The telecom industry, which has been struggling for a while, was eagerly aw­ai­ting the Union Budget 2018 in the hope of some relief. Industry associations had articulated several areas of ­concern, but most of these remained unaddressed in the budget. There were some positive policy changes though.

The sector was anticipating some changes in the tax treatment. As much as 33 per cent of all telecom earnings are paid out to the government in the form of levies and taxes, and the industry had been lobbying for a reduction in this burden. For instance, the industry had hoped that the tax treatm­ent of spectrum would be changed to treat it as an asset, wherein spectrum payments would be subject to depreciation, rather than the current position wherein payments can only be amortised.

Service providers had also hoped that telecom services would be excluded from the ambit of royalty (which is subject to tax). Besides, they were looking for a ­li­be­ral stance on other issues such as ­allowing the carry forward of losses and unabsorbed depreciation in the case of mergers, reduction in the withholding tax rate on commissions to distributors of prepaid services, deducti­­bility of expenditure in­curred on right to use spectrum, clarity on right-of-way-related taxation at the state level, lower customs duties, and accelerated depreciation on network hardware. The industry players also ­ex­pected that the goods and service tax on telecom services would be reduced from 18 per cent to 12 per cent.

However, none of these expectations was met in the budget. Reflecting this disappointment, the Cellular Operators ­­As­so­­ciation of India (COAI) noted in its post-budget statement, “The finance minister has completely ignored our key demands.” In contrast, the Broadband ­­­­In­dia Forum, a policy forum and think tank, praised the budget.

There were, no doubt, some positives for the sector. The budget increased the customs duty on imported mobile phones and mobile handset components, which could stimulate domestic manufacturing. The customs duty on mobile phones has been hiked to 20 per cent from 15 per cent at present, thereby offering somewhat higher protection to the domestic handset industry. Further, duties on parts such as batteries, SIM card slots, screws and mo­bile covers have been increased.

The budget also allocated substantial funding of Rs 100 billion for rural ­tele­com infrastructure, including the Bharat­­Net project, which could over time lead to better broadband coverage across the ­hinterland. The Rs 100 billion outlay inclu­des Rs 5.24 billion for setting up an ­additional 156 towers in the regions affected by Left Wing Extremism and for the ­upgradation of bandwidth (from 512 kbps to 1 Mbps) at 302 VSAT sites. A sum of Rs 4.5 billion has been allocated for 25,000 Wi-Fi hotspots in rural areas, Rs 4.4 billion has been allocated for ­providing optical fibre connectivity in the Anda­­man & Nicobar Islands and ­­Laksha­­­dweep Is­lands, and Rs 4 billion for dep­loy­ing 2,817 mobile towers in 4,119 uncovered villages in the Northeast.

Meanwhile, the funding for the Bharat­Net project has been retained at the same level as in the previous budget. One of the leading projects of the ­government, BharatNet is aimed at ­connecting 250,000 gram panchayats through optical fibre ­network in two phases. Services such as ­e-health, e-education, e-governance and e-commerce could be offered in future through this network. As of November 2017, 103,275 ­panchayats had been linked and nearly 238,677 km of fibre had been laid. The second phase of the project has an outlay of Rs 309.2 billion. The target is to ­complete it by March 2019 and connect the remaining 150,000 panchayats. The ­budget has stated that 500,000 public ­Wi-Fi hotspots will be set up across this rural network that will benefit around 500 ­million citizens.

The budget has also made a provision of Rs 45 billion for the Network for Spec­trum project. This is an alternative communication network being built by Bharat Sanchar Nigam Limited (BSNL) for the defence services to compensate for ­spec­trum released by the Ministry of Defence for civilian mobile services.

There is a focus on future technologies with the Indian Institute of Technology Madras being asked to set up a test bed for 5G at a cost of Rs 1.3 billion. Further, the budget has laid emphasis on promoting digital technologies like machine learning, artificial intelligence and internet of things (IoT) through the Digital India progra­m­me. It has doubled the allocation for Digital India to Rs 30.73 billion.

The revenue assumptions estimate that the telecom industry will generate Rs 486.61 billion for the government in 2018-19. This is a 58 per cent increase ­fr­om the revised revenue estimates of Rs 307.36 billion for 2017-18. However, this estimate may be too optimistic since the industry has seen revenues flattening over the past two years. Hence, the government’s revenue share might not expand to the extent projected.

The telecom sector has large positive externalities and it has been a key driver in the country’s socio-economic development. As per industry estimates, the sector generated 6.5 per cent of GDP in 2014-15, and provided direct and indirect em­ployment to almost 4 million people. However, its financial stability has seriously deteriorated. This has been acknowledged in the last two Economic Surveys, which express concerns about the sector’s debt servicing ability. By September 2017, the total subscriber base stood at 1.2 billion, of which 502 million connections were in rural areas and 705 million were in urban areas. Of these, over 98 per cent were wireless while landlines accounted for 1.96 per cent. Overall teledensity was 93.42 per cent, but  the rural-urban divide remained large. Rural teledensity stood at 56.78 per cent while urban teledensity stood at 172.86 per cent.

The telecom industry’s overall debt burden (including spectrum payment commitments) is around Rs 7.7 trillion. The total industry revenues in 2017-18 were around Rs 2.5 trillion at best. This puts a big question mark on the industry’s ability to continue servicing its debt and indeed, a major player like Reliance Com­mu­­ni­­cations has already collapsed.

Telecom service providers have only a few ways to generate more revenue in this hypercompetitive environment. One is to roll out rural services. However, this entails large capital costs and rural ARPUs are low. Another way is to motivate existing (and new) subscribers to increase their data uptake. A third way is to find new revenue channels, perhaps through payments banks or tie-ups with other industries such as e-commerce.

The latest Economic Survey (released on January 31, 2018) notes that the ­telecom sector is going through a period of stress with growing losses, piling debt, price wars, declining revenues and ­irra­tional spectrum costs. A new entrant has disrupted the market with low-cost data services and the revenues of incumbent players have fallen. The crisis has also severely impacted the investors, lenders, partners and vendors of these telecom companies.

The “new entrant” here is, of course, Reliance Jio Infocomm Limited (RJIL). RJIL started offering free data and voice calls from September 5, 2016, and it only started charging for data after six months (calls on the voice over long term evolution network remain free). The company has been able to garner a subscriber base of 160 million users as of December 2017.

RJIL’s entry sparked off a price war that reduced ARPUs for all players. This led to massive consolidation. When Jio launched services, there were around 12 service providers; however, this number has since whittled down. Vodafone India and Idea Cellular are in the process of a merger, with the combined entity envisaged to be the largest in terms of subscriber numbers. Currently, Bharti Airtel leads the pack in subscriber terms. Along with RJIL, these two operators could be the last ones ­standing in most circles (apart from the two PSUs, BSNL and Mahanagar Telephone Nigam Limited).

Since the budget has not offered ­subs­tantive relief to service providers, they must now pin their hopes on the National Telecom Policy (NTP), 2018, which may be released by April 2018. The NTP, 2018 will have to address issues pertaining to ­regulatory licensing frameworks, connectivity for all, quality of service, ease of doing ­business and absorption of new ­techn­ologies including 5G and IoT. The Tele­com Regulatory Authority of India has also issued recommendations on net ­neutrality, what prohibit discriminatory ­tariffs for data services. However, it remains to be seen whether the NTP, 2018 will help ease the burden of the telecom sector.

Devangshu Dutta