Telecom industry in self-destruct mode
A good deal of the problems that the telecom sector faces today has been solely created by service providers. They must keep it in mind that public interest cannot be won by just keeping price low. It’s important to maintain quality of service
Arundhati Bhattacharya, chairperson of the State Bank of India, recently sounded alarm bells over troubles surrounding the telecom sector. She wrote to the Government about the “highly unsustainable levels” of debt mobile companies face today. The industry’s debt to the banking sector is estimated at four lakh crore rupees. In a letter to the telecom secretary, Aruna Sundararajan, Bhattacharya stated that “stress in the sector has reached highly unsustainable levels after the entry of new players and launch of free services, which led to erosion of earnings before interest, taxes, depreciation and amortisation (EBITDA) of the telecom service providers.”
The total annual cash outflow of the telecom sector stands at Rs 1,78,000 crore, which includes interest payments of Rs 43,000 crore; loan payment of Rs 50,000 crore; spectrum related deferred payment of Rs 20,000 crore and annual capital expenditure of Rs 65,000 crore. As against this, the total EBITDA of the sector on an annualised basis stands at Rs 65,000 crore. This leaves a deficit of Rs 113,000 crore.
To stem the slide, the industry has sought “deferred payment” for spectrum purchases viz, repayment in 15 years with moratorium of five years instead of the current payback plan where they need to pay in 10 years after a two-year moratorium. It also wants to abolish the five per cent license fee towards Universal Service Obligation Fund (it wanted Goods and Services Tax (GST) at five per cent which was rejected by the GST council).
However, even if the Government were to accept both demands, annual burden would fall by just Rs 23,000 crore (license fee Rs 13,000 crore; spectrum charge Rs 10,000 crore). It would not make much difference. The industry would still be in deficit of Rs 90,000 crore. The crux of the problem lies elsewhere.
Problem cropped due to the entry of a 4G operator with aggressive tariff plans viz, ‘free and unlimited’ voice calls and low-cost data. Reliance Jio launched its introductory offer in September 2016. Both, data and voice calls were free for 90 days. The offer was then extended for another three months. From April, even as voice calls continue to be free ad infinitum, data is charged at a price of Rs 50 per GB.
This was a very tempting offer, impossible to resist by existing customers with incumbent players. Fearing migration, the latter reduced their tariff plans drastically to match that of Reliance Jio. Post revision, in India, tariff has plummeted to less than one dollar (compare this with $30 in Japan; $18 in Korea; $15 in the UK, China and Germany; $10 in the US; $7.5 in Spain; six dollar in South Africa).
At such rock bottom tariff, almost all companies are now bleeding. And, Reliance Jio sees nothing wrong in its pricing strategy, which it argues, is in sync with the Government’s grandiose plans for pan-India broadband connectivity. Low tariff helps increase in coverage, especially for the poor. It sounds appealing and the stance has been endorsed by the telecom minister too. But the argument is fallacious.
Public interest is not served merely by keeping the price low. It is equally important that companies provide services on a ‘sustainable’ basis and maintain ‘quality’. Already, call drop is a major issue. This because telecom companies are not spending enough on building infrastructure.
Just imagine, if banks were to insist on timely payment of their dues and so does the Government, with regard to license fee, spectrum charges etc. Service providers are bound to collapse. With this, access of mobile services to public will be denied. Free voice call (albeit for life time) and less than a dollar data plan will become a pipedream.
But companies know that the political establishment won’t let this happen. So, they have petitioned for relief and even banks have lined up in support due to fear of loans turning into non-performing assets. Government has promptly set up an inter-ministerial panel which is currently having deliberations with stakeholders.
Considering the far-reaching ramifications and big stakes involved, the Modi dispensation will be tempted to grant relief and will also force the banks to take a hair-cut. But this will be unfair to the tax payer. The problem is solely created by service providers. There could not be a more brazen example of ‘predatory’ pricing with the sole aim of snatching away customers from incumbent players. When a service is priced much below cost, what else is it?
Ideally, the Telecom Regulatory Authority of India should have nipped the problem in the bud. But it saw nothing wrong in this highly objectionable practice. Still worse, the Competition Commission of India, on a petition filed by incumbent operators, held that this is not a case of predatory pricing. It sees nothing wrong in the Reliance group using resources from other segments to cross-subsidise operations in telecom. It opined that incumbent players are well established and capable of standing up to the new player.
If everything is so hunky-dory and service providers could have slugged it out then why are service providers bleeding? Why are they seeking help from the Government? Why are the banks worried about loans? If a wrong has been done, the only way forward is to undo it. A correction process can be initiated only when companies recognise that ‘there are no free lunches’. Services cannot be likened to Government supplying food at one rupee per kg wherein excess of cost over is met as subsidy from the budget (though, this too is not desirable in view of huge fiscal ramifications).
Telecom companies must avoid becoming a captive of this mindset. They should recognise that theirs are private businesses and they have to sustain on their own. The Government must not abet them by endorsing their actions. Team Modi should muster courage of saying to ‘no’ to requested concessions (if granted, these will make the exchequer and banks bleed); instead, it should goad them to revise data tariff to reasonable level and shun the practice of free voice call.
(The writer has a PhD in economics from JNU, Delhi)
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