All You Need to Know About Telecom Sector Woes in India
The Supreme Court's decision on adjusted gross revenue will lead to INR 92,000 crore blow for telecom companies.
Vodafone CEO Nick Read, commenting upon the financial stress in India’s telecom sector, described the current situation as ‘critical.’ He hinted towards a possible collapse in the absence of government support while declaring the company’s September quarter results. Vodafone India and Idea Cellular merge their pan-India networks earlier this year, to form Vodafone Idea Ltd (VIL), to face the challenging market. Despite all efforts, VIL posted a loss of INR 50,921 crore—the highest-ever quarterly loss by any corporate in India.
Read, however, retracted from his statement and wrote a letter to the Prime Minister’s Office, the telecom ministry and other high-ranking government officials.
VIL is not a one-off case. The entire telecom sector in India is in doldrums, except possibly for Reliance Jio. Anil Ambani on November 16 resigned as director of the bankrupt Reliance Communications (RCom). Telecom major Bharti Airtel has reported a loss of Rs 23,045 crore for the September quarter. The Supreme Court's (SC) decision on adjusted gross revenue (AGR) has led to a total loss of INR 92,000 crore for telecom operators.
What are the reasons?
Numerous factors culminated to cause financial distress faced by the telecom sector.
1. Supreme Court ruling on AGR
SC’s verdict on AGR calculation in favour of the government on October 29 has been a big blow for the telecom players. “The Supreme Court's judgment is the last straw contributing to financial distress and it remains to be seen whether the industry will be able to recover from this setback. The immense financial pressure on the sector will also adversely impact 'Digital India' rollout,” said Rajan S. Mathews, director-general of the Cellular Operators Association of India (COAI) had said in a statement.
Post the introduction of the New Telecom Policy, 1999, telecom operators in India are required to pay spectrum charges and a licence fee in the form of revenue share to the government. AGR is the usage and licensing fee that telecom operators are charged by the department of telecommunications (DoT). The contention is on the particulars considered to calculate the amount payable.
The companies wanted that only their revenue from the use of spectrum should be taken into account while the government wanted a share of everything.
SC’s judgment in favour of the government has further unsettled the already distressed telecom sector. The sector has to clear dues of about Rs 92,000 crore in a span of three months. COAI plans to file for a review petition in the case.
Finance minister, Nirmala Sitharaman, addressing the telecom woes though said, “I want all telcos to flourish.” She further added, “I want no company to shut operations. I want everyone to be up and running.”
2. The entry of Reliance Jio
The entry of billionaire Mukesh Ambani-backed Reliance Jio in 2016 disrupted the existing telecom sector. Jio offered data services at throwaway prices along with free unlimited national calls. While the entrance of Jio has contributed towards the Internet boom in India, it had put a lot of pressure on its competitors. COAI in the past has accused Jio of using unfair trade practices to create a monopoly.
3. 2G Spectrum Case
Irregularities in allocation of second generation spectrum licenses for mobile communication and limited data transmission was one of the biggest high-profile corruption cases in India. Comptroller and Auditor General of India accused the then-government of issuing 2G licenses at throwaway prices causing a loss of INR 1.76 lakh crore to the exchequer. However, on December 21, 2017, the special court in New Delhi acquitted all accused in the 2G spectrum case considering the fact that the Central Bureau of Investigation could not find any evidence against the accused.
But the entire situation led to an en masse cancellation of telecom licenses by SC. Norway’s Telenor ASA, the UAE’s Emirates Telecommunications Group Co. PJSC and Russia’s Sistema PJSFC wrote off investments worth about $2.5 billion in India.
Few demands to overcome the telecom slow down
There have been various demands and suggestions floating around to fight these issues.
1. Revaluation of the SC judgment and government support
The telecom operators’ have demanded to bring down levies and taxes on telecom companies. They want the government to review SC decision and provide them with some debt relaxation.
2. Bringing down reserve price for the spectrum
According to data compiled by Analysys Mason’s Spectrum auction tracker, spectrum costs in India are among the highest in the world. The leading telecom operators in India pay the largest share of their aggregate revenue for airwaves at 7.6%, followed by Thailand at 7.3% and Bangladesh at 7%, according to Moody’s Investors Service.
3. Creating a differentiated consumer strategy
The telecom companies have to come up with more inventive business plan and strategies to survive the cut-throat competitive environment. India has three major private telecom companies operating pan-India—Vodafone Idea, Airtel and Reliance Jio. The first two are under heavy debt leading to an unhealthy market situation.