ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
-A A +A

Telecom Woes in India

What Does It Tell Us about Regulation?

Yugank Goyal (ygoyal@jgu.edu.in) teaches at the O P Jindal Global University, Sonipat, Haryana.

The Supreme Court ruling has shaken the telecom sector, putting the future of Vodafone-Idea at a serious risk. But, is this the real issue that ails the sector? The deeper problems in the telecom sector are examined to show why, in the future, the emerging nature of judicial decision-making and rapid changes in the innovation dynamics of this market require a different type of regulatory governance and designs.

The author wishes to thank Vikas Kathuria for valuable comments and Diya Patel for excellent research assistance.
 

The Indian telecom industry has become a battlefield of not just rival firms, but of larger competing truths. These conflicts pose philosophical and policy questions that are symptomatic of the underlying tensions between regulatory restraints and industrial growth. These truths also conceal within them a glimpse into the changing order of innovation and business models. The telecom crisis, therefore, in many ways, has the potential to guide us in revising some of our standard narratives on competition policy. In this article, I dwell on these very foundational truths in the cacophony of voices on the telecom sector crisis.

In particular, I advance two points. First, the nature of judicial decision-making now has huge policy stakes embedded within, and therefore, a larger philosophical discourse on the Court’s role in examining the point of law vis-à-vis the point of policy is needed, particularly when points of law are increasingly folded into complex and technical questions that are evolving at hand. Second, the regulatory attitude in the sector needs significant revision because the nature of competition, markets and innovation dynamics in this sector are changing rapidly.

Background

A recent incident precipitated the crisis in the already distressed sector. The Supreme Court’s 24 October 2019 (Union of India v Association of Unified Telecom Service Providers of India) ruling ordered the telecom companies to pay up all that they owed in the form of levies, arrears, penalties and interest payments penalties through the last one and half decades. The dispute was on how to calculate the gross adjusted revenues from which the government levies a tax. The companies contended that only their revenues arising out of their use of spectrum be considered. The Department of Telecommunications (DoT), however, also included all their indirect earnings that form the adjusted gross revenue (AGR). This would include, for example, dividends and ­revenue from sale of handsets that are bundled with services, interest income, scrap sale or even rental income.The ­Supreme Court upheld the DoT’s view in its October order.

This definition of AGR spikes up the arrears, penalties and interest payments to a value close to ₹ 92,000 crore to be paid by the telecom firms in three months. This value, in an industry that is already saddled with a huge debt, is a matter of serious concern. While Bharti Airtel and Vodafone-Idea have to pay ₹ 29,000 crore and ₹ 33,000 crore respectively, Reliance Jio, which is a new entrant, needs to pay ₹ 13,000 crore, due to its purchase of R Com’s liabilities. Vodafone-Idea’s cash reserves do not even match up to the penalty amount, making it seriously consider closing down (Ghosh 2019).

Vodafone-Idea reported a loss of almost ₹ 50,000 crore in the quarter ending in September 2019 (compared with ₹ 5,000 crore last year in the same quarter). This is, by many accounts, the largest loss by an Indian company. Airtel’s story is also woeful, reporting a loss of ₹ 23,000 crore (Pandey 2019).

These numbers are staggeringly high, enough to break a company down. Price wars in the last two years had led to a considerable bleeding of the incumbents already. Vodafone-Idea’s future seems uncertain. Since the company owes huge debts to public banks, and has a number of dependent vendors, a ripple effect may hurt the overall economy. Policymakers are genuinely worried and companies are trying hard to strike a deal with the government. A committee of secretaries was formed to consider a relief package for the beleaguered industry. They have granted a two-year moratorium on the spectrum payments, offering some cash flow relief, but do not touch the Supreme Court-imposed penalty. Estimates reveal that this package does not make much of a difference (PTI 2019). Conversations on the bailout have begun. While this may not be a good sign, there is a need to dig deeper.

Law versus Policy

Is the Court judgment to be squarely blamed? The judiciary in India has been a powerful catalyst for many policy reforms in the telecom sector itself (Thiruvengadam and Joshi 2012). Over the last decade, it has been a very important element in the policy space in general as well. But, as the sole final arbiter of commercial matters where stakes are so high, particularly in complex matters of evolving markets, and as the lines between policy and law blur routinely, one wonders the extent to which the judiciary engages in their judgments on points of economics as much as with points of law.

