High priced restrictive entry, distorted regulations make India's telecom sector unattractive

This article first appeared in the Economic Times on 17 May 2020.

In the wake of COVID-19, the PM has emphasized the opportunity to attract FDI by transforming the business environment and urged policy makers to ease the way business is done. The current configuration of broken supply chains and the problem arising from dominance of China in many sectors provide a space where investments in India look attractive.

The obvious question that arises is why not take this opportunity to review the policy and regulation for domestic players ? The need to focus on sectors like telecom that are the bedrock of the knowledge and service economy is critical. This is a sector where Indian businesses have scale (each of the private operator has more than 325 mn subscribers.) and yet only a single private operator of the three seems to be doing well. In no other part of the world, the sector as a whole is under stress. And remember this stress was there long before COVID -19.

This situation was caused not only by the entry of a new operator Reliance Jio, with an all IP network designed and optimized for data usage and a business model optimized for data, but also because of legacy policy and regulatory issues that affected the two older operators, Bharti Airtel and Vodafone Idea more. It is a fact that businesses must bear the consequences of disruptive challenges from new entrants with new technologies and business models. But when policy and regulatory framework cause sectoral disruptions, then these need to be rectified. This is more important in core infrastructure sectors such as telecom.

Given the rapid pace of technological developments and their effect on the economy, the telecom sector, more than any other sector, needs to have a policies that facilitate growth and are in coherence with global trends. The following will illustrate how much catching up India has to do.

A recent news item highlighted that China has installed a 5G network on Mt Everest not only to facilitate communications but also to gather data for research. When we also consider that in many countries, operators have not only been allocated spectrum for 5G networks, they have initiated deployments of such networks, the contrast with India is obvious. In India, 4G coverage is patchy, including in metros. With so much financial stress in the sector, 5G spectrum auctions do not invite a lot of excitement in the two private operators and auctions for 5G are likely to be delayed yet again.

A large part of the financial distress was caused by the penalty and interest payments on license fee and Spectrum Usage Charges (SUC) that are linked to AGR and high spectrum prices paid in 2016. While operators were responsible for devising appropriate mechanisms for managing the outflows due to the AGR issues, the question to ask is, should the DoT have come out with license conditions that are onerous? Just because it has the right and authority to do so, should it do so? Should it take the operators nearly 15 years to seek a review of the license conditions, as the matter goes between TRAI, TDSAT, DoT and the Supreme Court? Should DoT, as the policy maker be filing cases against TRAI and TDSAT? Should these arms of the government not be working in coherence?

Besides these structural issues, the policy framework has deeply embedded anomalies arising out of legacy issues and the orientation of policy makers is to not only continue with them but twist themselves in Gordian knots around them. For example, the SUC was imposed prior to 2012 when the spectrum and service licenses were bundled. But despite unbundling of the latter, this charge continues. This is despite several studies and representations seeking its revocations. A recent TRAI consultation paper (SUC for spectrum trading, April, 2020) highlights, how even regulatory agencies spend so much time in refining such distortions, rather than advocate for its removal.

Even when DoT proposes forward looking market instruments, such as spectrum trading, it distorts the underlying principle of allowing the market to function by over-specification of regulatory parameters such as units in which spectrum may be traded, geographic limits and imposing liability of past dues on the buyer (even when several SC judgments in other sectors have ruled otherwise). Regulation of new technologies and new instruments, it is necessary to start on a clean slate based on certain principles of openness and fairness rather than on legacy parameters.

Should Indian businesses not have a right to a streamlined, forward looking policy environment? Examples from the telecom sector merely highlight a deep malaise in our decision makers that is more broadly prevalent. Should the accountability of the executive not be based on outcomes for the sector such as investments generated and quality of service vis-a- vis global benchmarks? (Despite all the talk about growth of mobile Internet, we continue to have among the lowest upload and download Internet speeds globally). Another benchmark could be how much spectrum was DoT able to make available for commercial use? Timely and appropriately priced spectrum and removal of distortions exemplified above will see these parameters go up and there will be consequent increase in service and corporate tax for the government. High priced restrictive entry and distorted regulation make the sector very unattractive.

Even if businesses wish to move away from China, there are alternatives besides India available to them. That is why, streamlining our policy environment in all sectors to enable Indian enterprises to flourish should be the first step in attracting FDI.

(The author is Principal Advisor at Broadband Forum of India)