?24,700 crore waiver for Vodafone Idea-what does it mean?

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In today’s edition of The Daily Brief:

• Union cabinet approves Vodafone's bank guarantee issue
• Trump doesn't want to do business with Mexico and Canada?

Union cabinet approves Vodafone's bank guarantee issue

The Indian government has just given Vodafone Idea a much-needed boost. The Union Cabinet has decided to waive the requirement for telecom companies to provide bank guarantees (BGs) for spectrum purchased before 2022. This decision is expected to free up over ?24,700 crore for Vodafone Idea alone, offering much-needed relief to a company struggling to stay afloat.

But what does this actually mean?

A bank guarantee is basically a promise a bank makes to pay someone—in this case, the government—if the telecom company fails to pay what it owes. When spectrum is auctioned, telecom companies often don’t have to pay the full amount upfront. They can defer payments, but to do so, they’ve traditionally had to provide a bank guarantee. Banks don’t offer this service for free, though. Telecom companies like Vodafone Idea had to set aside a lot of cash or provide collateral to get these guarantees. This tied up money that could have been used for other important things, like improving networks or paying off debts.

With this waiver, Vodafone Idea can now use those funds for urgent needs, such as upgrading its infrastructure or managing its massive debt.

The government knows how much these bank guarantees weigh on telecom companies. Back in 2021, the requirement for guarantees on spectrum bought after that year was removed. However, the change only applied to new purchases from 2022 onward. Companies were still stuck providing guarantees for older deals. After ongoing requests from telecom operators and the Cellular Operators Association of India (COAI), the government has extended this relief to cover older spectrum purchases.

The move is expected to ease financial stress in the telecom sector and encourage more investment in network infrastructure.

Vodafone Idea’s financial troubles have been making headlines for years. The company has been battling mounting debt, losing subscribers, and watching its market share shrink. But what’s been holding the company back for so long?

To understand the root of Vodafone Idea’s struggles, we need to talk about spectrum—the invisible backbone of telecom services. Think about it: any wireless communication, whether it’s radio, Wi-Fi, Bluetooth, or mobile phones, relies on electromagnetic waves. “Spectrum” refers to a specific set of frequencies within these waves that telecom companies use to provide wireless services. The government auctions off these frequencies and telecom companies spend billions bidding for them.

When a company like Vodafone Idea buys spectrum, it typically pays for it in installments spread out over many years. This creates long-term debt obligations. Over time, these payments, along with the interest that builds up, can become a heavy financial burden. For Vodafone Idea, the cost of spectrum has been a major factor in its massive debt crisis, which now stands at over ?2 lakh crore.

It’s a sharp fall for a company that was once a giant in the telecom industry. Formed in 2018 by merging Vodafone India and Idea Cellular, it was, for a time, India’s largest telecom operator, serving over 408 million subscribers and holding a 35% market share.

Source: Tijori Finance

The merger wasn’t born out of convenience—it was a move for survival.

Although Vodafone Idea was a giant in the telecom industry, this giant had been battling a serious problem for years. In 2012, the government introduced a retroactive tax law specifically targeting Vodafone’s 2007 acquisition of Hutch. As a result, Vodafone was slapped with a massive tax bill of ?22,000 crore.

On top of that, both Vodafone and Idea had been in the telecom game for a long time, relying on old equipment that was expensive to maintain. Financial troubles meant they couldn’t afford to modernize their infrastructure, leaving them lagging behind technologically.

Then came 2016, when Reliance Jio stormed into the industry and completely shook things up. Jio offered free voice calls and ultra-cheap data plans, forcing competitors like Vodafone and Idea to drastically lower their prices. Profit margins shrank, and the pressure only grew.

The merger created a telecom giant, but from the very beginning, it was a giant with serious disadvantages. The newly formed company inherited a crushing debt of over ?1.2 lakh crore. Struggling to compete, it faced subscriber losses, poor network quality, and a lack of funds to roll out 4G and 5G services.

Another major blow pushed Vodafone Idea closer to collapse—this time over Adjusted Gross Revenues (AGR). AGR is a way the government calculates how much telecom companies owe in license fees and spectrum usage charges. Essentially, the government takes a cut of the revenues companies earn in exchange for their telecom licenses.

