Digital boost: Reduction in GST, licence fees and SUC to provide respite to telecom sector

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Published: October 25, 2018 3:54:41 AM

Reduction in levies such as GST, licence fees and SUC will provide some respite to telecom sector

GST,  licence fees, NDCP 2018, ICT Development Index, digital communications sector, Indian mobile industryConsolidation has been necessitated by intense competition, high spectrum fees, financial stress and decreasing revenues.

Last month, the Union Cabinet approved the National Digital Communications Policy (NDCP) 2018. It broadly aims to provide connectivity to all, and make India a digital and connected economy. The time-line for the same is set as 2022. It aims to create additional employment for 4 million people and enhance the contribution of the digital communications sector towards India’s GDP to 8%. It seeks to place India among the top-60 nations in the ICT Development Index of the ITU from 134 in 2017. Clearly, a lot of it hinges on telecommunications sector.

In April 2013, the government accorded infrastructure status to the telecom sector and telecom service providers, aimed at boosting investments. According to Invest India, the national investment promotion and facilitation agency, the Indian mobile industry is expected to create total economic value of $217.4 billion by 2020. As per TRAI data, India has 1.16 billion wireless subscribers—second highest in the world. We have 450 million internet subscribers, of which 87% access it wirelessly. India has the highest per capita and aggregate mobile data consumption. However, India has only 40% internet penetration (77% in urban areas and 15% in rural areas). According to telecom secretary Aruna Sundararajan, the industry will need $10-15 billion a year in investments. According to the Cellular Operators Association of India (COAI), Rs 2 lakh crore of investment is needed by the sector over the next two years for Digital India. Given the policy guidance and huge opportunity for growth that lies ahead, this is perhaps a golden time for the telecom sector. However, the sad reality is the fact that the sector is perhaps in its worst phase ever.

The sector is reeling under a cumulative debt of Rs 7.7 lakh crore. The financial woes have only increased since 2016. In 2018, just three private players have survived—Jio, Airtel and Vodafone-Idea—from 13 in 2008. Consolidation has been necessitated by intense competition, high spectrum fees, financial stress and decreasing revenues. Reduction in interconnect charges has further had an adverse impact on the health of telecom operators. With the voice calls going free and data being the turf for price war, average realisation per MB is down to a mere 1.6 paise in fiscal 2018, from about 23 paise in fiscal 2016. This is further expected to fall in fiscal 2019. Average revenue per user for Indian telecom players is perhaps the lowest in the world.

Telecom operators have invested around Rs 3.5 lakh crore in the spectrum since 2010. While a positive outlook was one of the factors, high reserve price at spectrum auctions played a vital part in this huge number. The high price of the spectrum and stressed balance sheets of telecom companies have led to inefficient utilisation of ‘spectrum’, which the NDCP recognises as ‘a key natural resource for public benefit to achieve India’s socio-economic goals’. According to estimates, around 38% of all spectrum put on auction since 2010 has remained unsold; the figure was as high as 67% in 2012, 100% in 2015 and 59% in 2016. Along with inefficient use and allocation of a key natural resource, this trend has also resulted in lower-than-budgeted revenues for the government. The government expects revenues of around Rs 49,000 crore from the telecom sector in fiscal 2019, up from Rs 31,000 crore in the previous year. This is unlikely to materialise.

To realise the vision of the NDCP, the telecom sector will need to be its backbone. The last two Economic Surveys also make note of the importance as well the challenges the telecom sector faces. For the sector to grow, provide greater access and improve the quality services, investments will need to be made. CRISIL Research projects the network capital expenditure in fiscal 2019 at about Rs 75,000 crore. Average return on capital employed is around 1%, making it difficult to raise funds. In addition, RBI’s circular dated April 18, 2017, which cautions banks to lend to the telecom sector and asks for increased provisioning, makes it difficult for telecom operators to access bank funds. While the financial health of the sector is not in its prime, RBI’s June 2018 Financial Stability Report shows that in a sectoral credit stress test, the most severe shock to the telecom sector has very little adverse impact on overall banking GNPAs.

The debt burden of the operators is expected to remain high over the next few years, as capital expenditure by them is likely to remain high, and revenues and operating margins are expected to fall. In such a scenario, the sector could use some help from the government and regulators. The decision to extend the time period allowed to repay spectrum debt from 10 to 16 years is a welcome move. The government should also consider offering some sort of concession on spectrum debt. This could be in the form of reduced interest rate or reduction in debt tantamount to the new investment in telecom infrastructure made by the operator.

Reduction in other levies such as GST, licence fees and spectrum usage charges will also provide some respite to the sector. Rational and prudent pricing of the spectrum will be crucial in ensuring success of auctions. A healthy competitive market is good, but price wars can be harmful, both for the consumers as well as firms in the long run. The regulator/government should take note of this and ensure a competitive level-playing field in the sector. The vision of the NDCP might be in jeopardy if the current state of the sector continues for too long.

Author is a corporate economist. Views are personal

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