As Telecom Distress Accelerates, Government Can Kiss Goodbye To Fiscal Roadmap

That the Indian telecom industry is up the creek without a paddle is now no secret. In recent months, the incumbents, driven to the wall by Jio’s free offers and aggressive pricing, have called for everything from minimum tariff floors to reduction in higher interconnect charges (currently 14 paise for calls terminating on a network), to lower spectrum usage charges.

The industry has gone to the watchdog Telecom Regulatory Authority of India (TRAI) to ease rules for consolidation, to the Competition Commission of India (CCI) alleging predatory pricing, and to the Communications Ministry for concessions. While banks are already fidgety over the possibility of loan defaults, the Department of Telecom itself has sounded the warning bell that government revenues from telecom will fall by a third due to falling tariffs.

The CCI did the right thing by rejecting the charge of “predatory pricing” by Jio – a charge levelled by market leader Airtel – for offering free services between September last year and March this year. The CCI’s reasoning is sound: it said that in a market with a large number of players, it is not unfair for a new entrant to “incentivise customers towards its own services by giving attractive offers and schemes.”

“Predatory pricing” refers to a practice where one major industry player with hefty resources prices products or services so low as to drive out competitors from the market. The problem is “predatory” intentions can never be proved. In any case, Jio did not enter the market to be a bit player – and its gains can ultimately come only at the cost of others, and some of them will surely be edged out of the market. It has ambitions of grabbing upto 40-50 per cent of the data market, and it is willing to invest capital – which is its competitive advantage – for a long time to achieve its corporate goals.

So, when Airtel and Vodafone complain to the Communications Ministry that Reliance is using huge profits from its other businesses (especially refining and petrochemicals) to keep prices in telecom down, they are merely pointing out a reality that exists in almost every industry. In any event, whether a competitor has priced predatorily or not will be known only after some rivals fold up, and the field is open for the rest to cartelise and start pushing prices up aggressively. This is the stage at which the CCI needs to step in.

Access to large amounts of capital can be a medium-term competitive advantage in a capital-intensive industry and Jio is using the profit gushers from elsewhere to foray into telecom services.

The complaints of the incumbents are not dissimilar to the charges of “capital dumping” levelled by Ola promoter Bhavish Aggarwal, who sees Uber’s easy access to capital raised abroad as somehow unfair. This applies to the Amazon versus Flipkart battle too, where the former uses profits from an existing market to expand in new markets like India.

The world over, using surplus capital from one profitable business to bankroll another is a widespread practice. For those who don’t have this profit cushion, this kind of competition will seem unfair, but the only way to judge whether something is unfair or not is to check if consumers are benefited from the results of such pricing. It is only when the reduction in competition results in consumers being fleeced by monopolies or oligopolies that we need to consider the harm being done by a company’s “unfair” pricing policies.

In the telecom industry, the problem with the big players currently is that they have chosen asset-light strategies to be nimble and less capital-intensive. They began by outsourcing key operations like network maintenance and billing to other companies (usually multinational firms), and, when spectrum costs started weighing heavily on them, they have been raising money by offloading their cell towers to tower management companies.

Simply put, the big players have chosen a deliberate strategy of investing less capital in order to become profitable more quickly than what the overall investments would warrant. Jio has approached the issue from the opposite end: it has made huge capital investments upfront, and hopes to reap the advantages of market share growth over the medium to long term by generating huge volumes. It is expanding the data market in the process.

While the incumbents, who collectively owe banks more than Rs 4 lakh crore, have reason to seek some sops from the government, they have as yet no case for demanding action against Jio for predatory pricing. It is fair for the government to reduce or eliminate some of the charges needlessly imposed on the industry, including the spectrum usage charge (imposed over and above price paid for spectrum), the restrictions on sharing spectrum, and complicated nature of permissions for mergers and consolidation. Payments for spectrum can also be evened out over the life of the licence (20 years) instead of having to be paid up in 10 years.

There is no case for, at this stage at least, forcing Jio to charge more from its customers than it is willing to, as long as the freebies don’t stretch forever.

However, the government clearly needs to moderate its expectations of revenues from the industry this year and the next, while the industry consolidates. The telecom department has warned that revenues could fall from the budgeted Rs 47,304 crore to Rs 29,524 crore.

Since demands for capital and other support are coming loud and clear from the banking industry, and from the farming sector, one thing is certain: the fiscal deficit targets for this year and the next are unlikely to hold.

It is best for the government to bite the bullet and let the deficit slip; the other option is to let growth decline just when the goods and services tax is about to disrupt many other things in the economy.

Not an easy choice to make, but I would tilt on the side of easing the fiscal deficit cap. When many industries are in distress, and growth prospects uncertain, the last thing you need is a belt-tightening by the government.

(A part of this article was first published in DB Post)