If India's biggest foreign investor -- Vodafone -- is about to shut shop, this will also send out a poor signal on India's investor-friendliness.
If there was a doubt in anyone’s mind as to how long India’s second-largest telco Vodafone Idea would stay afloat, Vodafone Plc chief Nick Reed has made it clear the end is pretty much nigh if, as the UK’s Sunday Telegraph quoted him as saying, the government doesn’t get it “boots off the industry’s neck” and allow it to compete. After talking of “unsupported regulation, excessive taxes and … the negative Supreme Court decision”, Read said that if the government didn’t fix things, “Vodafone Idea is destined for a potentially chaotic final act with potential repercussions for India’s international standing”. Prime minister Modi who didn’t do anything to help the industry in his first term though it was obvious rapacious government levies were throttling the sector – even before RJio came in – would do well to pay attention to what Read has said for a variety of reasons.
Vodafone is India’s largest foreign investor; it spent over $17 bn to buy out Hutch and Essar between 2007 and 2012, apart from what it brought in for expanding its network and buying spectrum. If such a big investor is close to shutting shop, as Read points out, it sends a terrible signal on how investor-friendly India is. While Vodafone was already hit by the UPA’s retrospective tax amendment after it won its case in the Supreme Court, the current government didn’t repeal the law even though Modi had campaigned against the UPA’s tax terror in the run-up to the 2014 elections. And while Modi’s government promised that it would accept court verdicts on the retrospective tax, including those by global arbitration panels, it tried its level best to stop Vodafone from approaching global arbitration tribunals.
Nor is Vodafone the only big investor to be hit by the retrospective tax, and the NDA’s non-action on it. Within less than a decade of being in the country, Cairn Energy of the UK was producing a fourth of India’s oil output. Not only was it was slapped with a retrospective tax, its shares worth $1bn were confiscated and dividends worth $300-400mn were appropriated; indeed, when Cairn (by then, the Indian operations had been sold to Vedanta) wanted an extension of its lease – so that it could add to India’s oil production – the government agreed only if Cairn India raised the revenue it would share by a whopping 10 percentage points. A ruling on its arbitration case – in this case, too, the government tried to prevent the arbitration – is expected next summer.
And in the case of Walmart’s $16bn purchase of Flipkart, the problem is that, after turning a blind eye to how the ban on FDI in retail was being circumvented by ecommerce players like Flipkart and Amazon – there were many others – while billions of dollars were coming in, the government suddenly decided it wanted to implement the law. Ironically, while the government is railing against the ‘deep discounting’ allegedly being done by players like Walmart and Amazon, it did nothing when similar allegations were being made by telcos like Airtel, Vodafone and Idea against RJio.
Given how investor-unfriendly government policies have been – the targeting of US seedtech firm Monsanto has been extensively covered in this newspaper – it is hardly surprising that FDI into the country has collapsed. Though the nominal numbers have risen from $31.4 bn in FY09 to $44.4 bn in FY19 – it rose from $41.9 bn to $62 bn if the amount re-invested by these firms from their India operations are included – the real way to look at this investment is as a share of GDP; after all, overall investment levels are also judged as a share of GDP. Taken this way, FDI fell a third, from 2.54% of GDP in FY09 to 1.63% in FY19; when you look at the broader definition of FDI, the fall is from 3.4% of GDP to 2.3%.
It is, of course, true that the overall investment climate worsening in the country would also have played a role in FDI levels falling, but one way to isolate the kind of problem Read is referring to is to see how many repeat foreign investments India is getting in certain sectors. Certainly, in telecom, there have been few foreign investors for several years; and, in the case of oil, as the list of participants in the recent energy meet at Houston during the Howdy Modi event make clear, investor interests is waning. That is also obvious from the number of foreign oil majors who are bidding for the oil/gas fields the government has been auctioning over the past few years.
In the case of telecom, apart from the fact that the performance of the telecom regulator Trai has been very biased and unfair (bit.ly/32MxkzC), even the Rs 133,000 crore impact of the Supreme Court judgment that Read spoke of would have been much smaller if the government had taken the right decisions in 2010 when India started charging market rates for spectrum (https://bit.ly/32Eoa7H); India charged high license fees when it gave spectrum for free, so when it started charging market rates (and a lot more, really) for spectrum in 2010, license fees should have been totally scrapped.
The other reason why Modi needs to listen to Read is that, once Vodafone Idea shuts down, India will be back to where it was in 1999 before the Vajpayee government ushered in India’s telecom revolution. Prior to 1999, there were just two mobile services providers; while Vajpayee ensured unlimited competition was brought in, India could once again have just two players, RJio and Bharti Airtel (apart from BSNL-MTNL, provided the merger and VRS results in a viable firm). In which case, the government/Trai will be back to monitoring the industry closely to guard against cartelization, rigging prices and stifling innovation; each tariff plan will have to, once again, be cleared by Trai. Most governments and regulators attempt to increase competition to ensure the industry grows well, the Modi government will preside over the death of two decades of competition.