Speak up for other goals

Last Updated: Tue, Oct 23, 2012 21:11 hrs

The response to the upcoming 2G auctions may be muted, with most operators saying they will bid for a few, specific circles. A significant premium over the base price of Rs 14,000 crore may be unachievable, making the Budgeted receipts of Rs 40,000 crore appear unlikely. Nobody has applied for a pan-India permit. No new global operator has evinced interest. Reliance Communications, Aircel and Sistema have opted out. Reliance Industries is not bidding, as was earlier expected. The government has, in addition, indicated that it could agree to a Rs 12,000-crore bailout for the loss-making Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). There are reasons for the lack of enthusiasm. Weak global growth and high rupee interest rates make it difficult to raise the vast sums required to buy spectrum, rollout networks and sustain operations. Growth has flattened. The subscriber base has declined for three successive months (July, August, September). Operating margins have declined quarter-on-quarter for the past two years. Every Indian operator has large amounts of debt to service and few are genuinely profitable. According to the Boston Consulting Group, the industry would need to generate Rs 35,000-40,000 crore of operating profits per annum to service enhanced costs, after the 2G auctions. This is a huge stretch, given that 2011-12 operating profits amounted to about Rs 24,000 crore.

In addition, there is policy uncertainty on several key issues. There is litigation on the 3G intra-circle roaming front. There is lack of clarity about refarming spectrum, with the Empowered Group of Ministers (EGoM) having deferred a decision until a week before the auctions. Refarming would affect the quantity of spectrum available on auction in November and, if the EgoM opts for complete refarming of the 900 MhZ band, this could mean Rs 30,000 crore in additional costs for operators. Operators bid high for 3G spectrum, helping the government rake in a total revenue of over Rs 67,000 crore two years ago. And despite tariff cuts, 3G services have not achieved enough off-take to justify that gamble. Next-generation 4G Long Term Evolution (LTE) has not rolled out except at pilot level. About 95 per cent of Indian subscribers remain voice-oriented, pre-paid 2G consumers with GSM and CDMA average revenues per user of Rs 95 and Rs 75 respectively. It will take an appreciable time for the data market to evolve. The share of data in Indian telecom revenues (including text messaging) is 14-15 per cent. Pure data (excluding SMS) contributes only five per cent. The share of data can expand only if the costs of building high-speed 3G/4G networks are absorbed and new data-oriented services created and marketed. The auctions may trigger a hike in basic voice tariffs and a PricewaterhouseCooper study estimates that the hike could be disproportionately large in metros. Given price-elasticity, a drop in usage minutes is conceivable. Weaker players will be unable to sustain operations and consolidation is likely.

Some of this seems inevitable, given the Darwinian nature of a highly competitive, over-crowded market. Still, daunted by the political cost, the government lacks the courage to state that socially desirable goals such as encouraging broadband uptake and improving rural tele-penetration (currently 40 per cent) cannot be met if a beleaguered industry is milked of windfall gains. If the positive externalities of high telecom penetration are to be fully realised, the government must stop flip-flopping on its telecom policy.

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