Published Editorial

Seven steps taken by Modi government in telecom

June 2016

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The Financial Express


Prashant Singhal
Global Telecommunication Leader

Rabindranath Tagore once said: “You can’t cross the sea merely by standing and staring at the water”

In May 2014, when the new Government commenced its term, hopes were high and India’s 1.25 billion citizens eagerly awaited a radical transformation capable of steering India on a high growth trajectory. The current Government is action led and in a dramatic rethink is navigating India’s growth story by building ‘information superhighways’.

In 2015-2016, the expected YoY growth rate will be nearly 7.6%, says the IMF, and that ‘India has firmly placed itself as the fastest growing global economy’. The World Bank, has further signalled hope having moved India 12 spots up in its ‘Ease of Doing Business Ranking’ at the back of strengthening investor confidence and creation of a favourable business climate. FDI norms were relaxed in several sectors and foreign collaborations have enhanced investments, says the Bank. Within the last two years itself FDI has increased from USD 24 bn to USD 40 bn, registering a staggering growth of 64.6%.

The Government’s new policies of ‘Make in India’, ‘Skill India’ and ‘Startup India’ are forward looking and these multiple initiatives can catalyse further development. As it should be, with such advancements, the expectations are much higher. Progress on several landmark reforms including the GST bill, labour laws and land bill will be favourable in the long run.

The contribution of the telecom sector has been significant in setting the pace for India’s economic growth. Once considered to be India’s poster boy for socio-economic reforms, the sector’s growth has significantly decelerated over the last couple of years due to massive financial stress. Telecom is one of the most heavily taxed sectors when compared to benchmark taxation, levies and surcharges that are levied on operators in South Asia and ASEAN countries. Currently, levies account for around 30% of revenue earned by telecom companies in India, as compared to around 5% in other APAC countries. In the last one year alone, sector debt has escalated by 52% to reach INR 3.8 tn at end of 2015. To add further injury this is set to increase to INR4.6 trillion once the planned 2016 spectrum auctions kick in. In simple terms, there will be a further worsening of the debt situation in the sector vis-à-vis the gross debt/OPBDITA levels. It is expected, that the ratio will rise to 6.5 times from its current levels of 5.4 times following the auction.

To make matters worse, Telco revenues have not kept pace with the rising debt. To prove this, if we analyse the four quarter rolling average revenue growth of wireless services from December 2011 to 2015, we see a decline from 13.9% to 5.7%; indicating a slowdown in the revenue growth rate. If this trend continues, we are looking at a sector that is inching towards nothing short of bankruptcy!

Though the introduction of positive policy reforms may have opened doors to new growth opportunities in the sector, there is an urgent need for the Government to relook at the spectrum prices and levies to prevent the sector from falling into a potential debt trap.

However, all is not bleak in the Indian telco land. The Government introduced new policy initiatives and programs that can transform the sector’s growth story.

The announcement of ‘Digital India’ program in the first 100 days of the government came as a breath of fresh air for an ailing telecoms sector. Telcos embraced the initiative and committed in excess of INR4 trillion to further this growth agenda. The underlying commitment is towards strengthening network infrastructure, enhancing mobile broadband connectivity and providing next generation services and applications. This was followed by Government’s decision to develop 100 smart cities across India that continues to draw both international and domestic interest.

Second was the creation of a spectrum roadmap for the nation. The Government’s star achievement is undoubtedly the approval of spectrum trading and sharing norms along with the ease in M&A guidelines. For a highly fragmented sector, consolidation which was once for talked for a long time and has today become a reality. Operators can acquire spectrum or pool together their holdings for better efficiency, improved quality of service and to cater to growing demand for data services.

The blockbuster success of the March 2015 auction which helped the Government garner INR1.09 trillion in revenues was critical in safeguarding business continuity for telcos and provided clean litigation free spectrum for the next two decades. In this regard, all eyes are set on the upcoming multi-band spectrum auction for which the Telecom Commission has cleared the largest quantum of spectrum with nearly 2,142 MHz for sale.

While expensive auctions resulting from high reserve prices have long been an issue of contention for the operators, the Government’s positive move to reduce spectrum usage charges (SUC) from 5% to 3% of AGR has come as a huge relief to financially stressed operators.

Third was the increase in pace of delivering broadband connectivity to the masses. Rural connectivity has regained focus with the revival of the National Optic Fibre Network, which was revamped as BharatNet to enhance broadband connectivity. From a mere 358 route km of optic fibre, the project has gathered pace and 116,000 route km fibre has been laid in the tenure of this Government. In the last one year, internet subscribers have increased by 32% and broadband at an impressive 125%. With the rising subscriber base, thrust on data services has enabled a smartphone revolution.

Fourth, the performance of the sector is revitalising. Performance on several parameters has been encouraging. Gross revenues have increased by nearly 11% in the last two years to reach INR2.6 tn. EBITDA margins have improved from 19.9% in 2014 to 24.8% in 2015. FDI in telecoms has steadily risen to INR 270 bn, one of the highest ever. Steps for turning around the loss making state incumbent is beginning to see traction, with operating losses turning profitable for the first time in the last decade.

Fifth, we are aiming to drive financial inclusion through the Payments Bank initiative. The millennium development goal of ‘universal financial inclusion’ seems like a distant dream with nearly 41% of India’s population still unbanked, In the last one year, new policy initiatives have opened doors to drive revenue growth. Operators have received in-principal approval from the RBI for Payments Bank license, which is expected to aide in customer retention and enables them to build on their M-Payment services.

Lastly, the thrust on infrastructure sharing is a big positive for the tower segment. With growing data usage and the need to quickly scale-up high-speed network rollouts, passive infrastructure sharing is not enough for long-term growth. As a progressive step, the DoT’s approval on active infrastructure sharing is likely to help operators in reducing capex and opex.

Further, the introduction of the concept of mobile virtual network operators (VNOs) by the regulator is another brick in the wall towards growth of mobile telephony. MVNOs are expected to open up new opportunities for operators such as wholesale revenue stream.

Finally, despite the numerous positive steps, the lurking issue of call drops has impacted the sector for more than a year. Reversing the tide of call drops is largely dependent upon making available more spectrum and installation of telecom towers for ubiquitous coverage. The call drops penalty imposed by the regulator was a negative move in light of the financial distress of the sector and went against the industry sentiments. In this context, making adequate spectrum available that is appropriately priced and contiguous is critical to improve quality of service. Further, lack of uniformity in RoW guidelines across states continues to impact tower roll outs.

In terms of auctions, since 2010, India has witnessed five spectrum auctions having total outlay of ~INR2.9 trillion. Amongst all these auctions, combined pay-out for the 2014 and 2015 spectrum auctions was about 59% of the total outlay so far. The burgeoning industry debt has reached INR3.8 trillion. Moreover, retrospective tax related policies need to be reviewed and the sector is in need for rationalised taxes and levies to ensure overall growth and financial viability.

In summary, the sector calls for positive enforcements to bring about a ‘digital kranti’

Currently, India is at the cusp of a digital revolution where it requires a regulatory impetus to realise this vision. Although India aspires to become a digital economy ensuring connectivity across the length and breadth of the country, the blues of the telecoms industry are pulling it behind its true potential. At this time, creation of an investor friendly environment is one of the principal requirements for progress of the telecoms sector.

In the words of our Telecom Minister Shri Ravi Shankar Prasad,

“India is at the tipping point of a digital revolution, and I am confident that change will come.”