The Dispute: Telecom operators argued that AGR should only include revenue from core telecom services—not all the money they make. After all, the license was for providing telecom services, not other activities. The government, however, included non-core revenue, like earnings from interest and asset sales, in its calculations.

The Verdict: In October 2019, the Supreme Court ruled in favor of the government. This left telecom operators with a massive combined liability of ?92,000 crore. For Vodafone Idea, this translated into over ?58,000 crore in dues.

The Fallout: Already drowning in debt, Vodafone Idea struggled to make these payments, pushing the company closer to financial collapse.

By 2021, Vodafone Idea’s debt had soared to ?1.8 lakh crore, and its subscriber base had shrunk to just 253 million. Its ARPU (Average Revenue Per User)—a key measure of profitability—was among the lowest in the industry, lagging far behind Jio and Airtel.

The company’s stock price tells the story of just how far it has fallen—a stark reflection of its ongoing struggles.

The telecom industry was quickly turning into a two-player game dominated by Jio and Airtel. That’s when the government decided to step in:

Moratoriums: In 2021, the government announced a four-year moratorium on AGR and spectrum payments, giving telecom companies some breathing room.

Equity Conversion: In 2022, Vodafone Idea converted ?16,000 crore of interest dues into equity, making the government its largest shareholder with a 36% stake.

Despite these efforts, Vodafone Idea’s financial situation has remained shaky. Banks have been hesitant to lend due to the company’s weak financial health.

The recent waiver on bank guarantees is a big relief, but it’s not a complete solution. Vodafone Idea still faces major hurdles:

• The company’s total liabilities are over ?2 lakh crore.
• It’s continuing to lose market share to Jio and Airtel.
• Most critically, it’s falling behind in the race to roll out 5G infrastructure, which is essential for staying competitive in the long term.

To truly turn things around, Vodafone Idea will need more than relief measures—it will need something extraordinary to change its fortunes.

Trump doesn't want to do business with Mexico and Canada?

Donald Trump is back in the spotlight, this time for his fondness for tariffs. In a recent post on Truth Social, he announced plans to impose hefty tariffs on goods from Mexico, Canada, and China on his first day as President, January 20th.

Together, these three countries account for more than a third of all U.S. trade, with annual commerce exceeding $1.8 trillion and supporting roughly 17 million jobs.

Source: Statista

Trump’s ongoing trade war with China isn’t exactly news. But including Mexico and Canada—two of the U.S.’s closest neighbors and biggest trading partners—was a bit of a shock. Both countries share strong trade ties with the U.S., and their economic interests are largely aligned.

In his post, Trump claimed these tariffs aim to stop immigration and drug trafficking into the U.S. But to understand why his threats are making markets so jittery, we need to look at what’s really at stake: one of the world’s largest and most integrated trading blocs.

Here’s some context.

The U.S., Mexico, and Canada have been connected by free trade agreements for decades. These deals allow goods to move across borders without tariffs and with less red tape. It all started in 1992 with the North American Free Trade Agreement (NAFTA). Then in 2020, Trump replaced NAFTA with the U.S.-Mexico-Canada Agreement (USMCA), one of the signature moves of his presidency.

These agreements didn’t just cut tariffs—they made North America a highly integrated manufacturing hub, where supply chains weave seamlessly across all three countries. Businesses have adapted to this model completely, with significant investments flowing freely between the U.S., Mexico, and Canada.

Source: Brookings

Companies in industries like auto, textiles, and energy rely heavily on duty-free access to all three North American markets. Take the auto industry, for example—over half of the cars made in Canada are built by American companies using parts sourced from both the U.S. and Mexico.

Mexico, in particular, has thrived under this arrangement. As of late 2023, it became the U.S.’s largest trading partner, holding a 15.8% market share. How did that happen? Part of it was timing and geography—Mexico was in the right place at the right time. But there’s more to the story.

Source: Brookings

Mexico’s rise isn’t just luck. It’s also tied to two major shifts in global trade: Trump’s earlier trade war with China and the broader “China+1” strategy that emerged during the COVID-19 pandemic.

Let’s break it down:

A decade ago, China was America’s biggest trading partner. But in recent years, exporting from China to the U.S. has become much less appealing.

