Digital India’s bedrock is telecom

India’s telecom revolution has earned the world’s admiration. At one stage,it was the fastest growing, lowest cost sector in the world, providing inclusive development to all. In airlines or electricity usually the government has to make it compulsory, and impose a universal service obligation (USO) to provide outreach to remote rural areas. Not so for telecom. The USO fund to subsidise rural outreach remained un-utilised, because the telecom industry did not need any subsidy or compulsion to reach out to the remotest areas of the country. That fund has now been used to provide fiber optic links to all villages as part of the Digital India initiative.

The telecom revolution of India is truly a breath-taking case study for policy makers and business schools. Since the early 1990’s it has been powered mostly by private sector investment, entrepreneurial energy and risk taking. This was despite some critical mistakes made in the sequencing of the liberalisation policy. The two prominent mistakes in the 1990’s was to sequence private entry into fixed line telephony before long distance and mobile telephony. This was incorrect sequencing and had to be corrected. The other “mistake” was not really a mistake but a consequence of wildly optimistic bidding for spectrum leading to winners’ curse and near bankruptcy of the sector. Hence in 1999, the NDA government led by Prime Minister Vajpayee made a bold policy correction of switching from fixed fee (for spectrum) to a revenue share model. Suddenly the industry became more viable, and literally took off. For almost the next ten years it exhibited a fantastic, record breaking growth of subscribers, investments, and sharply declining tariffs.

Unfortunately, the end of that decade of a dream run was marred by a major scandal, with allegations that spectrum and licenses had been given away unfairly and in a corrupt fashion. Of course, the infamous 2G scam did not lead to any final indictments, although two prominent politicians did spend time in jail. In 2010, India had its first auction of 3G spectrum which lead to a bounty of fiscal collection for the government. The promise of the continuance of the golden phase of telecom continued.

However, the present situation in telecom is far from rosy and financial health. It has three major private sector players (Reliance Jio, Airtel and Vodafone Idea), and two public sector players (BSNL and MTNL). Three big telecom players have shut down (Aircel, Tata Docomo, RCom). Nearly a hundred thousand jobs have been shed in the past year and a half. The combined sector debt is nearly 7.5 lakh crore.

At a conservative estimate, the annual interest burden for the entire sector is more than 80,000 crore. This is more than the current earnings (EBITDA). With such a high interest burden, not supported by adequate revenues is a cause for great worry. The sector needs large investments, especially in the light of the upcoming fifth generation 5G rollout. That needs healthy profitability. But the average revenue per user (the best sign of profitability) has fallen from 121 rupees per month in September 2016 to 70 rupees in December 2018, a fall of more than 40 percent. Even Bangladesh and Pakistan have much better revenue per user in their telecom industry. Of course, as a consequence of very low tariffs for voice and data, India’s rank in internet usage has jumped from below 100 to being one among the top three in the world. Nearly 40 percent of the 1.1 billion subscribers access the internet through their phone.

But the sector’s financial woes means that not only is there inadequate profits to fund future investment, but the share of the government’s fiscal benefit is also dropping sharply. The revenue share paid to government (since it depends on total gross revenue) has dropped from nearly 1 lakh crore in its heyday to less than 30,000 crore now. The goose which laid the golden eggs for the government is very sick. Recognising the precarious nature of the indebtedness of the sector, the Reserve Bank of India warned all commercial banks to not increase any debt to the telecom companies, fearing the creation of non-performing assets (NPA’s). Without access to debt and other funding, the sector will have to cut costs, investments, services and perhaps subscribers too. The sector has certainly suffered from hyper-competition, but the cutthroat price competition is now jeopardising the very future of this critical industry.

Telecom is the bedrock of Digital India. The entire financial services (banking, capital markets and insurance) sits atop the underlying architecture of telecom. Other crucial services like entertainment, e-governance, tele-medicine, online e-commerce, all of these depend on a robust telecom sector. It has the exalted status of a crucial utility, not unlike electricity or water. Indeed, in many countries, access to internet has been accorded the status of being an essential service.

So, against this backdrop, it is essential that we don’t allow the sector to go to the brink, or fall off the cliff. The government says it is expecting 6 lakh crore from the auction of 5G spectrum. If it is planning to collect such handsome revenue from the auction, then it must not double tax, by insisting on revenue share and other steep taxes, even after the auction. The sector has a high GST rate of 18 percent, and large unutilised input tax credit of nearly 30,000 crore. The overall cumulative taxation on telecom is almost on par with cigarettes! This is not the kind of treatment to be given to a sector of such critical imporance to the economy.

As India marches to become a 5 trillion dollar economy in the coming years, an increasing proportion of the economy will be coming from the digital economy. The emergence of Internet-of-Things means there will be increasing digitalisation of the manufacturing and services sectors. Video and data will dominate our lives more than ever. All this requires a robust and profitable bedrock of telecom. The government, regulator, policy makers and financiers must ensure that there is a reasonably healthy path from today’s hyper-competition, and cut-to-the bone tariffs, to profitable growth. Otherwise, the telecom success of India will only be a distant memory and confined to history books.

(The writer is an economist and Senior Fellow, Takshashila Institution)