The lessons from India's telecom policy fiasco

The high reserve prices in subsequent auctions, in fact, had made it clear nearly a decade ago that the country’s telecom policy had shifted from one that promotes competition to one that encourages an oligopolistic market.

But hardly anyone had envisaged back then that large firms such as Vodafone India Ltd and Idea Cellular Ltd could be among the ones that struggle to survive, leave alone a behemoth that would later arise from the merger of those two firms. If a joint venture between one of the largest business groups in the country and one of the largest telecommunication companies in the world, with billions of dollars in cumulative investments, can’t make it in India’s telecom market, it is clear that government policy carries a large share of the blame for this state of affairs. Analysts now refer to India as among the world’s most painful markets to operate in for a telecom firm.

This belief got cemented last week when Kumar Mangalam Birla stepped down as chairman of Vodafone Idea Ltd, while also reportedly offering his group’s stake in the firm to the government for free. The Aditya Birla group joins the Tata group, Japan’s Docomo, the UAE’s Etisalat and Norway’s Telenor, among others,that have written off investments worth billions of dollars in India’s telecom market.

It isn’t that the private corporations which burned these vast amounts of money have no share of the blame. While it can be argued that the design of some spectrum auctions forced them to make high bids, there were times when they climbed over one another just to get ahead of competition at any cost. Analysts joked at the time that India’s large telecom companies had perfected the art of buying the unaffordable. The over-enthusiasm was also visible in their willingness to agree on unreasonable terms in contracts with the government. This came back to bite them when the Supreme Court ruled in 2019 that regulatory dues need to be paid not only on telecommunication revenues, but also on ancillary revenues.

But policymakers carry a far greater share of the blame. Extreme policy flip-flops have left the sector in a battered state. And, as it turns out, the government is now left holding the can. There is a real possibility of a duopoly in the telecom market. Reliance Jio Infocomm, which launched its services about five years ago, is now the domestic market leader and expected to be the largest beneficiary.

Already, telecom services have become increasingly unaffordable for the country’s poor.

One of the policy changes in the post-Jio era has been to eliminate interconnection usage charges (IUC) collected by telcos for terminating calls on their network. The IUC framework allowed firms to levy ultra-low tariffs on users who had connections primarily for incoming calls. With the IUC subsidy gone, telcos have increased the minimum monthly cost of owning a mobile connection to as high as ₹86. Before the cut in IUC, the minimum monthly cost was in the low double-digits.

Policymakers should worry about the impact of this trend on tele-density, rather than only highlight the fact that tariffs for data users have reduced significantly. Doing the latter is akin to saying ‘let them have cake’. If you can’t afford voice calls anymore, use data services.

It’s not just tele-density that policymakers need to worry about. The majority of Vodafone Idea’s ₹1.8 trillion debt is owed to the government, and it is now staring at another write-off, much larger than the sums it is owed by other firms that went bankrupt earlier, such as Aircel and Reliance Communications. A default will also add to the stress within the banking sector, besides causing a huge disruption for telecom users.

And if India’s telecom market ends up as a duopoly, the government should expect far lower prices for spectrum, which will no longer be viewed as a very scarce resource, what with the number of bidders dwindling.

The fact that India is faced with a highly possible outcome of a duopoly also raises serious questions about the effectiveness of its anti-competition policy and the bane of regulatory arbitrage. These pages have pointed out that turf battles between the competition watchdog and the telecom regulator need to be ironed out, and the two need to work in a spirit of collaboration (bit.ly/3xIUO7L).

All of this also raises the pertinent question whether India is indeed the land of opportunity that holds so much promise for so many investors. One of the reasons that policymakers come up with onerous rules and regulations is the firm belief that investors would be willing to pay any price to tap the vast demand in our local markets. But investor experience in the telecom market shows that the local opportunity comes with a number of strings attached, and only a few make it to the elusive pot of gold at the end of the rainbow.

It’s high time that the policy lessons from the past decade are taken on board and changes made. Else, analysts may start saying India is among the world’s most painful markets to operate in for any business, not just for a telecom firm.

Mobis Philipose is editor, Mark to Market