Indian Telecom – Case of Poor Connectivity?

Indian Telecom – Case of Poor Connectivity?
The telecom sector was once the most prominent poster child of India’s booming growth story. It was a veritable gravy train that one thought could chug on till eternity. With more than a billion talkative and data-hungry Indians hooked on, it was inconceivable that anything could ever go wrong with the sector.

The telecom sector was once the most prominent posterchild of India’s booming growth story. It was a veritable gravy train that one thought could chug on till eternity. With more than a billion talkative and data hungry Indians hooked on, it was inconceivable that anything could ever go wrong with the sector. Now, 24 years after the then West Bengal chief minister Jyoti Basu made the first ever mobile phone call to the telecom minister, the industry that accelerated India’s economic growth lies sprawled on the ground, down for the count. 

The country’s largest telco Vodafone -Idea, formed in 2017 after the merger between the UK giant Vodafone and Aditya Birla Group-controlled Idea Cellular, posted the biggest quarterly loss in the country’s corporate history. In the September 2019 quarter, the company reported a whopping $7 billion. Bharti Airtel, India’s largest telco, until displaced by the Vodafone-Idea merger, performed marginally better with losses of $3,2 billion in the quarter.  Both companies have been overnight been delivered mortal blows by an adverse Supreme Court ruling on the AGR issue stating that  telcos should include all revenue accrued to the carriers, including from non-core activities, gifting a bonanza to  the DoT of more than  Rs 1.3 lakh crore in dues, penalty and interest from the sector

In a market already defined by cut-throat price competition, the entry of Reliance Jio, the telecom arm of India’s largest conglomerate Reliance Industries in 2016 made the landscape even more bruising for the players. Jio’s predatory pricing has turned India into the cheapest mobile data market by some distance. One gigabyte of mobile data in India costs 26 cents compared to $6.6 in the UK, $12.4 in the US and a global average of around $8. With dirt cheap data, the smartphone market has exploded. With nearly 450 million users, India is the second largest smartphone market only behind China. Since its dramatic entry in 2016, Jio has mopped up 280 million users forcing other players to look at consolidation and suffer massive loss of revenue. A few weeks ago, Vodafoe’s global CEO Nick read, speaking about the troubles the company faced in India said, “If you don’t get the remedies being suggested, the situation is critical. If you’re not a going concern, you’re moving into a liquidation scenario—can’t get any clearer than that." UK’s Sunday Telegraph quoted him as saying, the government doesn’t get it “boots off the industry’s neck” and allow it to compete. After talking of “unsupported regulation, excessive taxes and … the negative Supreme Court decision”, Read said that if the government didn’t fix things, “Vodafone Idea is destined for a potentially chaotic final act with potential repercussions for India’s international standing.” 

With the statement creating ripples, Read had to quickly backtrack in a bid not to rub the Indian government the wrong way. Vodafone Group apologised to the Indian government about the comments on some media reports, which the company said misquoted its CEO and added that Vodafone ‘remains invested in India’ as it is a key growth market for the company.

The writing on the wall, for the telecom sector, and not just Vodafone, had been clear for quite some time. In 2017, Anil Ambani, the chairman of the Reliance ADAG group whose telco Reliance Communication went bankrupt had said in 2017: “The wireless or mobility sector, from any dimension you look at, is in the ICCU. It is not in the general ward; it is not in the ICU; it is in the ICCU. It is a systemic threat for government, for its revenues, it's a systemic threat for our banking sector, and it is what I call creative destruction of a sector. If the customer is supreme and consumer is king, can we afford to be an oligopoly, a duopoly or a monopoly?". 

The government’s critics have accused it of allowing Reliance Jio a free run at the expense of its competitors. What Anil Ambani, and other telco have been alluding to is that the government and its regulators have looked the other way to help Reliance, which already is perceived to be adept at managing the policy environment, to create a monopoly with its aggressive pricing. 

The parlous state of India’s telecom sector can have many unsavoury consequences for a country desperate to put its economic growth back on track. With a slowing economy and decelerating tax collection, the government has been aggressively pursuing tax cases against large corporations in the courts. The $14 billion that the telcos have to cough up after the SC ruling is a case in point. Is the Indian government axing its own ankles? If the already heavily debt-ridden telcos go bust, the Indian banking system that had piled up a massive $200 billion in bad loans might find the road to recovery extremely hard. A further liquidity crunch will make corporate lending and capital formation almost impossible in the short-to-medium term. Telecom will join the ranks of sectors such as real estate, aviation and the non-banking financial services in ranks of terminally sick. 

The other big negative consequence of the telecom sector’s crash would be India’s credibility as a reliable destination for global capital. The rise in ease of doing business and corporate tax cuts notwithstanding, a lack of trust in Indian regulatory institutions and the reliability of its policy environment will deter even the most seasoned global risk-taker. 

Prime Minister Narendra Modi should pay heed to the alarmed statements of Vodafone CEO Nick Read. Vodafone is one of the largest foreign investors in India having spent nearly $17 billion to buy out Hutch and Essar between 2007 and 2012. Besides, it has invested billions in building its network and customer base in the country. Forcing a committed investor out of business would send a bad signal to existing and potential investors. 

Vodafone is not the only global firm to bear the brunt of aggressive government taxation. UK’s Cairn Energy which produced a quarter of India’s oil faced retrospective taxation to the tune of $1 billion. After the world’s largest retailer Walmart acquired Indian e-commerce firm Flipkart for $16 billion, the government is considering extending the rule of not allowing FDI in retail to e-commerce as well, putting not just Walmart but also Amazon in a quandary. 

While foreign investment in absolute terms may have risen, when measured as a share of GDP, it has contracted by 30% since 2009 from 2.54% to 1.63% in 2019. At a time when the Modi government wants global investors to make India a part of their international supply chains as an alternative to China in response to the trade war between US and China, a reputation of being hostile to overseas investors cannot help in any conceivable manner. 

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