Telecom crisis needs quick resolution
Senior economic analyst
India has the world’s second largest mobile phone customer base, with China only slightly ahead. India’s broadband market is also the world’s second largest, but the fastest growing. What is more, with only 55 per cent of the population covered, there is still a long way to go. But the telecom sector is in a crisis.
The rates that Indian telecom subscribers pay are among the lowest in the world. The government gets to keep around 35 per cent of what the subscriber pays, but charges among the highest spectrum prices in the world. Two of the three leading telecom service providers — Vodafone Idea and Airtel — are in deep financial trouble because of the humongous tax bills they have been ordered by the courts to pay in less than a month from now. Network quality in India has sharply deteriorated over the last few months to a level where it has become almost unbearable. It is obviously a result of the service providers’ inability to pay for network upkeep and essential balancing investment.
Thus, the question as to who has to concede ground to who is a no-brainer. Yet, there seems to be no light at the end of the tunnel for the two operators gasping for breath. It is not as if the telecom companies have not seen it coming. The Supreme Court order upholding the Department of Telecom’s calculation of adjusted gross revenue, which the firms had to pay along with penalties, came after a 14-year-long legal battle. But the breathing space that the firms had got thereby did not enable them to create a fund for any payment to be made as a result of a final court order.
This is because over the last few years, they have been bleeding profusely for having to combat the hugely competitive rates that the newcomer Reliance Jio charged. In fact, it arrived in 2016 with an introductory offer of free voice and data services. Airtel filed a complaint of predatory pricing against this practice of Jio with the Competition Commission of India (CCI). But the CCI rejected the complaint, saying that giving free access was not in itself predatory pricing.
The impact of this on the finances of the operators can be gauged from the fact that average revenue per month per user fell from Rs 121 in 2016 to Rs 67.39 in 2018. The rate went up in 2019 to Rs 74.38 when Jio, after establishing a considerable subscriber base, took its prices up and the others did likewise. Jio’s relentless drive forward has continued, with it becoming the number one service provider since late last year.
A solution is urgently needed as the country cannot move forward digitally without a robust telecom sector. Former Economic Affairs Secretary Subhash Chandra Garg has suggested two solutions: one, offer a one-time settlement requiring payment of the principal along with a waiver of interest and penalties; two, supersede the Vodafone Idea board and appoint a new one which will get a moratorium for some time to clear the dues. Airtel has indicated it will pay up according to the court directive.
The problem with the first solution is that the government, armed with the court order, will not want to go easy on the recovery of dues. If the entire Rs 1.2 lakh crore, ordered by the Supreme Court to be paid, is received by the end of the financial year, it will slice 0.3 per cent off the fiscal deficit to 3.5 per cent when the revised estimates projected a fiscal deficit of 3.8 per cent. As for the second option, it is highly doubtful if any new board taking over Vodafone Idea will be able to turn it around and repay all the dues over time. An irreversible collapse of Vodafone Idea will be bad for the consumer as a market with effectively two players will heighten chances of collusive pricing.
The origins of the present impasse can be traced to the decision in the 2012 Budget presented by Pranab Mukherjee to amend the income tax act retrospectively to enable the government to get round a Supreme Court order and be able to pursue the tax recovery case against Vodafone Plc of the UK. The government was seeking to tax Vodafone for its offshore acquisition of Hutch Essar, which levy the Supreme Court had disallowed.
There are two views on retrospective taxation. The US, the UK and Germany allow it within carefully defined boundaries. The Indian corporate sector at the time had argued that imposing taxes retrospectively would deter foreign investment. A firm enters into in investment decision and executes a contract on the basis of prevailing laws and it is a breach of faith to be told later that the relevant laws have been changed. What is at issue is not so much legality, as the scope of government arbitrariness.
If Vodafone Idea goes under, then it will send a severe negative signal round the world about the investment scenario in India and affect the government’s ability to attract foreign investment. Sentiments across the world will be influenced by the fact that the two leading telecom operators are in trouble, not because of any mismanagement on their part. Vodafone is a global company. The troubles are the creation of Indian regulation and the speed at which the Indian judicial system works.
