Update : Telecom Sector in India

Context:

• The Supreme Court dismissed pleas, including those of Bharti Airtel Ltd and Vodafone Idea Ltd, to review its earlier judgement that had asked telecom operators to pay more than Rs. 1 trillion of adjusted gross revenue (AGR) dues to the government.
• The operators are evaluating a further course of action including curative petition to challenge the review ruling and approaching the Department of Telecommunications (DoT) to seek a relief on the payment deadline.

Background

• The tussle over the definition of AGR had started when operators migrated to a new revenue-sharing system offered by the government in 1999 under which they agreed to share a certain percentage of revenue with the government.
• Bharti Airtel and other telecom operators had challenged the way the department of telecommunications (DoT) calculated AGR, based on which they pay licence fees and spectrum charges. 
• License and spectrum charges are calculated at 8% and 3-5% of AGR, respectively.
• The 24 October court order upheld the government’s definition of revenue, which defined AGR as all revenues of a license holder including those from non-core telecom operations such as rent, dividend and interest income.
• The October verdict also made non-telecom companies holding licenses for internal communications and signalling liable to pay license fees on their entire revenue, even if they do not offer consumer-facing telecom services.

Why is AGR important?

• The definition of AGR has been under litigation for 14 years. While telecom companies argued that it should comprise revenue from telecom services, the DoT’s stand was that the AGR should include all revenue earned by an operator, including that from non-core telecom operations.
• The AGR directly impacts the outgo from the pockets of telcos to the DoT as it is used to calculate the levies payable by operators. 
• Currently, telecom operators pay 8% of the AGR as license fee, while spectrum usage charges (SUC) vary between 3-5% of AGR.

Concerns/impacts 

• Further stress in the sector: This order has added to the stress of the telecom industry is reeling under a debt of over Rs. 4 lakh crore and has been seeking a relief package from the government.
• Heavy taxes: they pay 18% goods and services tax (GST) and 3-5% of the adjusted gross revenue as spectrum usage charges and 8% as license fee to the government.
• An erosion of value and further consolidation of a three-player industry: The telecom sector is moving towards an oligopolistic structure, with three players accounting for more than 90 per cent market share
• A consolidated market is likely to be less conducive for future spectrum auctions – in recent years, supply of spectrum has been higher than demand, and as per latest available data, 30 per cent of total spectrum put up for auction remains unsold. Thus, a consolidated market could potentially put downward pressure on both spectrum demand and spectrum pricing, which would negatively impact the government’s revenues,
• Hampers investment: It will lead to companies further shying away from investing in operational infrastructure, which could further worsen quality of services for consumers. Also rolling out of 5G services will be hit.
• Digital mission: The money now required to pay punitive interest, penalty and interest on penalty which forms nearly 75 per cent of AGR (adjusted gross revenues) dues would have better served the digital mission of the country.

Alternatives for Telecoms: To settle the dues companies owe to the DoT, they have relied on funds raised from the market, proceeds from divestment of assets and a relief provided by the government in form of a two-year moratorium on past spectrum dues.

Current scenario of the Indian telecom sector:

• Tele-density (defined as the number of telephone connections for every 100 individuals) in India, increased from 18.3 per cent in FY07 to 92.84 per cent in FY18. 
• India holds the distinction of being the largest consumer of mobile data globally.
• Indian telecom sector’s gross revenue grew from US$ 32.05 billion in FY08 to US$ 33.97 billion in FY19.

Challenges facing Indian telecom sector are:

• Financial Health of the Sector: Gross revenue has dropped by 15% to 20% for the year 2017-18 over the preceding year for the incumbents and overall sector revenue has dropped. Also, there is drop in voice and data revenue per user.
• Rapidly Falling ARPU (Average Revenue Per User): 
• But the ARPU decline now is sharp and steady, which, combined with falling profits and in some cases serious losses, is prompting the Indian telecom industry to look at consolidation as the only way to boost revenues. 
• Delays in Roll Out of Innovative Products and Services: Substantial delays in roll out of data based products and services are hampering the progress of telecom sectors. 
• This is primarily due to the non-conducive environment resulting out of government policies and regulations. 

