Telecom industry in existential crisis

Despite being a poster boy of reforms, India’s telecom industry is passing through an existential crisis. In a brutally competitive environment of low tariffs, high taxes and the absence of a stable policy and regulatory framework, there are only three major telcos left battling it out in the industry, notably Jio, Bharti Airtel and Vodafone Idea from around 10 players four years ago. The state-owned BSNL and MTNL are being merged under a revival plan. The possibility of a leading player going under was signalled when the CEO of Vodafone Nick Read indicated that the Indian venture may be heading for liquidation.

The telecom industry has been bleeding with falling average revenues per user that is among the lowest at over USD 1 and is saddled with huge debts of USD 123 billion, according to the union minister holding law, justice, communications and electronics and information technology portfolios. Of this, total bank debt/FI debt is USD 40.8 billion, deferred spectrum liabilities of the Department of Telecommunications are to the tune of USD 46.1 billion. Bank guarantees are at USD 7.8 billion. Third party liabilities are USD 28.1 billion as per the Inter-Ministerial Group report as of August 31, 2017.

Vodafone CEO’s candid comment was triggered by a Supreme Court ruling in October to pay USD 4 billion of fees linked to past frequency licences within 90 days. With USD 14 billion in debt, Vodafone indicated that it would not put any more money in its Indian business. Bharat Airtel, too, was adversely impacted by the apex court decision, especially its foreign partners. A 35.2% stakeholder in Bharti Airtel, Singapore’s top telecom company, Singtel, posted a USD 491 million net loss due to one-time provisioning for Airtel’s expected payment to the government as per the court’s ruling.

Alarm bells naturally rang in India’s policy establishment. Union finance minister forcefully indicated that she wanted “no company to shut their operations”; that the government was in no hurry to recover revenue dues from struggling telecom firms! To provide immediate relief, the government announced a two-year moratorium on spectrum payments amounting to USD 5.8 billion. While this measure was welcomed by the industry, the bad news is that is that the past dues, inclusive of penalties and interest, mandated by the Supreme Court ruling are roughly double the two-year relief!

Both Vodafone Idea and Bharti Airtel have separately filed petitions in the apex court seeking a review of its ruling, especially a waiver of penalties and interest. They have not contested the licence fees. For Vodafone Idea, such a waiver would reduce the demand from USD 4 billion to 949 million, which would definitely limit its cash burn in a big way. Similarly, for Bharti Airtel, relief from penalty and interest would reduce the hit from USD 3 billion to 763 million for only licence payments. Even if they do get relief from the apex court, these telcos still have to fork out huge spectrum usage charges.

The industry thus is not out of the woods as yet. To improve their bottom-line, telcos are contemplating a tariff increase in the first week of December. This could be the first time they are being hiked in a decade. Interestingly, even Jio - that disrupted the industry with its lower data plans and free voice calls since its launch in 2016 – has agreed to raise rates. Higher tariffs will certainly be vital in getting the industry back on track. Even a 10% hike substantially reduces Q2 2019-20 losses in earnings before interest and taxes of Vodafone Idea and Bharti Airtel by 32% and 83% respectively, according to the Mint.

However, a more sustainable path of recovery for the beleaguered telcos will be when the prohibitively high operating costs come down. There is no way that they can be viable with the lowest mobile tariffs while spectrum prices, spectrum usage charges and licence fees remain high. As if this weren’t bad enough, the Goods and Services Tax burden is at 18%. The government certainly has to make a call whether this industry is only a major source of non-tax revenue receipts rather than a strategic industry that is vital to its aspirations for a Digital India. A more enabling set of policies that improves the financial health of an industry that impacts the rest of the Indian economy is definitely warranted.

Alarm bells naturally rang in India’s policy establishment. Union finance minister forcefully indicated that she wanted “no company to shut their operations”; that the government was in no hurry to recover revenue dues from struggling telecom firms! To provide immediate relief, the government announced a twoyear moratorium on spectrum payments amounting to USD 5.8 billion