The future of India’s vibrant telecommunications sector looked rocky until last week, when the government finally bit the bullet and announced numerous structural and procedural reforms for the industry. Among the changes, the Center announced a 4-year moratorium on Adjusted Gross Revenue (AGR) and spectrum royalties with an option to convert interest on penalties into equity after its end. More importantly, the controversial definition of the AGR would now exclude non-telecom revenues. There are also other welcome measures which can ensure sufficient competition in the market.
George Santayana said that those who cannot remember the past are doomed to repeat it. Drawing on its timeless wisdom, let’s look at the history of telecom entanglements in our courts, which have hampered the potential of the industry, and look for lessons that governing institutions must avoid moving forward. Take the 2G case, which concerned the allocation of spectrum and its consequent loss to the Treasury, and the AGR case, which concerned a disagreement over its definition. Note that these cases stem from awkward governance, which is also responsible for the dismal state of telecommunications affairs that followed.
In the case of 2G, the government’s “first come, first served” policy of licensing spectrum was not only discriminatory, it also favored the privileged few. In addition, the Department of Telecommunications (DoT) from time to time ignored the advice of the Ministry of Law, the Prime Minister’s Office and the Telecommunications Regulatory Authority of India and acted unilaterally. After the Comptroller and Auditor General (CAG) estimated an alleged loss of revenue of ??$ 1.76 trillion to the Treasury, alleging wrongdoing in spectrum allocation, the case reached the Supreme Court, which struck down all 122 telecommunications licenses.
The Supreme Court, instead of punishing officers for corruption and / or canceling the licenses of companies that improperly benefited from them, saw fit to cut off the head instead of finding a cure for a headache. In addition, the court even failed to charge stray companies substantial penalties. The impact of his decision was not even taken into account. It has damaged international relations, investments, competition and consumers. Additionally, the ensuing 2G spectrum auctions were benchmarked against 3G tariffs, forcing carriers to borrow more money, resulting in an increasing burden on many. Ultimately, the 2G case was a turning point for the industry to decline, facilitated by reckless judgment.
Then came the October 2019 Supreme Court decision in the AGR case. Across the gamut of the AGR dispute, which began in 2003, the DoT holds significant responsibility. The DoT’s approach can be described as bureaucratic torture, marked by the belief that telecom operators were making windfall profits but withholding government money. This apparent lack of trust in telecom companies resulted in deference to a private accountant (instead of the CAG) to define AGR while broadening the scope of gross revenue to include non-telecom revenue and inadequate consultation on the AGR with the main stakeholders.
It is important to note that the Supreme Court did not see the big picture and ruled that non-telecommunications ancillary income should not be part of the AGR. Instead of relying on a specialized and neutral body, the tribunal set up to resolve telecommunications disputes, which is headed by a retired Supreme Court judge and accompanied by two experts, the Supreme Court ruled on unconvincing grounds that the tribunal lacked jurisdiction over the matter. We wonder why. Since the government’s AGR orders were overturned by various courts between 2006 and 2015, imposing a penalty and interest on past AGR contributions was simply unfair. This would have inflated the AGR liability by around 300%. Again, the Supreme Court did not assess the economic fallout. Thank goodness the penalty and penalty interest have now been removed and the definition of AGR has been streamlined for all future calculations.
However, the negative fallout from the 2G and AGR cases has had a direct impact on market competition and consumer welfare. As a result, competition in our telecommunications market has decreased, which was once overcrowded with 10 to 12 operators. Consolidation was needed to allow the lasting presence of four telecom operators. The outlook has improved after recent revisions.
The latest reforms instill confidence that the government can act when the going is right. In order to further encourage investment in the telecommunications industry, 100% foreign direct investment in telecommunications under the automatic channel has also been allowed. However, these reforms are just dressings for temporary relief. The wound still needs treatment. We propose a set of multi-pronged approaches that could strengthen our reforms:
First, privatize public operators to ensure that they act as major competitors.
Second, to retrospect the exclusion of non-telecom revenues in the AGR.
Third, use the unused Universal Procurement Bond Fund of about ??58,000 crore for soft loans in this sector, and also reduce the withdrawal of this fund from 5% to 3%, considering its misuse so far.
The road to recovery in the telecommunications sector is difficult, but hope seems to have been reinvigorated by recent government action. The country is now awaiting a second phase of telecommunications reforms that would seal the fate of the industry for the better. It must be done as soon as possible.
Pradeep S. Mehta is Secretary General of CUTS International, a global public policy think tank. CUTS’s Kapil Gupta also contributed to this article.
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