Is Government Preparing For A Vodafone Exit? Why Duopoly May Not Be Such A Bad Idea

The smoke signals indicate that Indian telecom industry is headed for a duopoly in the foreseeable future.

The other day, Communications Minister Ravi Shankar Prasad accused Vodafone Idea of trying to “dictate” terms to India on the kind of concessions it needs to remain in business. He may not have been so harsh, if the government was planning to scatter more largesse to retain competition in the industry at the current level.

Prasad was, of course, reacting to a strong statement made by Vodafone Group chief executive officer Nick Read last month, when he demanded more relief from the government after the Supreme Court verdict in the adjusted gross revenues (AGR) case. In the AGR case, which the industry lost, telecom companies have been asked to pay back-taxes of around Rs 1.4 lakh crore, including penalties and interest on accrued dues. Vodafone Idea accounts for the bulk of the overdues.

The government has so far given the industry a two-year moratorium on spectrum fees worth Rs 42,000 crore, but this will have to be paid after the moratorium ends.

Read has been quoted as saying: “I told them, if they don’t provide a relief package, we are in a situation of: ‘is this worth being a going concern?’ I went over there (ie, India) and was very, very clear that we have put multiple billions of dollars into the country over the years, but we will not put any further capital in (without acceptable relief).”

Read’s statement was buttressed by his Indian partner, Kumar Mangalam Birla, who told an audience at the Hindustan Times Leadership Summit, that closure was an option since the company had been asked to pay Rs 40,000 crore in three months. He is quoted by Mint newspaper as saying, “we will shut shop if we don’t get relief. Because there is no company in the world that can pay that kind of fine in three months; it just doesn’t work like that.”

But clearly the government is not amused with these threats, and Prasad made no bones about it. “I don't appreciate this kind of statement… no one should dictate terms to us. India is a sovereign country.”

Some more relief is on the way, as the Telecom Regulatory Authority of India (TRAI) has postponed its decision to end the interconnect usage charge (IUC) regime by one year. This was supposed to go from January 2020, and will allow Airtel and Vodafone Idea to retain substantial cash flows. Current IUC charges are six paise per minute, payable to the network where a call terminates.

Further relief depends on whether or not the Supreme Court agrees that the AGR dues of telecom companies can be partially reduced by the government, if it thinks fit.

Prasad’s statement, which comes after the statements of Read and Birla, may be indicative of a slight hardening of the government’s stand on telecom concessions. The question is whether it is willing to call Vodafone Idea’s bluff that it will quit India if not given more concessions.

There are two reasons why a Vodafone Idea exit (by opting for the bankruptcy route) may not be the kind of catastrophe it appears at first glance.

First, telecom tends to be a natural monopoly, and in most major markets, there are only two or three big players. In the US, AT&T and Verizon control more than 70 per cent of the wireless market, and the two weaker players – T Mobile and Sprint – are considered to be potential merger partners. In short, the US may be headed for a three-player market in the foreseeable future.

Second, the scenario in India has changed after the Narendra Modi government bit the bullet and decided to pump Rs 56,000 crore to revive and revamp a large state sector player for strategic reasons. Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) are to be merged after offering golden handshakes to over 92,000 employees. The merged entity will be given spectrum for a 4G rollout. If BSNL becomes a strong third player, India will continue to have three large players even if Vodafone Idea exits.

The government is probably calculating the costs of investing hugely in BSNL as against simultaneously offering huge spectrum fee concessions to the industry. If the cost of bailout is too high, it might well decide that a duopoly is fine as long as BSNL offers a clear third option to consumers.

As things stand, Vodafone Idea, with 375 million wireless subscribers as at the end of September, Reliance Jio with 355 million, and Airtel with 325 million are the big boys, but Vodafone Idea is the weakest of the three. Its exit will actually make it easier for Airtel and Jio to raise tariffs, which will then indirectly help BSNL to remain viable after shedding staff and investing in 4G infrastructure rollout. A strong private sector duopoly may also make a 5G auction more practical in fiscal 2020-21, though the timetable for the auction has not formally been shifted from this fiscal to the next.

Increasingly, it appears as if India is heading for a duopoly, with BSNL being the X factor that will prevent cartelisation. TRAI anyway has regulatory powers to prevent cartelisation and aggressive tariff increases.