By 1999, when Atal Bihari Vajpayee was the prime minister, it was clear the 1994 experiment with private sector telephony had run aground with the telcos in no position to pay the high licence fees they had promised to in their bids, and with the government and the telcos engaged in all manner of court battles in an attempt to apportion blame. While it was obvious the situation couldn’t go on, the choice before Vajpayee was to cancel the existing licences and bid them out afresh—this time, though, under a revenue-share formula instead of the high absolute values bid in 1994—or to offer the more sensible revenue-share formula to the existing players. While this columnist was in favour of cancelling existing licences on grounds that would be more transparent, Vajpayee offered the revenue-share regime to the existing players on grounds that, since they were in court, they could block fresh auctions for decades—much better, he argued, to get the process going. With the sector taking off after New Telecom Policy 1999, it is obvious Vajpayee made the right decision.
Even before RJio disrupted the sector with its free/next-to-free pricing, it was in deep trouble. While industry revenues used to double or treble every year in the early 2000s, growth fell to a mere 6.8% in FY16—it fell to an even lower 1.5% in FY17 after RJio came in, but the slowdown clearly predates RJio. In FY18, Kotak Institutional Equities is forecasting revenues contracting around 9%. With telcos already having invested Rs 9 lakh crore, the industry needs an ebitda of Rs 140,000 crore just to meet interest and amortisation costs—what it is actually earning is a mere Rs 50,000 crore. With industry debt at over Rs 4.6 lakh crore and Rs 3.1 lakh crore due in instalments to the government over the next 11 years, it is obvious there will be huge defaults if a way is not found to rescue the industry. This, then, is prime minister Narendra Modi’s Vajpayee moment.
While an inter-ministerial group of bureaucrats was set up to come up with a solution, reports suggest it is going to offer only minor relief—while telcos have 10 years over which to make payments for the spectrum they had bid for in the past, this is to be extended to 16 years. Apart from the fact that this doesn’t address the core issue of negative profitability, this means the banks that have lent telcos the money are likely to suffer big capital losses and the government also stands to lose if telco revenues suffer—with inflows from telcos to the central government projected to fall from Rs 78,715 crore in FY17 to Rs 44,342 crore in FY18, the share of non-tax revenue coming from telecom is down from 23.5% to 15.4%; it could fall even more if, like this year, telcos are too cash-strapped to participate in fresh auctions.
There is, critics argue, a big difference between 1999 and now. In 1994, licences were bid out on the promise that there would only be two private players—as part of the 1999 package, this was given up, and it is the hyper-competition this resulted in that drove tariffs down to what they are today. Telcos, by this logic, need to make some equally big concession today. That, however, is missing the wood for the trees. In the days when the government gave spectrum ‘free’, it charged telcos for this by getting them to share part of their revenues with it. When it started charging for spectrum through bids, however, it retained the high revenue-shares as well. This was unconscionable and, as a result, the share of revenue going to the government by way of recurring licence/spectrum charges and auction-bids rose from 11% in FY07 to 32.4% in FY17—if service taxes are included, the number rose from 23.2% to 47.4%. Apart from bankrupting telcos even before RJio added to the mess, this ensured they had little to spend on really upgrading their networks—think dropped calls, poor internet speeds and little exclusive entertainment content—which was critical to get customers to spend more. If a Modi can’t right this egregious wrong—by the way, in the NPA resolution process, the concessions that banks will have to make will be much larger—it is only because Rahul Gandhi’s suit-boot-ki-sarkaar has really stung him. For a prime minister hoping to turn around the economy and fix the investment climate, that’s an unfortunate position to be in.