Internet and telecom are the key drivers of economic growth. India has the potential to become the largest internet-using country after China, with current estimates showing that five to seven million mobile internet users are being added and about 35 million smartphone shipments happen every quarter in the country. The huge demand for mobile broadband requires adequate spectrum and capacity in radio access networks. Further, due to poor fibre connectivity, estimated at only 15-20 per cent of the existing towers, backhaul spectrum availability is critical.
Given the growth driver of telecom and internet in India is mobile, a critical resource for sector growth is spectrum – the only natural resource that is equally endowed across all nations. However, in India, operators and citizens are spectrum starved. There is a need to introspect why that is so. Further, with an economy on the rise that places ever higher demands on telecom services, the sector should have a growth trajectory that surpasses others. However, the Indian telecom sector story is that of the proverbial killing of the goose that lays golden eggs.
In the current scenario, there are three private sector operators – Bharti Airtel, Vodafone Idea and Reliance Jio – and public sector entities Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). BSNL and MTNL have a declining market share of 10.5 per cent and hardly any 4G services as they were not allocated spectrum for it. As of November 2019, the teledensity stood at nearly at 88.9 per cent, urban being 157.3 per cent and rural being 56.7 per cent. Mobile services contributed to nearly 98 per cent of the urban and nearly 100 per cent of the rural teledensity.
Vodafone Idea and Bharti Airtel are under tremendous financial stress, caused by accumulated losses of more than Rs 2.2 trillion that include due payments of revenue share (based on adjusted gross revenue [AGR]) due as a part of their licence fee, penalty and interest payments for delayed payments to the Department of Telecommunications (DoT), high prices paid in auctions for spectrum in 2016 and business disruption following the entry of Reliance Jio. To put the numbers in perspective, the entire revenue for the sector was Rs 2.11 trillion for 2017-18. Given the current poor financial situation of the private operators, the government had to delay the auction of 5G spectrum as most private sector operators are not in a position to bid for new spectrum and also invest in the new networks required. A major concern for policymakers is that there could be a significant reduction in competitiveness and consumer choice as there is a possibility that Vodafone Idea may exit the sector, given its weak financial state. Since BSNL and MTNL’s market share is very low and is not likely to grow significantly, the telecom sector could effectively have a duopoly.
What has caused the telecom sector to be in this state? While the private sector’s strategies and actions have contributed to the current situation, a major portion of the responsibility is due to the restrictive policy and regulatory environment in which the sector has operated. While the private sector must contribute to paying its dues for using a public resource (spectrum or right of way) for private gains, overly restrictive licence conditions, a constrictive environment for making more spectrum available from DoT and infeasible pricing of spectrum recommended by the Telecom Regulatory Authority of India (TRAI) could make the sector unviable. I would like to highlight some key concerns that could be addressed in the short term.
This is exemplified in the basis for AGR calculation that included total income from both activities that require a licence such as provision of telecom services and also that do not such as interest income and equipment sale. AGR forms the basis of licence fee and spectrum usage charges (SUC). While the licence explicitly identified all components of AGR and telecom operators accepted the licence conditions when they signed the licence, and must bear the consequences of the same, it is difficult to understand the logic of DoT in coming out with such conditions. It is true that the government has a sovereign right to specify any condition, but an enlightened and long-term view would indicate that it is not in the interest of the sector to have restrictive conditions.
Another such example is the legacy of SUC that originated when service and spectrum licences were bundled. Since these have been unbundled, there is no longer any requirement of SUC, which constitutes a significant outflow (3-5 per cent), as operators pay a licence fee for the spectrum. This is double charging and unfair. While DoT may be concerned that the removal of SUC would lead to lower revenue for the government, new services, higher adoption of existing services and the corresponding increase in service tax and corporate tax should more than compensate for it. Further, government dues on licence fee and SUC have come down, as the AGR of two of the private operators has come down.
Compared to several other countries, India has a relatively constrained supply of spectrum for commercial use, both in the unlicensed and licensed bands. In a spectrum-starved country such as India, where each operator gets about one-fourth of the licensed spectrum as compared to operators in other countries, making more bands both licensed and unlicensed bands available unleashing the potential of unlicensed spectrum is important.
Often operators have not bid when licensed spectrum was made available in auctions. This has been due to the arbitrary and high reserve prices set by TRAI. These are high in comparison to those in several developed countries. Lower propensity to pay and higher competition levels in India (with a peak of 12-14 operators per service area until 2012 and nearly five operators until the recent spate of mergers), and lower amount of spectrum per operator is a recipe for financial stress of the companies. TRAI has a peculiar and unique practice of setting the reserve price in any auction the same as the winning price in the previous auction and when it is a new band or recent auctions have not been held in existing bands, some arbitrary multipliers on the nearest band’s winning price are used. Despite the failure of the 2016 auctions, where bands that are globally in high demand had no bids, TRAI once again set very high reserve prices for the 3.3-3.6 GHz in its recommendations in 2018. After several iterations between DoT and TRAI on reconsideration of prices, TRAI announced that it had reduced them by 43 per cent. Even after this arbitrary reduction, prices continued to be much higher than those in the developed countries where such spectrum had been auctioned.
India has around 660 MHz of spectrum available for unlicensed use, spread across various spectrum bands. In comparison to other countries (the US 15,403 MHz, the UK 15,404 MHz, China 15,360 MHz, Japan 15,377 MHz and Brazil 15,360 MHz), this is significantly less. There is a perceived reluctance on the part of DoT to make more spectrum licence-exempt, largely because of a narrow interpretation of the Supreme Court judgment (2012). According to this perspective, the Supreme Court had mandated the allocation of spectrum only through auctions. However, a more informed reading and interpretation indicate that the Supreme Court, in its judgment, had referred to spectrum allocation as a policy decision within the purview of the executives. In a subsequent Presidential reference made by the government, the apex court had elaborated that the scope of the judgment was limited to 2G spectrum distributed on a first come, first served basis during 2007-08. Further, any alienation of scarce public resources needs to be done in a fair and transparent manner, backed by a social or welfare purpose. In the case of unlicensed spectrum, since there is no need to allocate spectrum specifically to any user, there is no contention regarding the choice of the allocation method. By not adopting clarifications in the judgment and the Presidential reference, DoT has delayed spectrum allocation in different bands, including unlicensed bands.
The above examples indicate the restrictive policy regime that has characterised private entry into the sector since its inception. There have been instances in the past, such as a shift from a one-time entry fee to a revenue sharing regime or moving to a technology-and service-neutral licence, where the government has shown how an enlightened policy perspective that could enable services to take off. A similar approach that views the private sector as a partner in growth (with relevant provisions to prevent abuse) and enables competition to bring in consumer choice, innovation and reasonable pricing will see services take off.
While the private sector must take a long-term perspective of what drives the growth in the sector and not just seek redressal through short-term measures, the onus on the government is much higher. It is the one that sets the agenda and has a vision of what kind of development citizens have a right to. So far, given the current state of the telecom sector, the government needs to push for a long-term enlightened policy agenda that will provide world-class services to its citizens and increase India’s competitiveness. I also hope that policymakers will recognise that 512 kbps should not qualify as broadband speed (which it is, by current definitions).
If we aim low, we cannot achieve high growth.