Despite the Supreme Court judgment and orders, and several meetings between telecom industry players and ministers, there is no clarity on how the adjusted gross revenue (AGR) situation will pan out for the sector. Indeed, it is still not clear just how much Bharti Airtel and Vodafone Idea Limited (VIL) will be expected to pay on this account, and it is also not clear whether non-telecom PSUs holding telecom licences will be liable to pay AGR.
It is clear, however, that VIL cannot pay up unless the amount is reduced drastically, or much more flexible payment schedules are allowed. Airtel can pay up, but it will then lack the financial strength to invest in creating more capacity. Even Reliance Jio, which is far better off financially, is cash-negative and not contemplating further rounds of capex.
If VIL exits the Indian market, it will leave behind over 300 million subscribers, including a large chunk of 2G users. A private sector duopoly of Airtel and Jio would then have to absorb these customers. Together, they lack the capacity to service such a large number of subscribers on their current networks. They would inevitably need to acquire VIL’s network and spectrum, which means higher capex and opex for both. Utilising those assets would also require policymakers to change the base prices and rules for spectrum licensing. Incidentally, Jio doesn’t have a 2G network, so it would have to persuade low-end VIL customers to move to 4G.
The duopoly would lack both the resources and the inclination to even look at 5G. This means that 5G network roll-outs would be indefinitely delayed, putting India’s telecom sector years behind the rest of the world.
The acquisition of a large number of customers should eventually be good for the two survivors in the sector. However, a duopoly may not be good for the economy. In the first instance, there would be big layoffs if a telecom operator exited the market. That would exacerbate the current slowdown in economic activity.
In the longer term, a duopoly would mean less competition, and little incentive to deliver higher quality of service. Given that Airtel and Jio would have to increase capex and opex (apart from Airtel’s payout of AGR), they will also surely raise tariffs.
The experiences of the past 15-20 years show that telecom services are highly price-elastic. Data usage and consumption of voice-minutes both shot up dramatically as tariffs headed down. It is important to note that VIL services a large number of low-end 2G customers, who are highly price-sensitive. Those customers will port out to the duopoly if VIL shuts down.
If tariffs are raised, data consumption and voice minutes might well decline. It is quite possible that ARPUs will stagnate at the lower end, although many analysts are making optimistic projections of a 30-40 per cent rise in ARPUs in a duopoly situation. This possible scenario of lower data consumption in particular would not be good news for telecom service providers and it would not be good news for Digital India since clogged networks with deteriorating quality of service will impact the larger economy as well. Banking, fintech, e-commerce, entertainment, ride-hailing, delivery of government services, etc. could all be impacted by poor quality of networks.
It is not difficult to extrapolate where this situation could lead, and there are many negative dimensions to the scenarios outlined above. It is also true that if VIL exits, the government will simply not recover a large portion of the AGR demand.
So it is up to the government to find face-saving solutions. It could take the momentous policy decision to “forgive” the AGR demand, or to offer more relaxed terms. It could, for example, go back to the Supreme Court and say that it has reconsidered its position on the AGR claims, leaving non-telecom revenues out of the picture. It could also forego the large interest component of the current AGR demands.
The government has several imperatives here. It is hoping to recover AGR dues that will help shore up public finances during a stressed period. It also has to try and find ways to ensure 5G roll-outs because India will fall behind the world technologically if that is delayed.
But the government must also consider the negative implications of the telecom sector turning into a duopoly. It must consider the possible political dimensions of 300 million telecom subscribers being forced into a sudden disorderly shutdown. There would be negative reactions from overseas investors if Vodafone leaves India.
Policymakers, therefore, have many objectives, some of which apparently conflict with each other. It must find ways to satisfy as many of them as possible. That will require both wisdom and pragmatism. s
By Devangshu Datta