The legal reasoning in the judgment cannot be disregarded. The Court essentially suggested that the understanding of gross revenue must come from the contract between the DoT and the telecom firms rather than from any accounting standard, as was claimed by the firms. The licence agreement between the government and the telcos (drafts of which were circulated as early as 2001) clearly stipulated the gross revenue heads which were under dispute. And therefore, clauses in that draft must be followed, as was decided. Further, the Court referred to its 2011 judgment of the Union of India v Association of Unified Telecom Service Providers of India, where it had ruled that the definition of AGR can only come from contract, and not from even Telecom Disputes Settlement and Appellate Tribunal’s (TDSAT) understanding of it (in fact it held that TDSAT did not have the jurisdiction to remove items from the revenue bucket).

If the firms had agreed to the government’s definition of gross revenue for 20 years, there is no reason that they should now be interpreted differently and levies evaded. Even under dispute, the provision of payment of these levies should have been provisionally accounted for.How could the firms remain confident for so many years that the Court would settle the matter in their favour? Or, they could have avoided undertaking the activities that they now are trying to dispute levies out of.

There is no difficulty in appreciating the reasoning here. The idea that once the contract terms are produced in writing and agreed upon, interpretations can only flow from that text, is fairly defensible. But the impact of this judgment has a massive economic ripple effect in an already declining economy. And courts cannot furnish judgments remaining immune to the context. Courts are routinely known to give judgments that reflect the zeitgeist, and their judgments cannot be read in isolation of what is happening outside the courtroom. This view asserts that public policy considera­tions be centralised in judgments.

This is a consequentialist view of courts. Courts are powerful, not only by the virtue of their authority but by the impact their judgments create. This is more so in the Indian context given the nature of cases courts have routinely dealt with under their writ jurisdiction and public interest litigation (PIL) and continue to alter their attitude with time (Suresh and Narrain 2014). This must make their role differently imagined. Justice Bhagwati (1985) in his classic defence of PILs had celebrated the instrumental thinking of the courts. And maybe there is a reason to take that argument further. This important question to use law for policy changes needs a more detailed and philo­sophical analysis.

But this is asking a small question that distracts us from the real issue. Consider, for instance, if the telecom firms were healthy, would the Court’s decision att­ract criticism? Perhaps not. So, the real context here is not the telecom firms’ health, but the changing nature of the telecom sector. And, in that change, is the Court’s reading of contractual terms defined almost 20 years ago, correct? Twenty years ago, securing a wired telephone connection in India was a matter of a family history event. Today, almost 119 crore people have access to telecom markets and 98% of them are on the wireless network (TRAI 2018). More than 45 crore Indians can now be identified as active internet users, half of which reside in rural parts of the country, and 99% of them use their phones to access internet (IAMAI 2019). India has the second highest number of mobile phones in the world. Five years ago, India had only two mobile phone manufacturing units, with half the phones being imported. In 2019, there are over 127 mobile manufacturing plants (Gupta and Auerswald 2019).

These rapid changes necessitate a more policy-oriented view of the points of law. Law perennially chases technology, and is always trying to catch up with it. In this dynamic space, the consideration that the licence agreements themselves were outdated carries some merit. Back in last 1990s, the government had fixed a 15% of AGR as licence fee. Later it was reduced to 13% and in 2013, to 8%. These changes indicate the changing nature of the industry, competitive impacts, and resultant revenue figures. Increasingly, Indian courts are going to be finding themselves in intersections of competing policy and legal questions. And a more grounded philosophical inquiry will be valuable to ascertain the “role” of courts in an interdisciplinary, multidimensional and rapidly changing industrial world.

The view that policy adjustments can be done by the government—rather than the courts—cannot be overlooked either. But, ideas like foregoing the penalty easily morph into bailouts. But, bailouts are iniquitously designed to squeeze off taxpayers’ money to fund an ailing corporation. They create moral hazard for the future, and often, it is akin to pandering to the corporate interests. These arguments therefore do not pass the scrutiny of sound economic policy.

Regulatory Governance

The Indian telecommunication sector witnessed massive regulatory churnings from state monopoly to private competitive multiplayer market in last three decades (Parsheera 2018). But firms have suffered in this process. One should remember that the telecom sector in India has been a graveyard of 20 companies in the last 20 years. This is a strange occurrence, where telecom sector as the poster child of Indian liberalisation, is also the most pitiful victim of it.

