The Union Cabinet has approved a relief package for the cash-strapped telecom sector. The relief package includes a wide set of measures such as granting a four-year moratorium on unpaid dues, redefining adjusted gross revenue (AGR) prospectively to exclude non-telecom revenue and rationalising spectrum user charges.
The package is expected to provide relief to the ailing telecom sector that is struggling with high levels of debt.
While the thrust of the regulatory framework has been to allow greater private sector participation, it also needs to promote an environment of competition and pro-market friendly policies.
The sector history
The telecom sector was liberalised under the National Telecom Policy (NTP) in 1994 under which licenses were issued to companies in return for a fixed license fee. Since the fixed license fee was high, the government through the NTP announced in 1999 gave an option to the licensees to migrate from fixed license fee to revenue sharing model.
License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the telecom companies. AGR is then computed after allowing for certain deductions. AGR has two components: the license fee and the spectrum usage charges. In total, this comes to around 15 per cent of the AGR as regulatory fees for the government.
The definition of AGR has been under litigation for more than a decade. The DoT claimed revenue share from all earnings under the AGR from the telecom companies but the telcos claimed that AGR should only include revenue from the core services and not revenues from investment or sale of assets.
While the telecom appellate body ruled in favour of the telcos, the Supreme Court upheld the DoT’s interpretation of AGR. The decision dealt a blow to the financially weak Vodafone Idea, which was staring at the possibility of bankruptcy.
While the government allowed private sector participation in the telecom sector, its policies over time have resulted in a situation where the telecom market could emerge into a monopoly over time. This will adversely affect consumers’ interests. The total amount to the government is owed by 15 operators but 10 of them have either closed down or are under insolvency.
Other sectors that need intervention
The banking system also needs greater competition to check the inefficiencies stemming from entry barriers.
Indian banking has long been dominated by public sector banks (PSBs). Between 1991 and 2016, the window to allow a private entity to start a bank was opened only three times. Until 2016, the Reserve Bank of India followed a block bank licensing policy. The policy of on-tap licensing or continuous licensing was announced only in 2016.
However, the response to the on-tap licensing has been lukewarm as some of the elements of the policy were considered to be stringent.
Along with reviewing the conditions for licensing, greater competition in the banking sector also entails privatisation of PSBs.
Numerous expert committees in the past recommended reducing government stake and privatisation of PSBs in a phased manner. Most arguments for nationalising banks are based on the premise that profit-maximising lenders do not necessarily deliver credit where the social returns are highest.
However, empirical evidence suggests that PSBs have been less aggressive in lending, in attracting deposits and in setting up branches since 1990. Multiple expert committees have pointed out that public sector banks lag on other performance metrics as well.
The policy response to the growing problems of PSBs has been to recapitalise banks. Recapitalisation puts enormous stress on government finances and distorts the behaviour of banks.
When private sector banks raise capital, they face a market test. They have to convince investors of their investments and profitability. PSBs do not need to answer these questions on profitability and performance. Despite receiving huge amounts of resources, PSBs have registered a weak credit growth compared to their private counterparts.
For many years, bank privatisation was off the table, the plan to privatise two PSBs is an important pro-market signal. A sector can be competitive only if there is a regular pace of exit by weak firms, paving the way for entry by new firms.
Civil aviation is another sector that has faced difficulties because no government was willing to bite the bullet and sell off Air India.
Air India is among the oldest PSUs of India. It enjoyed a monopoly over Indian skies from 1953 to 1991. With economic liberalisation, the aviation sector was opened to private players. Several full-service players and low-cost carriers entered the aviation space.
The government consolidated Air India and Indian Airlines in 2007 to better compete with private players but Air India’s market share kept on dwindling. It is surviving on taxpayer bailouts. Retaining the ownership is no longer a proposition for the government.
When Air India is privatised, it could be managed more efficiently and we could get a gain in competitiveness which would play a role in enhancing the efficiency of existing private sector players.
Allowing greater private participation in a sector is, therefore, not enough, it needs to be accompanied with a conducive environment for promoting competition.
Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.
Radhika Pandey is a consultant at NIPFP.
Views are personal.