In the current century, India’s growth has been fuelled by one sector above all – telecommunications. The connectivity revolution has powered India’s IT giants and helped hundreds of millions of Indians to get onto the grid, giving them a chance to improve their prospects. All of the government’s flagship initiatives’ success depends on this sector and its growth and penetration play a vital role in the government’s strategy to improve the economy. However, currently, telecom business is pushed into crushing debt and possible bankruptcy due to the Supreme Court’s judgement on the definition of AGR. The Department of Telecommunications (DoT) is going issue notices to telecom companies after January 24, the deadline for payment of AGR dues set by the apex court. This is despite the SC agreeing to list the modification petition filed by Bharati Airtel, Vodafone Idea and Tata Group.
India’s telecom sector:
- India is the second-largest telecommunications market.
- The telecommunication market includes three segments – wireless, wireline and internet services.
- The wireless market comprises of 98.2% of the total subscriber base as of June 2019.
- India is also the second-largest country in terms of internet subscribers and has the world’s highest data usage.
- The gross revenue of the telecom sector stood at USD 33.97 billion in 2018-19.
- Increased investments on spectrum technology, equipment and fibre-optics are vital the growth of this sector.
- Telecom sector is estimated to contribute about 90% of the government’s non-tax revenue.
- Therefore, securing the financial health of this sector is vital for safeguarding India’s revenue and the economy as a whole.
What are the initiatives taken by the government to promote this sector?
- Policy support from the government through an increase in the FDI cap to 100% from 74%, increasing expenditure on telecom infrastructure and services, and the launch of National Digital Communication Policy, 2018 has led to the growth of this sector.
- “Tarang Sanchar” launched by the DoT is a web portal that provides for information on mobile towers and EMF emission compliance.
- The nationwide Optical Cable (OFC) coverage doubled from 7 lakh km to 1.4 million km.
- The Department of Information Technology is going to establish over 1 million internet-enabled common service centres in accordance with the National e-Governance Plan.
- Digital India also played a role in the growth of this sector.
Why is the telecom sector currently facing huge debt?
- It all began in the 1990s when the Indian economy was liberalised.
- The telecom sector, during this time, was liberalised under the National Telecom Policy, 1994 after which the licences were issued to the companies in return for a fixed license fee.
- To provide relief from the high license fee, the government, in 1999, gave an option to the licensees to migrate to the revenue sharing fee model.
- Under this model, the mobile telephone operators are required to share a percentage of their adjusted gross revenue (AGR) with the government. AGR is divided into annual license fee (LF) and spectrum usage charges (SUC).
- The LF and SUC were set at 8% and 3-5% of AGR respectively, based on the agreement between the DoT and the telecom companies.
- However, the DoT and telecom companies are disputing over the definition of AGR since 2005.
- The telecom companies argued that the AGR should include only the income from the telecom operations.
- The DoT disagreed and stated that the AGR should also include non-telecom incomes like the asset sales, interests on deposits, rents etc.
- In 2015, the Telecom Disputes Settlement and Appellate Tribunals (TDSAT) stayed the case in favour of the telecom companies and held that the AGR includes all receipts except capital receipts and revenue from non-core sources like rent, profit on the sale of fixed assets, dividend etc.
- However, on October 24, 2019, the Supreme Court ruled in favour of the DoT by accepting its definition, putting the telecom companies under tremendous financial pressure.
- These companies were ordered to pay Rs.92,000 crores to the government within three months (January 24, 2020).
- The telecom operators, based on the TDSAT’s 2015 judgment had paid only what they estimated due as the licence fees and spectrum charges.
- However, the original disputed amount (license fees) of Rs. 23,000 crore snowballed into a massive figure of nearly 93,000 crores, as the DoT contended that the entire dues accumulated over the last 15 years along with interest and penalty.
- This led to a huge loss for the already suffering telecom companies and two of the three remaining private sector telecos, Vodafone Idea and Bharati Airtel posted their highest-ever quarterly losses since the apex court’s ruling.
- Before the verdict, the telecom companies were already facing huge taxes from the government (18% GST and AGR of 3-5% for spectrum usage charges and 8% as licence fee).
- The high debt faced by the telecos giants would mean increasing job losses and decreasing investments.
- To settle their dues, companies are going to pool funds from the market, proceeds from the divestment of assets and relief provided by the government in the form of a two-year moratorium on past spectrum dues.
- Even non-telecom companies that hold licences for internal communication and signalling are liable to pay fees on their entire revenue even if they do not offer telecom services. This is because the SC’s ruling is an interpretation of the licence agreement and thus applies universally to all companies holding telecom licences.
- This judgment and the government’s inaction to address this issue is going to have a devastating impact on the initiatives like Digital India, smart cities
What are the other challenges faced by the telecom sector?
- Financial health under threat: The gross revenue has come down from 20% to 15% for the year 2017-18 as the overall sector’s revenue dropped. The rapid decline of ARPU (Average Revenue Per User), losses and falling profits are worsening the financial stability within this sector.
- Delayed rollout of innovative products and services due to the unfavourable environment caused by government policies and regulations.
- According to the International Telecommunication Union, broadband penetration in India is only 7%.
- Inadequate availability of spectrum is a major concern for India. This situation is worsened as ISRO and India’s defence forces are demanding a major reservation. This could hamper the effective roll-out of the 5G services. The mobile phone operators may push back 5G network deployment by at least 5 years due to insufficient spectrum and high base prices.
- High competition and dropping of tariff following the entry of the Reliance Jio.
- The telecom infrastructure has not penetrated the semi-rural and rural areas due to the initial liability of high fixed cost.
- Fixed-line penetration in India is also poor.
- Huge Right-of-Way (ROW) cost charged by the state governments for permitting the laying of fibres etc.
- Lack of trained personnel to maintain and operate telecom infrastructure.
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What can be the way forward?
- The state governments should set up adequate telecom infrastructure to realise the National Digital Communication Policy (NDCP).
- The government should ensure a favourable environment for the entry of new players into the market and them improving the telecom sector.
- The government should increase the optical fibre penetration across the rural areas as these areas house 72% of the Indian population.
- It must provide for easy and cheap right-of-way permissions.
- Improving policies and regulations for ensuring the growth of the existing telecos and increasing the investments in the domestic market.
- Promoting favourable environment for 5G rollout as it will impact of the government’s various flagship programmes like Digital India, Smart Cities and all the other sectors within the Indian economy like health, transport, finance etc.
- The government should limit predatory pricing by fixing the minimum price to prevent price war.
- The licence fee, which is currently 8% of the AGR is one of the highest in the world. This should be reduced to support the companies’ growth.
- The government should increase its spending on research and development to make India capable of manufacturing and exporting hardware components like mobile handsets, touch screen monitors etc.
Telecom sector is an essential service and not a revenue generator. It is estimated that for a given level of mobile penetration, a 10 per cent substitution from 2G to 3G increased GDP per capita growth by 0.15 percentage points. Likewise, the doubling of data use leads to an increase in the GDP per capita growth rate of 0.5 percentage points. This should be realised by the government. Pressuring it to increase the government revenue will only further damage the already stressed sector.
Why is India’s telecom sector currently facing a huge debt? What can be done to address this issue? (250 words)