In November 2018, the Reserve Bank of India had reported banks' exposure to the telecom sector was to the tune of Rs 90,600 crore
Declining fortunes of telecom operators and their increasing vulnerability with chances of spillover to the financial sector is a cause of worry, according to a leading think-tank.
A very sizeable portion of the government's plans for enhancing service delivery, financial inclusion and skill development (such as the Digital India and Skill India initiatives) are hinged on widespread and affordable access to communications and IT services.
"However, there is a view that the sector may have become victim to its own success and that the public attention on it due to high-profile scandals resulted in more onerous policies," said the Indian Council for Research on International Economic Relations (ICRIER).
Recent consolidations following the entry of Reliance Jio has transformed the competitive landscape of the industry. Leverage levels for most firms are high as debt burdens have risen, resulting in decreasing interest coverage ratios.
In November 2018, the Reserve Bank of India had reported banks' exposure to the telecom sector was to the tune of Rs 90,600 crore.
"While increasing the vulnerability of the sector itself, the spill over to the financial system is also a cause for worry," it said in the working paper titled 'A Study of the Financial Health of the Telecom Sector.'
The emergence of disruptive technologies and their potential to impact traditional telecom operations is widely accepted.
Under the current framework of regulatory asymmetry, operators must acquire licenses to provide services that over-the-top (OTT) content providers can offer for dramatically lower prices without license.
The Goods and Services Tax (GST) regime also impacted the sector's liquidity. The current standard rate of GST on the supply of telecom services and products is 18%.
Besides, spectrum acquisition is a huge cost to the industry. Since 2010-11, the total spectrum acquisition charge adds up to Rs 2.55 lakh crore.
"Given these challenges, sectoral growth must be catalysed through policy action to ease existing constraints," said the paper, adding also on the reform anvil is the rationalisation of penalties -- the scale and sheer number of which adds to operational costs.
Given the seriousness and speed with which the government aims to enable digital citizenship and the essential role that private operators must play in this transformation, it is important that policy prioritises between short-term benefits of immediate revenue generation and long-term dividends that a robust connected economy can create.
India has not yet exhausted potential returns from the telecom sector. In fact, the second round of dividends may be around the corner from the data economy and 5G. The policy must do all it can to maximise this potential.
"Effecting most of these changes will hinge on institutional reform -- especially in the form of greater cooperation between the line ministry and the independent regulator -- which is a first order priority," said the ICRIER paper authored by Rajat Kathuria, Mansi Kedia and Richa Sekhani.
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