The journey of the Indian economy since the big-bang reforms of 1991 has been nothing short of a roller-coaster ride, and no other sector encapsulates it better than India’s telecom sector. Some of the promised fruits of liberalization—high competition and low product prices— indeed materialized in this sector, leading to a phenomenal rise in tele-density in the country. Yet, some of the darker aspects of the liberalization process—cronyism, resource-grab and corruption—also manifested themselves quite starkly in the sector.

In 2012, the Supreme Court struck down the licences of several telecommunication companies citing corruption and arbitrariness in the allocation of spectrum, ruling that the process had enriched telecom firms at the expense of the exchequer. Five years after that verdict, the telecom sector is at the cross-roads once again. Faced with a new rival with deep pockets—Reliance Jio Infocomm Ltd—heavily indebted telecom incumbents have rushed to the government for a bailout package, which the government is considering.

The telecom firms are reportedly seeking a bailout deal that would reduce various statutory payments such as the spectrum user charge and the interconnect charge, besides extending the timeframe for making spectrum-related payments to government. Incumbent telecom firms such as Bharti Airtel Ltd have often complained that frequent changes in telecom policies have often hurt them while favouring some rivals. For example, the government in 2002-03 allowed companies with fixed telephony licences to offer mobile telephony services, which favoured Reliance Infocomm (later Reliance Communications) and Tata TeleServices Ltd. Similarly, when the government changed rules in 2007-08 to allow companies offering mobile services on the CDMA platform to also do so on the dominant GSM platform, the major beneficiaries were again Reliance Communications and Tata Teleservices. Subsequently, in 2012, the government allowed companies with a broadband wireless licence to offer voice services, which benefitted Reliance Industries Ltd. Governments and regulators on their part have often cited changes in technology and consumers’ interests while changing rules and regulations.

This is not the first time telecom firms have lobbied for a bailout package, though. The first such package was in 1999. Eighteen years later, the sector is in crisis once again. To understand how this has happened, it is helpful to rewind to the mid-1990s when the first country-wide telecom spectrum auctions took place. The auctions were badly designed, and complaints regarding lack of transparency in the auction process and frequent change of rules were common.

The net result of those auctions was slow roll-out of services because of the financial stress borne by auction-winners, slow clearances for frequency allocations, and the lack of a suitable framework for managing the interconnect arrangements. Eventually, the problems snowballed and the telecom sector successfully lobbied to obtain a bailout in 1999.

The then-NDA government waived existing obligations of telecom firms in lieu of a revenue-sharing agreement; the licence fees fixed earlier were waived. However, this move was criticized among others by the Comptroller and Auditor General (CAG) at that time, as providing undue favour to telecom firms. But the rapid expansion of the telecom sector after the 1999 bailout package quelled criticism about the move, and the move was hailed retrospectively.

After the 1999 bailout, the government conducted one more auction in 2001, which was designed better than the previous one. But faced with shortage of spectrum, the government began to allot additional spectrum on a first-come-first-served basis and abandoned the auction route. This allegedly led to certain malpractices, with operators trying to inflate their subscriber numbers. According to an explosive 2010 CAG report, this policy led to losses worth Rs1.76 trillion. The abuse of the first-come-first-served policy led the government to revert to the auction route. A subsequent court verdict cancelling licences granted under the earlier policy in 2008 only put the final nail on the coffin of the first-come-first-served policy.

Partly because of the government’s urge to maximize revenues in order to be perceived as honest administrators of public resources, and partly owing to the aggressive bidding by telecom firms to access a scarce resource, telecom firms are today among the most indebted firms in the Indian economy. The exaggerated claims of the CAG did not help matters as it helped raise public expectations from the spectrum auctions. The CAG’s maximum estimate of loss—Rs1.76 trillion—was based on revenues generated by 3G auctions, which seem to have been inflated by aggressive bidding.

The moral hazard created by the 1999 bailout might have played a part in the aggressive bidding by telecom firms since they might have anticipated a bailout in the event of financial distress.

While there are some striking parallels between the latest crisis and the one in the 1990s, the one big difference is the entry of Reliance Jio. Jio’s launch has been disruptive for the sector and its expansion plans may put further pressure on incumbents, as an earlier Plain Facts column pointed out.

Yet, it is the burden of repaying high spectrum costs which lies at the root of the crisis as it did in the 1990s. Heightened competitive pressures have only aggravated the crisis. The outstanding debt of telecom firms is Rs4.85 trillion, besides another Rs3 trillion owed to the government as deferred payment obligations for spectrum.

The deterioration in debt metrics of telecom firms began right after the government reverted to the auction route in 2010, data from the Centre for Monitoring Indian Economy (CMIE) show. The debt-to-equity ratio for the industry was largely stable during the non-auction years (2001 to 2010) while it has steadily deteriorated thereafter.

Aggressive bidding by telecom firms has led to a debt pile-up, which threatens the health of both telecom firms and their lenders. And their aggressive expansion has hurt margins. While telecom firms have been able to widen their reach over the last few years, it has been largely offset by falling average revenue per user (ARPU). The entry of Reliance Jio might drive ARPUs even lower.

In the final analysis, it seems that while the auction route may have helped eliminate arbitrariness in the allocation of scarce telecom spectrum, it may have created perverse incentives for both the government and the telecom firms , leading to the current debt crisis. Given the precedent of 1999, telecom firms are once again asking for some kind of relaxation in their payment obligations to the government.

India’s telecom saga shows why auctions may not always be the best way to apportion a national resource, especially when such auctions are guided by the sole objective of revenue maximization.

At this point, there are no easy choices for the government. If the government does not intervene today, it risks losing out on its future spectrum revenue stream. Given the exposure of state-owned banks to telecom debt, it also raises the risk of defaults or haircuts on those loans, the eventual costs of which would be borne by taxpayers.

And if the government gives in to the bailout demand, as reports indicate, it will risk exacerbating the problem of moral hazard, raising the risks of more and bigger bailouts in the future, the eventual costs of which would be borne by future taxpayers.

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