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Insights into Editorial: A relief package to lift India’s Telecom gloom

 

 

Context:

The Union Cabinet has approved a crucial plan to provide relief to the ailing telecom sector.

The relief package will provide much-needed relief to telecom companies like Vodafone Idea and Bharti Airtel.

As per earlier reports, the relief package is likely to include a four-year moratorium on adjusted gross revenue (AGR) related dues besides allowing telecom firms to surrender unused spectrum.

The relief package will also include some other measures that will further ease the burden on telcos.

The relief package will primarily provide relief to Vodafone Idea, which is on the brink of going bankrupt.

A moratorium on AGR-related dues will offer space to the cash-strapped company to improve its business and clear dues over a longer period.

 

About Adjusted Gross Revenue (AGR) in Telecom Sector:

Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).

The AGR directly impacts the outgo from the pockets of telcos to the DoT as it is used to calculate the levies payable by operators.

It is divided into spectrum usage charges and licensing fees, pegged between 3-5 percent and 8 percent respectively. The definition of AGR has been under litigation for 14 years.

While telecom companies argued that it should comprise revenue from telecom services, the DoT’s stand was that the AGR should include all revenue earned by an operator, including that from non-core telecom operations.

Currently, telecom operators pay 8% of the AGR as licence fee, while spectrum usage charges (SUC) vary between 3-5% of AGR.

 

Why Adjusted Gross Revenue (AGR) has been a contentious issue?

  1. When the AGR issue, first went under litigation there were about 15 operators. However, until now 10 of them have either closed operations or are undergoing insolvency proceedings in the last 14 years.
  2. Further, at the current juncture, profits for telcos are under pressure from severe competition and the falling ARPUs (Average Revenue Per User).
  3. Given this, AGR due will seriously hurt financial stability of whatever telecom companies are doing business in the Indian market.
  4. Also, Telecom equipment suppliers may also go down as their dues will not be paid.
  5. In 2019, the Supreme Court of India upheld the Department of Telecom (DoT)’s interpretation of Adjusted Gross revenue (AGR).
  6. This meant a huge blow to telecom service providers, as the telcos had to pay an estimated ₹1.4 lakh crore to the government.
  7. The definition of AGR has been such a contentious issue because it has huge financial implications for not only telcos, government but on the Indian economy at large.

 

Government choses reforms in Telecom sector:

  1. In the backdrop of the outstanding performance of the Telecom Sector in meeting COVID-19 challenges, with huge surge in data consumption, online education, work from home, interpersonal connect through social media, virtual meetings etc., the Reform measures will further boost the proliferation and penetration of broadband and telecom connectivity.
  2. The Cabinet decision reinforces the Prime Minister’s vision of a robust Telecom Sector.
  3. With competition and customer choice, antyodaya for inclusive development and bringing the marginalized areas into the mainstream and universal broadband access to connect the unconnected.
  4. The package is also expected to boost 4G proliferation, infuse liquidity and create an enabling environment for investment in 5G networks.
  5. A number of structural and process reforms in the Telecom sector. These are expected to protect and generate employment opportunities, promote healthy competition, protect interests of consumers, infuse liquidity, encourage investment and reduce regulatory burden on Telecom Service Providers (TSPs).

 

Structural Reforms by the government:

  1. Rationalization of Adjusted Gross Revenue:  Non-telecom revenue will be excluded on prospective basis from the definition of AGR.
  2. Bank Guarantees (BGs) rationalized: Huge reduction in BG requirements (80%) against License Fee (LF) and other similar Levies. No requirements for multiple BGs in different Licenced Service Areas (LSAs) regions in the country. Instead, One BG will be enough.
  3. Interest rates rationalized/ Penalties removed: From 1st October, 2021, Delayed payments of License Fee (LF)/Spectrum Usage Charge (SUC) will attract interest rate of SBI’s MCLR plus 2% instead of MCLR plus 4%; interest compounded annually instead of monthly; penalty and interest on penalty removed.
  4. For Auctions held henceforth, no BGs will be required to secure instalment payments. Industry has matured and the past practice of BG is no longer required.
  5. Spectrum Tenure: In future Auctions, tenure of spectrum increased from 20 to 30 years.
  6. Surrender of spectrum will be permitted after 10 years for spectrum acquired in the future auctions.
  7. No Spectrum Usage Charge (SUC) for spectrum acquired in future spectrum auctions.
  8. Spectrum sharing encouraged- additional SUC of 0.5% for spectrum sharing removed.
  9. To encourage investment, 100% Foreign Direct Investment (FDI) under automatic route permitted in Telecom Sector.

 

However, concerns that need to be take care:

  1. Gross revenue has dropped by 15% to 20% for the year 2017-18 over the preceding year for the incumbents and overall sector revenue has dropped. Also, there is drop in voice and data revenue per user.
  2. Service providers have to incur huge initial fixed cost to enter semirural and rural areas. Key reasons behind these costs are lack of basic infrastructure like power and roads, resulting in delays in rolling out the infrastructure.
  3. The change in definition of AGR that will reduce the burden on telcos, applies only prospectively, so those past dues remain payable.
  4. While it provides time to put their house in order, the telcos’ overall liability does not come down and ultimately they will have to raise tariffs to generate sufficient cash flows. AGR dues will have to be paid with interest.
  5. A long-standing demand for the government’s intervention in setting telecom floor tariffs, as it has done in the civil aviation sector to protect competition, did not find a place in the relief package.
  6. Available spectrum is less than 40% as compared to European nations and 50% as compared to China. Hence, it is imperative that spectrum auctioning at sustainable prices is the need of the hour.
  7. Also, government auction spectrum at an exorbitant cost which makes it difficult for mobile operators to provide services at reasonable speeds.
  8. However, the government was keen on ensuring that there were more players in the sector and customer retaining choices. Competition in the sector will always lead to better prices and better technology.

 

Conclusion:

Enhanced accessibility of the broadband services will enable the digital empowerment of India, hence adequate steps must be taken by the government to strengthen the overall telecom sector.

The government needs to actively facilitate shared infrastructure with policies and legislation.

One way is through consortiums for network development and management, charging for usage by authorised operators.

The telecom industry is crucial to India’s next wave of growth through digitalisation and the government should not be blinded by short-term revenue considerations that imperil long-term prospects.