Utilize a rear-view mirror for further telecom reforms

Live Mint, September 21, 2021

By Pradeep S. Mehta,

The future of the buoyant telecom sector in India seemed rickety until last week, when the government finally bit the bullet and announced numerous structural and procedural reforms for the industry. Among the changes, the Centre announced a 4-year moratorium on adjusted gross revenue (AGR) and spectrum dues with an option to convert interest on penalty dues into equity after it ends. Most importantly, the contentious definition of AGR would now exclude non-telecom revenues. There are also other welcome measures that can ensure sufficient competition in the market.

George Santayana famously said that those who cannot remember the past are condemned to repeat it. Taking a leaf from his timeless wisdom, let’s look at the history of telecom tangles in our courts, which shackled the sector’s potential, and seek lessons that governing institutions must avoid going forward. Take the 2G case, which was about spectrum allocation and its consequent loss to exchequer, and the AGR case, which was about a disagreement on its definition. Mind you, these cases stemmed from clumsy governance, which is equally responsible for the sad state of telecom affairs that followed.

In the 2G case, the government’s ‘first come first served’ policy to allocate spectrum licences was not only discriminatory, it also favoured a select few. In addition, the Department of Telecommunications (DoT) overlooked the advice of the law ministry, Prime Minister’s Office and Telecom Regulatory Authority of India from time to time, and acted unilaterally. After the Comptroller and Auditor General (CAG) estimated a presumptive revenue loss of ₹1.76 trillion to the exchequer, alleging wrongdoing in spectrum allocations, the case reached the Supreme Court, which cancelled all 122 telecom licences.

The apex court, instead of punishing officers for corruption and/or cancelling the licences of companies that unduly benefited, deemed it fit to cut off the head instead of finding a cure of a headache. Furthermore, the court even failed to make errant firms pay substantive penalties. The impact of its decision was not even considered. It adversely affected international relations, investments, competition and consumers. Moreover, the subsequent 2G spectrum auction was benchmarked to 3G rates, which forced the telecom companies to borrow more money, leading to a burgeoning burden for many. Ultimately, the 2G case was a watershed moment for the industry towards its decline, facilitated by an ill-considered judgement.

Then came the Supreme Court’s October 2019 ruling on the AGR case. In the entire gamut of the AGR dispute, which started in 2003, DoT holds significant accountability. The DoT’s approach can be described as bureaucratic torture, marked by a belief that telecom operators were making windfall profits but withholding money from the government. This apparent lack of trust in telecom companies resulted in deference to a private chartered accountant (instead of the CAG) to define AGR while expanding the scope of gross revenue to include non-telecom revenues, and inadequate consultation on AGR with key stakeholders.

Importantly, the apex court failed to see the bigger picture and adjudicate that ancillary non-telecom revenues should not be part of AGR. Instead of deferring to a specialized and neutral body, the tribunal that was set up to resolve telecom disputes, which is headed by a retired Supreme Court judge and accompanied by two experts, the apex court ruled on flimsy grounds that the tribunal had no jurisdiction over the matter. One wonders why. Given that the AGR orders of the government were set aside by various courts between 2006 and 2015, levying a penalty and interest on past AGR dues was plainly unjust. This reportedly inflated the AGR liability by about 300%. Yet again, the apex court failed to appreciate the economic fallout. Thank heavens, the penalty and interest on penalty has now been scrapped, and the definition of AGR has been rationalized for all future calculations.

Nevertheless, the adverse fallout of the 2G and AGR cases directly impacted market competition and consumer welfare. Consequently, competition in our telecom market declined, which was once overcrowded with 10-12 operators. It needed consolidation to enable the sustainable presence of four telecom operators. The prospects of this have brightened after the recent revisions.

The latest reforms instil confidence that the government can act when push comes to shove. To further encourage investment in the telecom industry, 100% foreign direct investment in telecom under the automatic route has also been permitted. However, these reforms are only bandages for temporary relief. The wound still needs treatment. We suggest a set of multi-pronged approach that could strengthen our reforms:

One, privatize state-run operators to ensure that they act as major competitors. Two, make the exclusion of non-telecom revenues in AGR retrospective.

Three, use the unutilized Universal Supply Obligation Fund of about ₹58,000 crore for soft loans in this sector, and also reduce this fund’s levy from 5% to 3%, considering its poor utilization so far.

The telecom sector’s road to recovery is arduous, but hope appears to have been invigorated by the government’s recent measures. The country now awaits a second phase of telecom reforms that would seal the fate of the industry for the better. It must be done sooner rather than later.

Pradeep S. Mehta is secretary general of CUTS International, a global public policy think tank. Kapil Gupta of CUTS also contributed to this article.

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