The telecom turmoil

The telecom sector has been in a state of chaos, raising some serious questions for the government. Fresh trouble arose after the Supreme Court agreed with the Department of Telecommunications’ definition of adjusted gross revenue and directed telcos to pay dues with interest, amounting to Rs 1.33 trillion, within three months. Incumbent companies, saddled with debt, have expressed their inability to pay and are looking for waivers. The total debt of telcos is at Rs 4 trillion. The Cellular Operators Association of India (COAI) has argued that the decision will lead to a monopoly in the sector and will affect the digitisation programme of the government. But the latest entrant, Reliance Jio, which has disrupted the market, has objected to “the threatening and blackmailing tone” of the COAI. Meanwhile, stock prices of legacy players have suffered, their credit rating has been downgraded, and at least one of them is reported to be negotiating better terms of repayment with lenders. The apex court verdict has also dealt a body blow to the incumbent operators and could effectively kill the golden goose that has been a large source of non-tax revenues for the Centre.

The government, on its part, has done well to set up a committee of secretaries to suggest measures to ease financial stress in the sector. The committee and, by extension, the government would be well advised to look into the issue more broadly and address some fundamental policy questions. First, why have the incumbents piled up so much debt? The accumulation has not happened entirely because of the way businesses are managed. Policy and regulatory changes over the years have had a role. This also resulted in significant consolidation in the sector, as a number of telcos exited the business or shut it down. Only a holistic review of past decisions will allow the government to make policy corrections, which will help ease stress in the sector in a sustainable manner.

Second, will the sector and consumers be better off with further consolidation? Analysts are of the view that dues arising from the apex court ruling could reduce the market to only two private-sector operators. This would clearly lead to concentration of market power and have a bearing on the quality of services and investment in the sector. To be sure, this is not a case for saving inefficient incumbents. But another operator moving out of the market may not be explained by operational parameters alone.

Third, the government needs to decide what it expects from the sector. On the one hand, private operators have been pushed to the wall and, on the other hand, it is reviving inefficient public-sector firms with concessions. This will lead to a misallocation of resources and market distortions. Further, it is worth examining if the government should only focus on squeezing the telcos, or it should also consider their ability to invest, which can have a multiplier effect in today’s connected world. And how can it strike an optimal balance? Clear answers to some of these questions would help the government take the right policy call. The Indian telecom sector is at a critical juncture and how the government handles the situation will not only have a bearing on the sector but will also influence the investment climate in general.

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