India launches bil­lion-dol­lar cell phone shake­down

Bangkok Post - - OPINION - Mi­hir Sharma

Some­thing about India’s tele­com sec­tor at­tracts its grasp­ing state like a bee to honey. Most com­pa­nies in the space have al­ready been taxed, reg­u­lated, fined, li­censed or just plain ex­pro­pri­ated half to death. Yet that hasn’t stopped India’s bureaucrats, or its politi­cians, or even its judges. Ig­nor­ing the fact that tele­com growth pulled the In­dian econ­omy to­wards double-digit growth back in the barely re­mem­bered boom years of a decade ago, they seem to see the sec­tor now less as an eco­nomic en­gine and more as a piggy bank.

The most egre­gious re­cent ex­am­ple is the gov­ern­ment’s at­tempt to profit off a pos­si­ble merger be­tween two of the big­gest re­main­ing tele­com com­pa­nies — Voda­fone India Ltd and Idea Cel­lu­lar Ltd. The merger — which was sup­posed to have been com­pleted last month — would cre­ate India’s largest mo­bile ser­vices com­pany, and the world’s se­cond-largest af­ter China Mo­bile Ltd. Al­most a year ago, India’s com­pe­ti­tion com­mis­sion said the two firms could go ahead. Most an­a­lysts viewed the merger as a way for Voda­fone to edge qui­etly out of India af­ter years of dis­ap­point­ment.

The deal hasn’t gone through yet, how­ever, be­cause the gov­ern­ment de­part­ment in charge of squeez­ing — I mean, over­see­ing the sec­tor — has been hold­ing things up. It’s ap­proved the merger only on the con­di­tion that the com­pa­nies pay the gov­ern­ment US$1.1 bil­lion they claim is owed partly as pay­ment for ad­min­is­tra­tively as­signed spec­trum in the past.

Fine, you think — ex­cept a large part of that claim is, in fact, be­ing con­tested by the two com­pa­nies in court. India’s De­part­ment of Telecom­mu­ni­ca­tions, many sus­pect, is try­ing an end run around the ju­di­cial process, since it’s lost sim­i­lar cases be­fore: “You want my per­mis­sion for this merger? OK, then stop fight­ing my de­mands for cash.” Calling this high­way rob­bery “ap­proval” of the merger is pure Newspeak. While Voda­fone has pub­licly de­clared it­self “happy” to re­ceive per­mis­sion for the merger, it’s gen­er­ally be­lieved that the com­pany will challenge the de­mand in court.

Con­nois­seurs of In­dian bu­reau­cratic ob­struc­tion­ism will recog­nise that it has en­tered a new and fascinating phase. Once, the gov­ern­ment said “no” just for the sheer joy of it. Now it has deeper, more com­plex mo­tives.

First, the gov­ern­ment hates to see any money leave India. If, as of­fi­cials in­sist, India is “one of the most open economies in the world” for in­vest­ment, it’s open the same way the Ho­tel Cal­i­for­nia was: Com­pa­nies are wel­come to bring in bil­lions of in­vest­ment, but it’s hard to repa­tri­ate prof­its or pull out af­ter run­ning into all­too-com­mon road­blocks.

Se­cond, while the pri­vate sec­tor may no longer be an ide­o­log­i­cal en­emy, it’s too of­ten seen as a source of funds to ease the gov­ern­ment’s fis­cal deficit. Spec­trum charges, which are the source of the dispute be­tween the gov­ern­ment and Voda­fone/Idea, are seen as one way to meet fis­cal tar­gets.

And fi­nally, to give them their due, some of­fi­cials and politi­cians may just be scared. If they are seen to be giv­ing big com­pa­nies any lee­way at all, they may wind up be­ing in­ves­ti­gated for cor­rup­tion.

India des­per­ately needs for­eign cap­i­tal to deal with an in­vest­ment crunch at home and dis­putes like this one are hardly likely to en­thuse in­vestors. They have more than enough du­bi­ous history to re­in­force their neg­a­tive im­pres­sion. Re­mem­ber, this is a sec­tor in which for­eign com­pa­nies have con­sis­tently lost large amounts of cash thanks to gov­ern­ment ac­tion. Nor­way’s Te­lenor ASA had its li­cence re­voked af­ter in­vest­ing $2.7 bil­lion in the coun­try, even though its case had noth­ing to do with a scan­dal that led to a mass can­cel­la­tion of li­cences. Rus­sia’s Sis­tema JSFC suf­fered sim­i­larly.

Ja­pan’s NTT DoCoMo Inc strug­gled to get its money back af­ter a joint ven­ture with Tata Te­le­ser­vices Ltd went bad; the gov­ern­ment sim­ply re­fused to let Tata pay its Ja­panese part­ners and even ig­nored an ar­bi­tra­tion set­tle­ment in Lon­don till it was forced to al­low the pay­ments by a Delhi court. And, of course, Voda­fone it­self fa­mously dis­puted a gi­ant tax bill in court, won, and then was told it would have to pay the money any­way af­ter par­lia­ment ret­ro­spec­tively amended the rel­e­vant bits of India’s tax law.

India’s gov­ern­ment needs to grow up. It should have the courage to make de­ci­sions that ben­e­fit com­pa­nies in­vest­ing in a strug­gling sec­tor, or no­body will in fu­ture. It should recog­nise that sys­tem­i­cally im­por­tant sec­tors like com­mu­ni­ca­tions need spe­cial care. And it should wean it­self off its de­pen­dence on non-tax rev­enue to fund pop­ulist spend­ing. It may be fun to be a bully, but no­body likes a gov­ern­ment that re­peat­edly throws its weight around.

Some­thing about India’s tele­com sec­tor at­tracts its grasp­ing state like a bee to honey.

Mi­hir Sharma is a Bloomberg Opin­ion colum­nist.

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