Telecom reforms package not enough to revive the ailing industry

more telecom reforms needed.
The telecom reforms do precious little to shrug off the image of India as a rent-seeking state.

Telecom reform measures: The government has announced a number of structural and procedural reforms to bail out telecom companies reeling under a severe financial crisis. Last week’s Cabinet decision was greeted with some relief by the telecom industry. The question is whether these steps are enough to revive the industry that is witnessing cut-throat competition.

Let’s take a look at the steps proposed by the government to mitigate the problems faced by the industry. The most impactful of the telecom reform steps is a four-year moratorium on payment of adjusted gross revenue (AGR) dues which will help struggling Vodafone Idea and Bharti Airtel to stay afloat. Another major measure is a moratorium on payment of spectrum dues. Also, service providers can pay interest on these dues by way of equity. Here are some of the other steps announced last week.

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Structural reforms

  • The definition of the Adjusted Gross Revenue was rationalised by excluding non-telecom revenue of the telcos.
  • An 80% reduction in the requirement of bank guarantees against licence fee and other levies payable to the government. Telcos with multiple service areas are no longer required to give multiple guarantees.
  • Interest rates applicable on delayed payment of licence fees and spectrum usage charge (SUC) has been cut by 2 percentage points. Interest will be compounded annually, not monthly as it is done now. Penalty and interest on penalty scrapped.
  • No bank guarantee would be needed to secure instalment payments at spectrum auctions from now onwards. Also, the tenure of spectrum has been increased from 20 to 30 years.
  • Telcos can surrender spectrum after 10 years.
  • No spectrum usage charge will be charged for spectrum acquired in future auctions. Spectrum sharing charge of 0.5% has been removed.
  • Foreign Direct Investment up to 100% Investment has been allowed under the automatic route to boost investment in the sector.

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Procedural reforms

  • The government has fixed the auction calendar which will be held in the last quarter of every financial year.
  • Import of telecom equipment will no longer require licences under the 1953 Customs Notification. Only self-declaration is needed now.
  • The change in Know Your Customer norms require only an app-based self-KYC. Migrating from prepaid subscription to post-paid and vice-versa will not require submission of fresh KYC. Also, customer Acquisition Forms will be made digital.

The crisis in the telecom industry has its beginning in the licence agreement signed by telecom companies in 1999. They agreed to a revenue-share formula that replaced the fixed licence fee. The telcos agreed to share with the government a part of their revenue. But they challenged the way the adjusted gross revenue (AGR) is calculated. In October 2019, the Supreme Court upheld the government’s definition of AGR. The ruling has irreparably damaged the financial stability of the older service providers — Airtel and Vodafone Idea.

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Why telecom reforms are inadequate

For the debt-laden Vodafone Idea, the steps offer a lifeline. The company has a net debt of Rs 1.9 lakh crore. Despite the sops, VI will still need to raise capital to stay afloat and may need to hike tariffs for its prepaid customers. The telecom reforms will also reduce regulatory burden on telcos, while generating job opportunities and protecting consumers’ interest. Moreover, they will strengthen and stabilise the sector to bridge the digital divide and improve broadband connectivity.

Of course, the reforms can offer some relief to the bleeding telcos. But can they ensure a robust telecom sector in the country? There are two reasons why they may not. The first reason is that the telecom reform measures, while reducing the financial and regulatory burden on telecom service providers, do not offer a stable platform for the sector to grow into a world class industry.

A robust telecom industry is crucial for India to become a global economic powerhouse. Seeing it as a revenue earning opportunity will be detrimental to this important sector as well as to the economy. The government policies should support the industry’s effort to offer cheap services to the most vulnerable sections of the society. The current policies look to milk the companies through multiple levies such as licence fee, revenue share and corporation tax. It is estimated that 35% of the revenues earned by telecom service providers go to the government in the form of various levies.

The second reason why the reforms are inadequate is that they do precious little to shrug off the image of India as a rent-seeking state. An image makeover is essential at a time when the country is trying to project itself as an alternative to China as a manufacturing and services hub for the world economy. Any attempt to levy more on existing industries will deter the investors who are looking at India favourably.

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