India needs to come up with newer and bolder solutions to save the telecom sector

SEP 12, 2021


Gross revenue in the sector reached ?2.74 lakh crore in 2020-21, a CAGR of 2.4% during 2018-21. However, revenues are not witnessing a proportional increase along with usage. Debt also reached ?3.85 lakh crore in end-March 2021, 1.4 times the sector revenue. There is a clear need to improve telecom’s viability.

Indian telecom is playing a critical role in building the country’s digital infrastructure. In end-June, there were 768 million mobile broadband subscribers, almost double the number of subscribers three years ago. Mobile data traffic increased at a compound annual growth rate (CAGR) of 44% during 2018-21. This has largely driven the proliferation of content services, ecommerce, ride-hailing, hyper-local, e-education and e-healthcare services. Operators have a crucial role in supporting this ecosystem, at a time when the internet is reinventing business models across industries in a post-Covid-19 world.

Gross revenue in the sector reached ?2.74 lakh crore in 2020-21, a CAGR of 2.4% during 2018-21. However, revenues are not witnessing a proportional increase along with usage. Debt also reached ?3.85 lakh crore in end-March 2021, 1.4 times the sector revenue. There is a clear need to improve telecom’s viability.

Taking the 5G Call Globally, operators have accelerated 5G investments, with 5G capital expenditure expected to reach $106 billion (?7.8 lakh crore) in 2021. By mid-August 2021, 176 operators have already launched commercial 5G services in about 72 countries/territories.

For successful 5G implementation in India, operators need to form strategic partnership with leading players in other industries. Ability of GoI to fund the 5G investment appetite will be crucial. GoI needs to incentivise operators and other stakeholders to come up with new use cases. A viable cost structure is necessary for 5G-based innovation and to foray into adjacent market proposition. Telecom needs enough leverage to get the necessary investment for 5G.

Mobile average revenue per user (Arpu) in India is substantially low at $1.50, ?110.27 (Russia $4.40, ?323.46; Brazil $4.90, ?360.21; South Africa $5.50, ?404.32; Malaysia $10.80, ?793.94). This is largely attributable to mobile data prices being one of the lowest globally at $0.10, ?7.35, per GB (Russia $0.30, ?22.05; Malaysia $0.60, ?44.11; Brazil $1.60, ?117.62; South Africa $1.70, ?124.97). As a result, the sector’s return on invested capital (RoIC) is lower than other countries. Substantial tariff hike is required to double Arpu in the next 1-1.5 years for new investments and to strengthen balance sheets of operators. All stakeholders need to collaborate for this.

Regulatory levies in India are some of the highest in the world. About 30% of revenue of operators is spent on taxes and levies. In most countries, the telecom licence fee is negligible, and a one-time upfront payment is required. GoI needs to substantially reduce licence fees. Alternatively, a one-off licence fee can be considered like in other countries.

The definition of adjusted gross revenue (AGR) also needs to be amended, so that revenue is payable only on licensed telecom services. Every effort should be made to follow the principles of the Supreme Court judgment on AGR. If there are any calculation errors in determining the outstanding AGR dues, opportunities should be given to operators to clarify or rectify them.

The New Telecom Policy 1999 (NTP-99) envisaged offering universal service as one of its primary objectives. Universal Service Obligation (USO) for rural and remote areas would be undertaken by all fixed service providers who shall be reimbursed from the USO Fund (USOF). Currently, about 49% of USOF (?58,200 crore) is potentially available. The USOF levy in India is substantially higher at 5% of AGR (Bangladesh 1%; Turkey 1%; Russia 1.2%; Indonesia 1.25%). This contribution should be immediately reduced until the existing USOF is utilised.

Full Spectrum of Rates Also, in most countries, spectrum usage charges (SUC) is levied through an upfront payment in auctions without any ongoing charges, as opposed to 3% of AGR in India. At times, SUC is incurred to cover only the administrative cost of managing the spectrum. Since spectrum is acquired through market-determined prices in auction, SUC should be removed or reduced. On top of this, operators are paying a higher interest rate on borrowings for spectrum. Interest rate for 2014-15 spectrum borrowings was to the tune of 10%, and for 2016 at 9.3%, as compared to current market rate of 7%. Historical borrowing rates should be aligned with current rates. GoI’s 2-year moratorium on spectrum payments for 2020-21 and 2021-22 was welcome. This should be extended by 3-4 years to help unlock capital for network quality improvement and 5G deployment.

Today, telecom is an essential service. Lowering of GST rate of 18% should be considered. Further, working capital woes of operators — arising on account of accumulation of GST credits of about ?35,000 crore due to capital-intensive investments and levy of GST on procurement of services from GoI over the last few years — should be immediately addressed. An effective measure is to notify GST exemption on the licence fee and spectrum charges paid to GoI, presently taxed at 18% and paid by operators under the reverse-charge mechanism. This relief will be a big boon to the sector as it will reduce the GST credit accumulation of about ?3,000 crore each year. Another measure can be to introduce time-bound schemes to allow refunds of accumulated GST credits for the next 3-4 years.

An optimum number of operators to balance competition and share of revenue pie should be in place. A minimum of 3-4 major operators are required for inclusive growth in the sector (China, 3; Indonesia, 3; US, 3; Brazil, 4; Russia, 4).We should think of newer and bolder ways of doing things. For instance, devising a revenue-share mechanism for spectrum allocation could be considered. With services growth in the future, there will be a proportional revenue increase. A pure revenue-share mechanism has worked well during 2002-10. It is important to create an enabling self-sustaining ecosystem for all stakeholders to thrive.

The sector needs immediate correction — either through regulatory intervention or a market-based approach — to bolster financials and long-term growth. Time is of the essence, and measures need to come out immediately, with a phased plan of action in place to attract more capital and enhance long-term sustainability.

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