Telecom Sector Reforms – Explained, pointwise

Introduction

The Union Cabinet has approved a relief package for the ailing telecom sector. The government has sought to address several issues in the policy regime, including the definition of AGR that had led to the large build-up of dues and pointless litigation.

The reforms are expected to provide relief to the telecom sector that is struggling with high levels of debt and make sure that the market has at least three players. It is also expected to boost 4G proliferation, infuse liquidity and create an enabling environment for investment in 5G networks.

Let’s have a detailed look at the various aspects of the current issue.

Trajectory of India’s telecom sector

The telecom sector was liberalized under the National Telecom Policy (NTP) in 1994 under which licenses were issued to companies in return for a fixed license fee. To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model (means instead of paying a huge upfront fee, telcos could now pay a share in the revenue to cover the fee).

This revolutionized telecom services over the next two decades.

But, while the government allowed private sector participation in the telecom sector, its policies over time, like charging high spectrum prices, AGR dispute, etc., resulted in a situation where the telecom market is now headed towards a potential duopoly.

The recent news of Vodafone Idea Limited’s (VIL) near-bankruptcy situation sent shockwaves across the telecom sector. VIL accounts for the highest share of rural subscribers in the country. Should it exit, the mobile operators’ space would become a duopoly with Reliance Jio and Airtel.

India had 15 operators back in 1999 and 21 in 2009, and now, it is down to four (Jio, Airtel, Vodafone Idea, and BSNL/MTNL).

What was the need for reforms?

Introducing reforms had become a necessity for the government due to the financial stress induced by the following reasons:

Debt accumulation: The real trouble for the telecom operators began when the government decided to price the 3G spectrum at a very high rate, which eventually gave it a windfall gain of Rs 67,719 crore. At that time, this helped the govt of the day to bridge the fiscal deficit, but it resulted in a massive debt accumulation by telcos in the coming years. To upgrade their 3G infrastructure, the telecom companies were required to invest heavily in the coming years. The cumulative debt of the companies rose from Rs 82,726 crore in 2008-09 to Rs 2.5 lakh crore in 2012-13. Over the years, this high debt burden only worsened.

Spectrum payment obligations and AGR liabilities in excess of ₹1.68-lakh crore as of June 30 need to be cleared by telcos.

Financial constraints coupled with the high debt burden and the disruption caused by the entry of Reliance Jio meant that the telecom sector, once a pillar of India’s modern economy post-liberalization, was in dire need of life support.

The relief-cum-reform package provides exactly that.

What are the associated issues/concerns?

Though reforms are well directed, there are some issues/concerns that are being voiced against them, like:

Non-telecom revenue will be excluded only prospectively from the definition of AGR. Hence, the past dues of Rs 1.6 Lakh crores still remain payable.

Deferment, not waiver: The deferment for AGR dues cannot be construed as waiver since the package only envisages a moratorium of four years on such AGR dues from 1st October 2021 (appointed date) with the interest and penalties accruing for such deferral. This will provide only temporary relief, since the dues will ultimately have to be paid with interest.

Rise in tariffs: As the overall liability does not come down, so ultimately companies will have to raise tariffs to generate sufficient cash flows.

Demand for setting floor tariff ignored: A long-standing demand for the government’s intervention in setting telecom floor tariffs, as it has done in the civil aviation sector to protect competition, did not find a place in the relief package.

What are the potential implications?

Positive effect on Cash flow: Ratings agency ICRA has assessed that the moratorium on AGR dues provides annual cash flow respite of around Rs 14,000 crore for the industry, while the moratorium on spectrum dues gives another Rs 32,000 crore of annual cash flow relief for the industry as a whole.

Accelerating transition from 2G to 4G: The freed-up working capital means operators are likely to make investments in 4G expansion. This, coupled with affordable handsets being manufactured in India on the back of PLI scheme, may lead to accelerated shift from 2G to 4G.

Faster roll-out of 5G: 5G can add $450 billion to the Indian economy by 2040. Removal of spectrum usage charges on 5G will make it more viable and could fast-track service availability. The faster roll-out of 5G services will enable India to become a global innovation hub. It will lead to more job creation, bolster the startup ecosystem, bridge the digital divide, and fuel the digital aspirations of the nation.

Spectrum Tenure: In future auctions, the increase of the tenure of the spectrum from 20 to 30 years means telcos won’t have to worry about repurchasing spectrum for another 10 years.

Bank guarantees: Telcos had to pay huge bank guarantees (BGs), resulting in blocking up surplus cash. For e.g.: Vodafone Idea had BGs worth 24000 Cr in the Financial year 2021. This provision has been done away with for future auctions. This will allow greater financial space to telecom operators.

FDI in telecom sector: GoI has allowed 100% FDI through the automatic route in the sector. It will encourage investment in the country and push India’s rankings on the innovation index. Healthy competition amongst operators and a stable environment will allow customers to opt for differentiated experiences and taste innovations from around the world.

Relief to the banks: The banking sector’s exposure to the telecom players is significant at over Rs 1 lakh crore. The telecom package comes as a relief to the banks, as it mitigates the imminent possibility of default by vulnerable operators. This would help in stabilizing and reducing the non-performing assets in the sector.

Faster onboarding of consumers: App-based know-your-customer (KYC) process, will allow users to validate their credentials remotely, followed by contact-less delivery of SIMs at their premises. This will empower consumers and ensure faster onboarding.

What more steps can the govt take?

Lower the burden: The government should lower the burden on telcos by reducing taxes and regulatory levies. Presently, Indian telcos pay over 25% (including GST, licence fees, etc.) of their gross revenue as tax, compared to less than 10% in other countries.

Pricing of 5G: Past two auction rounds for 5G have received no bids from the industry. Govt needs to rethink its pricing policy and rationalise it suitably.

Floor tariff: Govt can also look at setting a floor tariff price so that no operator is able to indulge in predatory pricing. This will enhance the revenues for telcos, which they can then invest in network upgradation and management.

Govt should push towards a sustainable tariff regime to ensure the industry gets a fair return. This in turn will allow it to continue investing in new technologies and innovation to bring world-class services to customers.