A major reason is the regulatory blunders and flawed policymaking. Governments have continuously regulated arbitrarily in the middle of the game, and instead of carving effective competi­tive ecosystems, they have regulated even on the prices. This is not how appropriate regulatory governance is done. Telecom requires heavy ex ante investments. If there is a risk of ex post political appropriation or erosion of the surplus, firms may not invest in the first place. Hence, there arises the need for governments to offer credible commitments to private investors in the form of independent regulatory agencies located at an arm’s length from the political offices; this is the foundational idea of regulatory governance (Levy and Spiller 1994). But in countries like India, regulatory agencies are hardly independent and remain informally embedded within the sociopolitical web of relations and patronage politics (Goyal 2017). Hence, the firms suffer from several competing interests and regulatory relations that they find themselves suspended in. Investors loathe regulatory uncertainties, parti­cularly the one on prices. The vast size of India was a big justification for the gamble, but it did not pay off for many of them. Regulators often dictate price terms to firms, and instead of cleaning the system of arbitrariness and corruption, impose prices with insufficient knowledge.

However, the argument that price regulation is anathematic to regulatory theory, as claimed by many, is misplaced. Laffont and Tirole’s work (1993) has shown extensively as to why price regulation is important in many cases, particularly when we deregulate. This is surely complicated in the case of telecom, where network externalities are very high and platforms rather than products emerge, but this does not mean that regulators cannot and must not look at the prices. Dubash and Morgan (2012) have reminded us of need to reconsider regulatory designs of the West which are focused on efficiency, in the context of the global South, where the concerns related to equity are equivalently important. Viewing through such lenses, meaningful government interventions must be welcomed, provided the government has sufficient capacity and expertise to design the regulatory and price restraints. The record has not been very positive so far. This makes their price interventions very risky. Spectrum costs in India are among the highest in the world, and therefore, setting prices suboptimally or super-optimally can be disastrous. In the mid-1990s, when the sector was opened up for private participation, the government fixed an exorbitantly high licence fee overestimating the revenue potential that had led to a similar crisis as that of today’s. To add­ress the problem, the 1999 Telecom Policy was rolled out, which proposed the revenue share model. It worked very well, and the growing market attracted many global players. But in 2008, the government distributed spectrum licences on a first-come, first-serve basis, a decision that led to uncovering of the 2G scam in the sector, and the Supreme Court cancelling 122 telecom licences later. Many companies packed up.

In the spectrum auctions in 2012, the government inflated the price tenfold, extrapolating 2010 prices. Such arbitrariness in a changing market environment was costly. The government ended up collecting only a fourth of its expected sale and 57% of airwaves remained unsold. In 2016 also, the prices were very high and only 40% of the spectrum put up for auction was sold. The dominant narrative in the industry that the government wants to squeeze money out of market players may not be misguided. After the Supreme Court judgment, telecom firms are expecting the government to intervene, in other words, to allay the distress shared by them, because governments have not been exactly of help, so far. It is important that the claim against the regulatory attitude be recognised and that a more reasoned regulatory approach evolves.

This is particularly true in the case of rapidly evolving market structures. We need a culture where regulators can accept errors and learn by doing, evolving their own guidelines through a participatory approach (Tirole 2017). These adaptive policy innovations include regulatory sandboxes as testing grounds for new business models, in particular for sectors like telecom.

Changing Business Models

The growing need to understand changing business models must be recognised. Note that against record losses, Reliance Jio posted profits in the last quarter. Does it indicate that the problem may not lie with the market or industry, but is symptomatic of the specific firm’s health? Surely, Reliance Jio’s late entry saved it from existing regulatory woes, but other firms also had a longer experience in the industry to draw from. Those who argue that telecom is best served by a free market design, are now having to absorb a new reality. Since, as per textbook economics, why should anything be wrong here? Reliance Jio entered the market in 2016 and built and secured a significant market share with aggressive price cuts and technology. In a matter of two years, Aircel and Reliance Communications declared bankruptcy, Telenor and Tata Teleservices sold their businesses to Bharti Airtel, while Idea merged with Vodafone. This is how businesses work. And predatory pricing is not a strong argument. Predatory pricing is after all a strategy used by incumbents to ward off new entrants. Here, the entrant and not incumbent was using its parent’s deep pockets to fund its new venture. Sharing economies like Uber and Airbnb routinely use this strategy to enter an otherwise tightly controlled market by traditional and large players.

It must be recognised that it is the rise of new business models and accompanying theories of innovation in newer forms that call for a renewed understanding of old concepts. A recent study by Abbosh et al (2019) exposes us to new paradigms of innovation. The authors first show that the return on innovation spending had declined globally. And then, in their survey of 840 companies from eight countries across 14 industries, they find that companies which register high returns on innovation are those that have, inter alia, aimed at making major impact on markets and societies rather than incrementally changing existing products. In other words, innovation truly resulted in profits when new markets were created through it.

