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Govt should find a way to save the telecom sector

The telecom story in India is fast approaching a dead end. The Supreme Court on Wednesday expressed its displeasure with the Department of Telecommunications (DoT) for its attempt to recalculate the adjusted gross revenue (AGR) dues of telecom companies. The court also remarked that allowing self-assessment by companies was a blatant violation of its orders, a “fraud”, and an attempt to “hoodwink” it. In its earlier verdict in October last year, the court had upheld the government’s definition of AGR for telecom companies, which means the operators are liable to pay about Rs 1.47 trillion to the government.

The issue dates back to 1999, when the telecom operators were shifted from the fixed-licence regime to a revenue-sharing model. The AGR issue has been in various courts and tribunals since 2003 and telecom companies have got favourable rulings. However, the government persisted with its definition, which was upheld by the highest court. Legacy players with higher debt are finding it difficult to pay, and at least one has said that it may not continue as a “going concern”. The possibility of such an outcome raises several concerns. While the government is now seeking approval for a staggered payment, why did it persist with its definition despite getting adverse rulings, knowing fully well that it will affect the sector’s finances? One possibility could be revenue concerns. However, reduced competition and increased stress in the sector will affect revenues in the long run. Further, bankruptcy in the telecom sector will put pressure on the banking system, which is already under significant stress. This will affect their lending capacity, which will have a direct bearing on economic activity and growth. It could also have fiscal impactions as the government might need to put more capital in public-sector banks. A bankruptcy or further accumulation of debt by telecom operators will affect investment and customer service. The state-owned companies in the sector are clearly not in a position to service a large base of customers. India will be left behind as the rest of the world moves to the next generation in technology. This would directly affect the government’s own digital initiatives. Moreover, mounting stress in a sector that was seen as a shining example of economic reforms and liberalisation would dent India’s image as an investment destination.

Therefore, as things stand today, the government could end up being a big loser. It may not get the kind of revenue it was expecting because of the inability of operators to pay. On the other hand, it would be left with a weaker banking system, stressed telecom services, and massive job losses. This is clearly a self-goal. The entire problem has been created by the government and if a relaxation is not given for the payment of AGR dues, which could take some pressure off the telecom operators, it will need to find ways to save the sector, including possible changes in the law. While the debate over judicial overreach will continue, the government should not allow the sector to be reduced to a state of duopoly or push it further in stress, as it will directly affect India’s economic prospects. It created the problem in the first place; it should now take the responsibility of cleaning up the mess.