1. Low Broad Band Penetration: As per white paper presented on broadband at the last ITU (International Telecommunication Union), broadband penetration in India is only 7%.
2. Limited Spectrum Availability: Available spectrum at an exorbitant cost is less than 40% as compared to European nations and 50% as compared to China. 
3. High competition and tariff war: Competition heating up post entry of Reliance Jio. Other telecom players have to drop in tariff rates both for voice and data
4. Lack of Telecom Infrastructure in Semi-rural and Rural areas: Service providers have to incur huge initial fixed cost to enter semi-rural and rural areas. 
5. Poor fixed line penetration: India has very little penetration of fixed line in its network whereas, most of the developed countries have a very high penetration of fixed lines
6. High Right-of-Way (ROW) cost: Sometimes, states governments charge a huge amount for permitting the laying of fibre etc.
7. Lack of trained personnel to operate and maintain the cellular infrastructure.
8. Delays in Roll Out of Innovative Products and Services: Substantial delays in roll out of data-based products and services are hampering the progress of telecom sectors. This is primarily due to the non-conducive environment resulting out of government policies and regulations.
9. Low Broad Band Penetration: Low broadband penetration in the country is a matter of concern and the government needs to do a lot more work in the field to go up in the global ladder.
10. Over the top services: Over the Top (OTT) applications such as WhatsApp, OLA, Viber and so on do not need permission or a pact with a telecommunications company. This hampers the revenue of telecommunication service provider.
11. License fee: The license fee of eight per cent of the Adjusted Gross Revenue including five per cent as Universal Service Levy (USL) is one of the highest in the world.
12. Substantial Investments in 4G Infrastructure: Telecom operators have already incurred huge capex to roll out 4G infrastructure. Rolling out of 4G infrastructure is critical for higher Internet speed in India. It is estimated that 90% of the users in India will access the Internet through mobile by 2020. 

Govt. initiatives:

• Department of Telecommunication launched ‘Tarang Sanchar’ - a web portal sharing information on mobile towers and EMF Emission Compliances.
• Six-fold increase in Government spending on telecommunications infrastructure and services in the country.
• Country-wide Optical Fibre Cable (OFC) coverage doubled – from 700,000 km to 1.4 million km.
• The Department of Information Technology intends to set up over 1 million internet-enabled common service centres across India as per the National e-Governance Plan.
• FDI cap in the telecom sector It has been increased to 100 per cent from 74 per cent; out of 100 per cent, 49 per cent will be done through automatic route and the rest will be done through the FIPB approval route.
• FDI of up to 100 per cent is permitted for infrastructure providers offering dark fibre, electronic mail and voice mail.
• The Government of India has introduced Digital India programme under which all the sectors such as healthcare, retail, etc. will be connected through internet.

Way forward:

Need for smart villages: Penetration of rural markets (72% of population staying in rural areas) will be the key growth driver.

Smart cities: The Indian Government is planning to develop 100 smart city projects, where IoT would play a vital role in development of those cities.

5G: 5G, which will allow operators to move beyond connectivity and collaborate across sectors such as manufacturing, finance, transport, retail and health to deliver new and personalized services. Opportunities related to IoT, M2M, and augmented and virtual reality (AR-VR) will create new revenue streams 

Infrastructure Sharing: By sharing infrastructure, operators can optimize their capex, and focus on providing new and innovative services to their subscribers.

Availability of Affordable Smartphones and Lower Tariff Rates: This would increase tele penetration in rural areas.

Curb on predatory pricing: the government should fix a minimum price to save the industry from price war

Lower License fee: The license fee of eight per cent of the Adjusted Gross Revenue including five per cent as Universal Service Levy (USL) is one of the highest in the world.

Reduce reserve price for spectrum auction: In the past, some of the operators participated recklessly in these auctions leading to exaggerated prices — much above their true valuations. 

Optical fibre: The government should increase the network area through optical fibre instead of copper which is expensive. This is necessary to ensure last mile connectivity.

R&D: The government should spend large on R&D and create an environment that makes India capable of manufacturing and even exporting hardware components like mobile handsets, CCTV Cameras, touch screen monitors etc.

Introduce new and efficient technologies such as M2M and cloud computing.