This is exactly what Reliance Jio did, according to the authors. Armed with an investment of $32 billion from Reliance Industries, the company offered handsets, voice and data at remarkably low prices. Suddenly, a vast section of the population, otherwise left out of the information superhighway, joined in. Reliance Jio’s phones were rolled out in rural areas at a meagre refundable deposit of ₹ 1,500. The study noted that if products target “higher needs” of consumers—autonomy, happiness and social connections—innovations are more effective. This again absolves Reliance Jio’s entry as a point of pain.

The real concern, therefore, has to be located elsewhere. There are two such locations. First, if Vodafone-Idea quit the market, the industry will effectively be reduced to a duopoly. And that is a dangerous alarm bell for competition. The conflict between regulation and competition law in the telecom sector has been the bone of contention for several years (Kathuria 2018). And a competitive playing field is often what is credited to have secured a consumer-centric environment. But, that may be short-lived. At this stage, after a lot of closures, bankruptcies and mergers, four players remain in the telecom sector: Vodafone-Idea, Reliance Jio, Bharti Airtel and BSNL with market shares of 31.7%, 30.3%, 27.7% and 10.3% respe­ctively. This puts the Herfindahl-Hi­rs­ch­man Index (HHI) to 2,800 (HHI estimates market concentration, the lower the better for competition). If Vodafone-Idea packs up, then the HHI could increase by 47%–68%. This is highlighted in Figure 1. This figure also shows the HHI in the telecom sector in a number of countries (data was secured through subscription values in Wikipedia). Vodafone-Idea’s exit may make the telecom market in India one of the most concentrated globally.

The second location of concern is the changing market dynamics which bring back the importance of structure. Telecom businesses have begun exhibiting high levels of network externality that go beyond the traditional business model dependent on voice calls alone. The entire ecosystem of information and communication is the new playground of the telecom sector. This includes data, e-commerce, cloud, entertainment and sharing economies. In many ways, carriers are no longer carrying voice calls. They do (or potentially can) provide platforms on which transactions and not just conversations run. Economists call them two-sided markets, and press the need to revise our existing regulatory and competition models to capture the new emerging models. In these markets, structure and not just prices matter, and given the network externality and multi-product pricing models, the Coase theorem fails, beca­use the end user is unable to internalise the welfare effect of their use of platform on other end users (Rochet and Tirole 2006). This centralises the role of expertise in regulatory governance even more.

Telecom operators in their emerging role will be at the centre of such two-sided markets, which in turn will govern all our lives. And that makes the emerging duopoly in telecom worrisome. Reliance Jio has grand plans of widening their platforms, by rolling out JioGigaFiber (rolling out in 1,100 cities), set-top boxes, DTH services, affordable smartphones, enterprise solutions (like clouds, cybersecurity), smart homes, voice-over WiFi, potentially assuming a monopolistic position in a variety of spaces over time.

But this does not mean that big firms need to be discouraged, or broken up. Traditional responses to new problems do not often work. Moreover, the rise of big firms also lifts up the boats of many small firms, which can now rely on cheaper services provided by big firms as a result of them being big (think about how many people benefited through Uber, Airbnb, inexpensive cloud services, Amazon’s online marketplace, target advertising). So the issue is not about their dominance, but of ensuring that the dominance is not abused. One way in which this can be done is by ensuring contestability (Baumol et al 1983). If entry-exit costs are small, fearing rise of new entrepreneurs lured by supernormal profits, the monopolist or the duopolists will remain on their toes. The telecom sector may show signs of a contestable market, if leasing and sharing of essential facilities is allowed and practised but, it is not easy. Contestability of telecom markets, therefore, remains a question right now. But regulators must try designing features of the market, which enable its contestability. And therefore, economic reasoning becomes even more important.

The problem, however, will be that new firms may be motivated by the prospects of them being “bought out” by incumbents. These “entries for buyout” (Rasmusen 1988), and associated entrepreneurs create very little social value since they are interested to secure a part of the dominant firm’s rent. And they pose a huge concern for those who have faith in the self-correcting power of competitive markets. That is why, as Tirole (2017) suggests that we should not put undue burden of proof on competition authorities when they take decisions, because evidence for a future abusive practice is harder to get amidst rapidly changing market dynamics. We need to err on the side of competition. This puts a higher responsibility and expectation of expertise on regulators. But for this, as mentioned, we need to be receptive to regulatory failures too, for regulators will also learn by doing.