• Trump’s tariffs and other restrictions made Chinese goods more expensive for American buyers.
• The COVID-19 pandemic exposed the risks of relying on long, complicated global supply chains, sparking a shift toward “nearshoring”—sourcing goods from nearby countries.
• Political tensions between the U.S. and China have only made their trade relationship more uncertain.

At the same time, Mexico offered what businesses were looking for: a large labor pool and proximity to the U.S. It became the perfect alternative to China.

Ironically, Mexico’s new role as an economic powerhouse is, in part, a legacy of Trump’s first term. His trade policies unintentionally set the stage for Mexico’s growing importance in U.S. trade.

Here’s where things get complicated. Mexico hasn’t just replaced China as a manufacturing hub—it’s also become a backdoor for Chinese goods to enter the U.S. while avoiding tariffs.

Here’s how it works: many Chinese companies have set up operations in Mexico. They import parts from China, assemble them into finished products in Mexico, and then label them as “Made in Mexico.” These products can then be exported to the U.S. tariff-free under the USMCA rules.

The data tells the story:

• Container trade from China to Mexico jumped 26.2% between January and July 2024, following a 33% rise in 2023.

Source: CNBC

• At the same time, imports from Mexico to the U.S. have surged over 20% annually from 2020 to mid-2024, while imports directly from China have dropped from 17.7% to 13.5% of total U.S. trade.

This isn’t just about smart logistics—it’s about cutting costs. Take Chinese electric vehicle (EV) maker BYD, for example. By exporting EVs from its Mexico facility to the U.S., it avoids steep tariffs and even qualifies for a $7,500 tax credit under the Inflation Reduction Act (IRA). If BYD were to ship the same cars directly from China, they’d face a 100% tariff, instantly doubling the price.

Trump’s tough talk on tariffs isn’t new, and Mexico has been in his crosshairs before. Remember the 2019 threat to impose a 5% tariff on all Mexican imports over immigration issues? Or his campaign promise to slap a 100% tariff on Mexican-made cars? Now that he’s back in the presidency, the stakes are much higher.

For starters, Trump’s proposed tariffs could violate the very agreement he once called a key achievement—the USMCA.

Imposing tariffs on Mexican goods could tear apart supply chains that have taken years to build. Even Tesla’s Elon Musk reportedly paused investments in Mexico due to uncertainty around these potential tariffs.

Canada wouldn’t be spared either. Industries like aluminum, oil, and uranium are tightly linked to U.S. supply chains. The U.S. auto industry, for example, depends on Canadian energy, metals, and critical minerals. High tariffs could severely disrupt these industries, making it even harder for the U.S. to compete in its ongoing trade battles with China.

Economically, breaking apart North American supply chains would force companies to scramble for new suppliers, driving up costs for businesses and consumers alike. The result? A long period of confusion and disruption as industries try to adjust to this new reality.

That said, it’s possible Trump doesn’t intend to follow through on these threats. He might just be looking for leverage.

Here’s why: a review of the USMCA is scheduled for 2026. The U.S., Mexico, and Canada will decide whether to renew, change, or scrap the agreement altogether. Trump’s tariff threats could be a way to strengthen his position ahead of those negotiations.

Still, the risk of this strategy—throwing the North American economy into chaos—is massive. Whether it’s a negotiating tactic or a real plan, the uncertainty alone could have serious consequences.

Tidbits:

1. Hindustan Unilever Ltd. (HUL) is planning to spin off its ice cream division, which includes popular brands like Kwality Walls and Magnum, into a separate, publicly listed company. This move is aimed at tapping into India’s growing ice cream market and boosting shareholder value after HUL missed profit targets for four straight quarters.
2. Bribery allegations against the Adani Group have led to paused investments, falling stock prices, and canceled international deals. While GQG Partners continues to support the group, the increasing allegations are taking a toll on Adani’s financial health and reputation.
3. Gold sales have jumped 40% year-on-year, thanks to jewellers like Tanishq teaming up with quick-commerce platforms to offer 10-minute deliveries. The trend is being driven by small gold coins, festive demand, and rising interest in instant luxury shopping amid economic uncertainty.
4. The Cabinet has approved the ?1,435 crore PAN 2.0 Project, allowing existing PAN cardholders to upgrade to QR-enabled cards for free. This initiative is part of the Digital India vision, designed to make processes simpler, paperless, and more efficient while improving grievance redressal for taxpayers.

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This post was first published on Substack.