Originally Published 2019-10-30 10:50:11 Published on Oct 30, 2019
The Supreme Court has ordered the companies to pay the government not just the dues but a hefty penalty -- as well interest on both
India's telecom sector is staring at decimation, thanks to state action

India’s growth this century has been fueled by one sector above all: telecommunications. The connectivity revolution has powered India’s information technology behemoths and helped hundreds of millions of young Indians get onto the grid, giving them a chance to improve their prospects. If India is to become the sort of entrepreneurial superstar that its government hopes it will, then the telecom sector is obviously going to be central to that plan.

So why does the Indian state seem determined to push telecom businesses into crushing debt and possible bankruptcy, instead of ensuring the sector remains healthy and competitive? This week, one of India’s three remaining large telecom companies, Bharti Airtel Ltd, postponed the announcement of its financial results for the last quarter. This isn’t good news, given that in the quarter ending in June 2019 it reported a loss for the first time ever. Bloomberg News’ average of analysts’ expectations from the quarter ending in September is that the company will lose Rs 14 billion, almost $200 million.

The immediate reason for the delay is clear: a recent Supreme Court judgment that ordered Bharti Airtel and other legacy telecom companies, including Vodafone Idea Ltd, to pay billions of dollars to the government. The decision sprang from a long-running dispute between the sector and the state on how to calculate the government’s share of revenue, which it receives as part of the fee for handing over telecommunications spectrum. The companies argued that only their revenue from the use of spectrum should count; the government wanted a share of everything including, for example, revenue from rent.

The Supreme Court has now ordered the companies to pay the government not just the dues but a hefty penalty -- as well interest on both. The total amount the companies owe approaches $13 billion. Vodafone Idea owes $4 billion of that, Bharti Airtel around $3 billion.

The companies are supposed to pay up in three months, though it’s far from certain how that’s possible. They’re already snowed under with debt -- thanks, in large part, to the Indian state. Vodafone Idea’s debt in March 2019 was $14 billion; Airtel’s was over $15 billion. Some of that debt burden is thanks to the exorbitant amount they’ve already shelled out for spectrum. The government changed an earlier policy that subsidized spectrum to one involving auctions that would maximize the amount that it receives as revenue -- great news for the drafters of the budget, bad news for investment in the sector and overall growth.

It doesn’t help that the sector’s caught in a bruising price war thanks to a cash-rich new entrant: Reliance Jio Infocomm Ltd., which can call upon the massive war chest of petrochemicals major Reliance Industries Ltd. Jio’s two rivals have long accused it of receiving favorable regulatory decisions, such as one that allowed 4G spectrum that had been assigned for data to be used for voice services as well. Jio’s entrance into the market has been great news for Indian consumers, who now get high-speed data at some of the lowest rates in the world. But it means that Jio’s already heavily burdened competitors may go under.

The government now says it will convene a panel of senior bureaucrats to consider how to ease financial stress among telecom companies. Yet, this comes after it’s attempted to squeeze every last rupee out of the sector to pay for spectrum, imposed adverse regulation and then appealed legal decisions all the way to the Supreme Court. Moreover, the government is also planning to spend $6 billion to revive moribund state-owned telecom companies and assign them 4G spectrum at an “administrative” cost. The price war will now include not just deep-pocketed Jio but the even deeper pockets of the Indian state.

There’s no point making the laissez-faire argument and shrugging one’s shoulders if Vodafone Idea and Bharti Airtel shut down. It’s hard to see why any new investors would want to enter a market in which the playing field is so uneven. Besides, past investors have already been burnt by state action: Norway’s Telenor ASA, the UAE’s Emirates Telecommunications Group Co. PJSC and Russia’s Sistema PJSFC wrote off investments worth about $2.5 billion after the Supreme Court canceled licenses en masse a few years ago, following corruption allegations that have not been upheld by the courts.

Foreign investors will also note that they can’t even appeal to international arbitration anymore, since the Indian government unilaterally canceled the investment treaties that made that possible. Investment by existing operators into the new infrastructure that could power India’s future -- such as 5G -- looks unlikely in the near future.

India’s statist politicians seem to assume that every sector is a cash cow for their welfarism, and that foreign investors can’t quit India. They had better think again. Aviation has already been decimated by state action; it looks like telecom is next, in spite of the fact that it is the backbone of any realistic growth strategy for India. The government’s boasts about improving the ease of doing business in India, or of being a magnet for investment, ring awfully hollow given how hard politicians are making it for healthy, competitive markets to survive.

This commentary originally appeared in Business Standard.

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Mihir Swarup Sharma

Mihir Swarup Sharma

Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...

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