Conclusions

Tarun Khanna and Krishna Palepu’s (2000) useful framework to explain the persistence of conglomerates in India becomes relevant here. While firms in developed countries usually rely on core competency of the firm for its growth, in countries like India, there are large conglomerates operating in diverse areas from oil to telecom. This is, the authors suggest, due to institutional voids in countries with weak state capacity, information asymmetries and lack of efficient capital, labour markets and a well-functioning judiciary. In the absence of necessary institutional factors favouring new entrants, firms use their dominant position and reputation in one market to enter into another.

The way Reliance Jio has risen is a symptom of how institutionally shackled Indian corporate and business landscape continues to be. The reason for the tragedy of the telecom industry is a stark reminder of our own recent pasts, and failure to learn from it. Rather than remove systemic issues and recognise structural changes necessitating new designs of reforms, the basic nature of polity has continued to encourage cronyism and bureaucratic power. The telecom disaster is a poignant reminder of the deeper malaise that India suffers from, and addressing Vodafone-Idea’s woes will only treat the symptom, leaving the causes to remain as they are.

References

Abbosh, Omar, Verdrana Savic and Michael Moore (2019): “What Sets the Most Effective Innovators Apart,” Harvard Business Review, 8 March.

Baumol, William J, John C Panzar and Robert D Willig (1983): “Contestable Markets: An Uprising in the Theory of Industry Structure: Reply,” American Economic Review, Vol 73, No 3, pp 491–96.

Bhagwati, P N (1985): “Judicial Activism and Public Interest Litigation,” Columbia Journal of
Transnational Law
, 561.

Dubash, Navroz and Bronwen Morgan (2012): “Understanding the Rise of the Regulatory State of the South,” Regulation & Governance, Vol 6, No 3, pp 261–81.

Ghosh, Shayan (2019): “Vodafone Idea Will Shut Shop If There Is No Govt Support: Kumar
Mangalam Birla,” Mint, 7 December.

Goyal, Yugank (2017): “Informal Institutions in the Regulatory State: The Case of Bureaucracy in India,” Law and Development Review, Vol 10, No 1, pp 147–77.

Gupta, Arvind and Philip Auerswald (2019): “The Ups and Downs of India’s Digital Transformation,” Harvard Business Review, 8 May.

IAMAI (2019): “India Internet 2019,” Internet and Mobile Association of India, September.

Kathuria, Vikas (2018): “The Conflict between Regulation and Competition in the Indian Telecom Sector,” Economic & Political Weekly, Vol 53, No 38, pp 38–44.

Khanna, Tarun and Krishna Palepu (2000): “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups,” Journal of Finance, Vol 55, No 2, pp 867–91.

Laffont, Jean-Jacques and Jean Tirole (1993): A Theory of Incentives in Procurement and Rregulation, MIT Press.

Levy, Brian and Pablo Spiller (1994): “The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation,” Journal of Law, Economics and Organisation, Vol 10, No 2, pp 201–46.

Pandey, Navadha (2019): “Airtel, Vodafone Idea Post Record Losses in Q2,” Mint, 14 November.

Parsheera, Smriti (2018): “Challenges of Competition and Regulation in the Telecom Sector,” Economic & Political Weekly, Vol 53, No 38, pp 45–52.

PTI (2019): “CoS on Telecom Relief Package Disbanded: Govt Source,” Deccan Herald,  25 November.

Rasmusen, Eric (1988): “Entry for Buyout,” Journal of Industrial Economics, Vol 36, No 3, pp 281–99.

Rochet, Jea-Charles and Jean Tirole (2006): “Two-sided Markets: A Progress Report,” RAND Journal of Economics, Vol 37, No 3, pp 645–67.

Singla, Lokesh and Seema Sharma (2009): “Telecom Equipment Industry: Challenges and Prospects,” Economic & Political Weekly, Vol 44, No 1.

Suresh, Mayur and Siddharth Narrain (2014): The Shifting Scales of Justice: The Supreme Court in Neo-Liberal India, Orient Blackswan.

Thiruvengadam, A K and P Joshi (2012): “Judiciaries as Crucial Actors in Southern Regulatory Systems: A Case Study of Indian Telecom Regulation,” Regulation & Governance, Vol 6, pp 327–43.

Tirole, Jean (2017): Economics for the Common Good, Princeton University Press.

TRAI (2018): “Yearly Performance Indicators of Indian Telecom Sector,” second edition, Telecom Regulatory Authority of India, New Delhi, 4 May.

Union of India v Association of Unified Telecom Service Providers of India (2011): 10 SCC 543.

Updated On : 6th Jan, 2020

Comments

(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top