Question: What’s common to telecommunications, energy and steel businesses in India? Answer: All are built around resources owned by the state.
There could be other businesses that fit this description as well, but the telecommunications business’ dependence on licences and spectrum, both allotted seemingly on the basis of science but actually in accidence with the whims of the ruling government, explains the ongoing controversy.
As this newspaper has pointed out, notably through a front page report on 9 December, the fracas started with the allegedly preferential allotment of licences and spectrum in 2008, but has snowballed into a larger scandal that dates back to the late 1990s or the early 2000s. In the process, the telecom minister in charge has lost his job; he and several of his aides are being investigated; the top court in the land has come down hard on the Prime Minister for ignoring an early warning about the 2008 allotments and on the federal investigating agency for taking its time over investigations into the same; the government’s own audit arm has put a nice big number to the notional losses to the exchequer from the scam; and several journalists have had their reputations dented by reports that they played a part in ensuring the former telecom minister retained his job when the then ruling government returned to power in 2009.
India’s telcos have done their bit to grow the business and increase the country’s teledensity from a single digit in 2000 to around 60% now, but much of the growth (and profitability, in the case of the companies involved) has come from three policies of the government.
The first was in 1999 when the government allowed telcos to move from a licence fee regime to a revenue-sharing one. The second was in the early 2000s when Reliance Communications and Tata Teleservices were allowed to offer mobile telephony services despite possessing licences to offer only fixed line telephony. The third is the ad hocism (couched in rules) that the government has displayed in handing out extra spectrum to telcos that have used up theirs.
Through these policy flip-flops, the bigger companies have built their businesses. The smaller ones have realized that while the business was profitable, they can’t afford to compete with the big boys. Many have chosen to cash out.
What 2008 marked was a shrinking of the cashing-out cycle that hadn’t been seen before: Previously, businessmen built their businesses to some size before selling a majority stake or the entire company; some of the companies that were allotted licences in 2008 did so soon after. Seen purely from the economic perspective, that’s perfect arbitrage. It’s also perfect opportunism.
Is telecom in India an oligopolistic market? Tell us at firstname.lastname@example.org