After witnessing several ups and downs during the past year, the telecom industry in India is entering another momentous year. The industry, with a gross revenue of Rs 658.41 billion (approximately $9.0 billion) in the second quarter of 2020-21, is the second largest in the world. Over the past one year, the industry performed reasonably well despite the challenges posed by the Covid-19 pandemic.
Like other sectors, the telecom industry was also impacted by the pandemic. The impact was felt more in the initial period of the outbreak. There was a sharp fall in the number of subscribers, around 2.8 million in March 2020 and 8.2 million in April 2020. Broadband subscribers declined by 11.1 million in April, the first such fall over the past two years.
However, as businesses and individuals adopted digital ways, the telecom industry emerged as a saviour. Telecom, along with IT, became the lifeline for people, businesses and government organisations, enabling them to perform their roles and responsibilities efficiently during the crisis. As new trends such as online learning, remote office, videoconferencing, digital banking, e-commerce, OTT entertainment, video gaming and remote healthcare became the new normal, data usage reached an all-time high.
Many telecom players have benefited from the surge in voice traffic and data uptake, due to which the telecom sector is performing well as compared to other infrastructure subsectors. In the first quarter of this fiscal year through June 2020, customer spending on voice and data services increased 16.6 per cent year on year, totalling Rs 356.42 billion ($4.80 billion). The growth of data services was primarily triggered by the use of OTT platforms for voice communications, chats, online meetings, webinars, entertainment, etc.
Data to drive growth
The number of telecom subscribers in India stood at 1,171.8 million and tele-density at 86.38 per cent, as on October 30, 2020. LTE is the dominant technology, accounting for 63 per cent of mobile subscriptions.
Mobile broadband has gained huge popularity, with over 67 per cent contribution in 2020. However, only 10 per cent of the wireline connections in the country are fibre based, which is far less when compared to other competitive markets. Also, only 30 per cent of the towers are fiberised at the moment. This is very low when compared to other countries, for example, in South Korea, nearly 70 per cent of the sites have been fiberised while in the US, Japan and China almost 75 per cent towers have been fiberised. For India to realise its 4G/5G goals, the number has to go up to at least 65-70 per cent. It is estimated that investments of around Rs 1 trillion will be required for this.
The demand for data is likely to surge even after the pandemic. The growing content consumption has encouraged firms such as Amazon, Netflix and Google to make India one of their core markets. Also, the convenience offered by digital solutions such as videoconferencing has encouraged several firms to adopt remote offices as part of their corporate strategy. These developments, in tandem with the country’s digital mission initiatives, will further lift the demand for data. In order to leverage these opportunities, telecom service providers (TSPs) have to focus on capacity building by investing in spectrum and fibre.
The year 2020 was the toughest for the industry in terms of the financial obligations imposed on TSPs post the adjusted gross revenue (AGR) verdict. With AGR dues amounting to around Rs 1.6 trillion, to be paid over the next 10 years, the operators will have severe cash constraints to support the capex requirements in the next few years. This apart, over the next 12 months, telecom operators will have to shell out hefty amounts for the renewal/ replacement of the existing spectrum for 4G services.
Along with the financial burden, the challenges around pricing and competition are rising. The Indian telecom market has always been highly competitive. This is the reason why telecom tariffs in India have remained the lowest in the world, despite the high capex and opex required for network roll-out.
Private operators’ ARPUs in the second quarter of 2020-21 stood at Rs 142, among the lowest in the world, just above Uganda. The industry has been demanding a floor price mechanism for long, so as to maintain a level playing field.
Meanwhile, India is among those countries that pay higher regulatory fees and taxes in telecom. The Indian telecom sector is the most heavily taxed sector when compared to South Asia and ASEAN countries in terms of taxes, levies and surcharges that are levied on TSPs. The estimated levy in terms of licence fee, spectrum usage charges (SUC), and goods and services tax (GST) on the Indian telecom sector ranges from 29 per cent to 32 per cent. Of this, telecom-specific levy contributes to 11-14 per cent. The license fee in most of the countries such as Bangladesh, Pakistan, China and Sri Lanka is less than 5 per cent compared to that in India where it is 8 per cent (including 5 per cent of the Universal Service Obligation Fund).
Further, most of the countries that have adopted auction as a mechanism to assign spectrum do not have any revenue sharing mechanism such as SUC in India. In some countries, for example, the US and Australia, the annual spectrum fee is meant to cover the cost of management and regulation of spectrum and is therefore kept at a marginal level. However, in India, the SUC continues to be in the range of 3-6 per cent of the AGR.
The 18 per cent GST being levied on users of telecom services is also on the higher side, considering the criticality of telecom networks in the current times of Covid-19.
Such huge levies and tax burdens have put Indian operators in a tight spot. As a result, they are reluctant to make investments, which are crucial for the sustenance of the industry. The low ARPUs and the accumulating financial liabilities in the form of AGR have put immense pressure on telcos and this is likely to affect the stability of the industry.
Worldwide, 5G is gaining traction, with several use cases being identified across sectors such as agriculture, manufacturing, healthcare and public infrastructure. It is estimated that in India the investments in key components of 5G network, which include spectrum, sites and fibre, will cost roughly Rs 1.3 trillion-2.3 trillion. Thus, in order to make the market conditions favourable for the adoption of advanced technologies such as 5G and to garner investments for a robust 5G infrastructure, regulatory levies should be reduced. The licensee fee should be brought down to 1 per cent and SUC should be reduced by 3 per cent across all TSPs and spectrum bands.
The launch of 5G is expected in the later part of the year. The technology is poised to open up a plethora of possibilities in terms of business models, better education, healthcare, smart cities, smart manufacturing, intelligent logistics, and overall, better lifestyle for one and all. With the focus on Atmanirbhar Bharat, revenue from the telecom equipment sector is expected to grow. The number of internet subscribers in the country is also expected to double by 2021 to 829 million and the overall IP traffic is expected to grow four-fold at a CAGR of 30 per cent by 2021.
We welcome the government’s decision to kick-start spectrum auctions in March 2021. While the government has addressed the need for more spectrum, lowering the reserve prices can provide additional resources for network expansion to telcos. As a result, this could turn out to be one of the most disappointing auctions, with a lot of spectrum remaining unsold. Most likely, the new spectrum will be used to replace old or expiring airwaves for LTE, and capacity addition will still remain a challenge.
Telecom has emerged as the backbone of the country’s economy and data as the enabler of people’s fundamental right to communicate in a digital society. Upcoming technologies such as 5G will further broaden the scope of telecom networks, making them integral to inclusive growth. Hence, it is important that the government pays attention to the concerns of the industry and takes proactive measures to maintain a sustainable telecom ecosystem.