes.

Need of the Hour

It is essential that the government looks over the sector as an essential service provider rather than a revenue generator. A committee of Secretaries chaired by Cabinet Secretary Rajeev Gauda has been set up the government to study the way to bail out the telecom industry. It is yet to see what recommendations the committee make, but it is essential for the government to do a few things immediately. First, steps needs to be taken to bring down the levies & taxes on the telecom companies. Approximately 30% of the revenues are paid by the telecom companies to the government apart from spectrum fees. Reducing the levies and taxes are long standing demands of the telecom companies which immediately need to be looked upon.

Secondly, it is crucial to bring down to the reserve cost for spectrum in order to match the present sentiments of the market. The notion of conducting an auction would allow the market forces in determining the price, hence there is no advantage in keeping the last discovered price as the base price in the next round of spectrum. The profound division among the operators will ensure that there is no cartelisation while bidding.

Thirdly, the government must work towards revamping the entire regulatory & policymaking apparatus for making it agile & tune it in accordance to the requirement of the digital nation.

Lastly, BSNL and MTNL must be enabled to give tough competition to the private sector operators. It is important to get them unshackled from corporate & political interference so that they can take instant decisions on matters like buying of necessary equipment.

Establishing Committee of Secretaries is a welcome step by the government as the telecom sector is in need of an immediate bail out. The committee is expected to recommend such measures which will help in mitigating the financial stress prevailing within the telecom industry. The Committee will be comprised of representatives from the ministries of telecom, law & finance. It will consider critical issues like reduction in spectrum usage charges, deferment of spectrum auction for two years, waiver of penalties etc.


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