3 min read.Updated: 06 Jul 2021, 01:35 AM ISTLivemint
The telecom JV finds itself in another conditionality loop. While its survival would serve us well, let’s look to sensibly-raised market tariffs rather than state intervention for an answer
Telecom services are vital. They provide the substratum for myriad online gigs—many of them yet to be dreamt up—that could lend India’s economy just the edge it needs in this age of digital value creation. For cyber startups to thrive, our telecom sector should be efficient, robust and customer-oriented, a combination that is best assured by the prevalence of sufficient competition. Unfortunately, with a debt-laden Vodafone-Idea (VI) gasping for survival, the sector is at risk of being reduced for all practical purposes to a duopoly of Reliance Jio and Airtel. Last week, VI was reported to have breached loan agreements with lenders. More recent reports suggest that these banks may give the company a reprieve if it is able to financially shore itself up and meet its future repayment obligations. Its effort to raise ₹25,000 crore by way of equity and debt, however, has pushed it into an even more complex loop of conditionality. Would-be investors want as collateral assets that are mostly pledged to its current lenders. Should VI’s bankers give up some of their claims, as the company has urged them to, it could get the capital infusion needed to keep going. Whether this offers a viable way out of the imbroglio is unclear. But, one way or another, VI’s fate could be determined by the decisions of others.
The reasons why this joint venture between the UK’s Vodafone Group and India’s Aditya Birla Group found itself in dire straits can be traced at least partly to the vagaries of our regulatory environment. By the time these two partners merged operations in 2018, spectrum costs had been pushed sky-high by a judiciary-ordained switch to auctions. Jio’s 2016 entry with market-penetrative tariffs had already forced a price response that battered VI’s margins. In October 2019, VI suffered a severe blow in the shape of an apex court ruling that directed it (and others) to cough up huge dues on revenues to be shared with the Centre, though the inclusion of non-telecom inflows in these calculations was a case of the sharing deal’s spirit losing out to its letter. Today, VI’s overall burden of liabilities is estimated at around ₹1.8 trillion. Only a thin slice is owed to banks. Nearly ₹1 trillion must be paid—by and by—to the government for its use of airwaves, plus about ₹60,000 crore as revenue dues. VI appears keen to meet its commitments. Among other things, it has put up for sale an optic-fibre unit to raise funds. On 25 June, it wrote to the Centre asking for a year’s deferment of its spectrum instalment of ₹8,200 crore due in April. Its accumulated losses have wiped out its net worth, having lost over ₹44,000 crore on revenues of ₹41,950 crore in 2020-21 alone, and if it were to go bankrupt, prospective buyers would likely be daunted by its baggage and so India’s exchequer will have to take a 13-digit write-off.
We all have some stake in VI’s survival, but what can be done? Even if the Centre enhances its forbearance, and it is not clear if a state bail-out can be justified, VI’s profit prospects would depend on a margin-assuring rise in market tariffs. An official floor for user charges has been suggested, but price controls are best avoided. Even though a licensed sector with high entry barriers has fewer self-corrective forces to rely on than a free market does, stiff interventions rarely serve any sector well. Jio and Airtel, however, ought to hike prices on their own. The exit of a third player would leave them both exposed, willy-nilly, to suspicions of market collusion and dominance abuse.