3 min read.Updated: 12 Nov 2019, 11:41 PM ISTRajat Kathuria
The endless litigation reflects deep trust deficit between the private and public sectors
Policy uncertainty is not good for investment, it is said. Yet, despite that caution, the Indian telecom sector has been the beneficiary of vast amounts of investments from both domestic and foreign sources. The magnitude of foreign investment in the telecom sector since the 1995 liberalization move stands at a whopping $40 billion. An alternative thought experiment will be to ask how much more the sector could have benefited from a robust and stable policy environment.
The National Telecom Policy (NTP) of 1994 acknowledged for the first time the need to create a world-class telecommunications infrastructure, and the centrality of private investment to achieve that aim. But inviting private investment without an independent regulator was flawed thinking. The Department of Telecommunications (DoT), which was the regulator, had also devised a regime that was skewed in its favour, and was essentially anti-private sector. It was, therefore, a matter of time before litigation became a norm. Eventually, the Supreme Court pronounced that private investments cannot happen without a regulator. It was baptism by fire for the Telecom Regulatory Authority of India (Trai), because DoT was reluctant to surrender its regulatory role. I was in Trai back then, and recall that DoT did not cede much ground. The gory details of what happened need not be detailed here—suffice it to say that the excessive and severe discord between DoT and Trai led to litigation, which in turn prompted the government to dissolve Trai, and its adjudicatory powers were given to a special tribunal for telecom, TDSAT, which came into being in 2000.
Spectrum assignment has been yet another instance of policy uncertainty. Until 2001, spectrum was assigned through auctions and, thereafter, via a contrived administrative procedure linked to subscribers. This created perverse incentives to game the system during 2003-08. The more subscribers you could show on your network, the more spectrum you were awarded. This was easily the darkest of times for Indian telecom. Certain operators inflated subscribers to gain spectrum, others successfully lobbied to literally jump the queue when the notorious first-come, first-served criterion was selected as the assignment method. Again the Supreme Court came down heavily on the impropriety in assigning spectrum and cancelled 122 telecom licences in 2012. It justified its judicial overreach in larger public interest and pronounced that assigning spectrum be henceforth done through an auction. Auctions continue to be the norm today and has become a millstone around the sectors neck.
One more quagmire that requires resolution is the definition of sector revenue, which is linked to licence fees. Because telecom operators have to pay a percentage of adjusted gross revenue (AGR) to the government as licence fee, its accurate calculation is of vital importance. Its genesis dates back to 1999 when the irrational exuberance of the nascent yet promising market contributed to the exaggerated bids by new entrants.
Unable to honour their bids, operators were granted a migration package in which licence fee became a percentage of revenue. The deal, welcomed then, has now become a bone of contention between DoT and operators. The department contends that for AGR calculations all revenues earned (including from non-telecom sources such as deposit interests and sale of assets) by operators must be included. Operators reason that AGR should only include revenue from telecom services. The Supreme court, interpreting the extant rules last week, had sided with DoT creating a $19 billion burden on the sector. I suspect that DoT does not believe operators will report revenue truthfully if exclusions are allowed. Perhaps the Supreme Court concurs. Ironically, in 2012 the court had taken a dim view on the ability of DoT to assign spectrum transparently.
The endless litigation reflects an institutional malaise and deep trust deficit between the private and public sectors. Unless we resolve this, telecom will not live up to its promise and, in turn, will impair our digital future. In the short term, this means recalibrating our aspiration to be a $1 trillion digital economy by 2024. That in itself should be a wake-up call.
Rajat Kathuria is the director and chief executive of Indian Council for Research on International Economic Relations.