Another blow to telecom

The Supreme Court has pronounced on a long-running dispute between the legacy telecommunications companies, including Bharti Airtel and Vodafone Idea, and the government about the nature of fees the companies must pay. The court upheld the position of the government, saying that the companies must pay Rs 92,461 crore (about $13 billion) to the government. The telecom companies had argued that revenue sharing with the government as part of the spectrum fee should be limited only to their earnings from the use of the spectrum; the government insisted that other revenue, such as from interest or rents, should also be counted. The additional dues were, in fact, only about Rs 23,000 crore. The government is also demanding interest, penalty, and interest on the penalty, which takes it above Rs 92,000 crore. The government will be pleased and relieved, since the additional bonanza will be available to cover its straitened finances — in fact, it can be partially used to fund the revival plan for the state-owned rival to Airtel and Vodafone Idea, BSNL-MTNL. 

Differently put, this is a death blow to the telecom market if the government chooses to exercise the option given to it by the court judgment. At the end of 2018-19, Bharti Airtel had a debt burden of Rs 1.06 trillion, excluding some deferred spectrum payments. Almost half of that was short-term liabilities. Vodafone Idea had a net debt in the same ballpark, of Rs 1.2 trillion at the end of 2018-19. This additional burden comes at a time when they are in a price war with Reliance Jio, which is willing to run services at a loss, thanks to money pouring in from a war chest built out of steady revenue from the group’s petrochemicals business. The government must now take a call on how it intends to continue. The mess it has made of the airline sector must not be repeated in telecom because the impact will have a domino effect on the larger digital chain. Further, an increase in stress in the sector could affect its debt servicing capability with implications for the banking system.   

The government should re-evaluate what it expects from the telecom sector. Is it to be an engine of growth and productivity, as it was in the 2000s, or is it simply a cash cow for the government to fund its welfare spending? If it is the latter, then certainly the government can demand its full dues and at least one of the companies will probably exit the market. But if the government recognises that healthy competition and investment in telecom are priority for productivity-enhancing growth, it will have to think very differently. In a short while, companies will have to start investing in 5G infrastructure if Prime Minister Narendra Modi is to achieve his aim of a Digital India. Innovation ecosystems will have to be built around cutting-edge communications infrastructure. A sector hollowed out by the state’s demands will not be able to put this infrastructure in place. The government will now have to decide how it wants to deal with the sector. It can perhaps waive the penalty and interest, in the furtherance of the broader national agenda.

 



Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel