India's government is working on a rescue package for its beleaguered service providers. That cannot come soon enough.

Gagandeep Kaur, Contributing Editor

November 20, 2019

4 Min Read
Indian Telecom Industry Still in a Tough Spot

The Indian telecom industry is in disarray after the recent court judgment about adjusted gross revenue (AGR), which demands $13.9 billion in additional payments by the country's debt-ridden service providers. (See India court decision a massive blow for telcos.)

Having fought operators on the AGR issue, India's government is now working on a relief package to help the industry, which is facing challenges on multiple fronts. The package could involve a reduction in license fees, from today's rate of 8% of AGR, a waiver of penalties on the past dues, reduced interest rates and a moratorium on dues.

The AGR dispute dates back 15 years. At issue is whether revenue from non-telecom activities should form part of AGR under telecom license conditions. Operators in the private sector have argued it should not, while the government has taken the opposite view. After a court ruling that took the government's side, operators face crippling payments in penalties, licenses fees and interest.

"That things have gone from bad to worse for the telecom sector in the past few years is a well-known fact," says Deepak Kumar, the founder analyst at B&M Nxt. "The government has been quite aware of the dire financial situation that even the leading telcos are facing today. The recent relief announcement shows that policymakers also realize that the players have got pushed to the edge of their existence, and any further exits could prove detrimental to the health of the sector itself."

What may have prompted the relief plan is government fear that Vodafone Idea might quit India. The AGR ruling has been especially harsh on that operator, whose entire cash reserves of $2.9 billion could be wiped out by AGR payments.

Although Vodafone has denied it plans to leave India, it is clearly in a bad spot, the latest results showed. Vodafone Group has been reluctant to inject more funds into the Indian venture, while media reports suggest that Vodafone's partner Idea, a part of Aditya Birla Group, is similarly unenthusiastic about providing additional funds. Without a government rescue plan, the company might be forced to cease operations. (See Vodafone Registers Slight Sales Growth as Debts & Losses Pile Up.)

The exit of a global service provider will reflect extremely poorly on India, especially given the earlier departures of service providers including Telenor, MTS and Etisalat. None of those foreign telcos were able to survive and Vodafone continues to be an exception. Indian authorities, moreover, are eager to project the image of a growing economy that attracts foreign investment. The track record of foreign telcos is hardly inspiring and Vodafone's exit may have a far-reaching impact.

"Any such exit could have negative repercussions for the economy as well, not just in terms of the direct impact but also in terms of investor sentiment," says Kumar. "The relief measures mulled by the government should be seen in this light and are positive signs indeed."

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Vodafone's departure would also deprive the government of spectrum and license fees from a major player. Authorities have already witnessed a significant drop in their revenues from these fees as service providers have quit the market or been swallowed up by rivals. In 2016, the disruptive entry of Reliance Jio, now one of India's biggest operators, triggered a spate of mergers and acquisitions that reduced the number of players in each service area to just four, from between 12 and 14 previously. If Vodafone leaves the market, there will be only two private-sector players and a government-owned service provider per service area.

The relief package may help to reduce debt, but profitability will remain elusive if the industry does not rectify the issue of rock-bottom prices. With their low average revenue per user, Indian operators lack the means to modernize or upgrade networks, or even to cover operating costs. That has had an impact on the government by limiting what operators can spend on frequency licenses. Indeed, operators have been complaining about high spectrum costs in an upcoming 5G auction. And telco debts could ultimately have an impact on the banking sector, which is facing several crises in the country.

In the meantime, RJio has been arguing that no relief should be offered to its competitors, Bharti Airtel and Vodafone Idea. "Any reduction in the financial liability of the licensees arising from the judgment of the court would in effect be rewarding them for their conduct in initiating frivolous and vexatious proceedings to delay payment of their just dues... any proposal for waiver will be considered as a loss to the public exchequer and contrary to the Supreme Court judgment," it said in a letter to the government earlier this month.

– Gagandeep Kaur, contributing editor, special to Light Reading

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About the Author(s)

Gagandeep Kaur

Contributing Editor

With more than a decade of experience, Gagandeep Kaur Sodhi has worked for the most prominent Indian communications industry publications including Dataquest, Business Standard, The Times of India, and Voice&Data, as well as for Light Reading. Delhi-based Kaur, who has knowledge of and covers a broad range of telecom industry developments, regularly interacts with the senior management of companies in India's telecom sector and has been directly responsible for delegate and speaker acquisition for prominent events such as Mobile Broadband Summit, 4G World India, and Next Generation Packet Transport Network.

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