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From boom to doom: Story of India's telecom sector

Last updated on: September 17, 2012 14:36 IST

From boom to doom: Story of India's telecom sector

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T N Ninan

To revive India's once-booming sector, proliferation has to be followed by consolidation, and the government should focus on how best to achieve the transition.

When mobile phone companies, used to reporting 10 million and more new customers in a month, do the opposite and drop twice that number – in a month – you know that India's most dynamic industry has entered a new, more troubled phase.

It may be that the new numbers on customer totals are merely a more accurate reflection of reality, since inflated claims have been very much a part of the industry story so far.

Still, there is a new reality, and it has been little recognised so far because of the sector's history of rapid growth, super-profitability and dramatic stock market gains. The new story is the exact opposite of this history, and tells of slowing growth, falling profits, and negative returns on shares.

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Photographs: Stefan Wermuth/Reuters
Tags: India

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From boom to doom: Story of India's telecom sector

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The industry leader's profits have collapsed from seven per cent of revenue last year to four per cent in this year's first quarter, and its share price has dropped to where it was six years ago, despite rapid business growth in the interregnum.

Others have done no better, and some have done decidedly worse. Customers are an unhappy lot: the experience of service quality has gone from bad to worse, and simple things like stopping unwanted messages seem too much to ask for.

Broadband services are slow and unsatisfactory. Fresh investment is hard to finance, because half of the leading operators are in the red, and some of the profitable ones are already awash in debt.

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Photographs: Reuters
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From boom to doom: Story of India's telecom sector

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Finally, the depressed market value of the companies does not encourage the issue of fresh paper. In short, the poster boy of India's LPG (liberalisation, privatisation, globalisation) story is not worth showcasing any more.

It doesn't help that the government seems to be milking the industry even when it has entered a troubled phase.

The licence fees and spectrum charges that the phone companies pay the government (Rs 16,551 crore last year) total up to more than today's straitened profits, and in the case of some companies add up to twice as much as profits and more.

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Photographs: B Mathur/Reuters
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From boom to doom: Story of India's telecom sector

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Revenue under these heads is over and above the massive sums that the government will make on spectrum auction -- the one scheduled for this year is generally expected to fetch much more than the government's estimate of Rs 40,000 crore (Rs 400 billion).

It would be strange if the industry were to be starved of investible surpluses while the government rakes it in (over Rs 2 lakh crore, under all heads, in three years).

The government is not likely to give up its take, especially since the alternative to spectrum auctions has been discredited.

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Photographs: Reuters
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From boom to doom: Story of India's telecom sector

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So the way to save a once-dynamic industry, whose revenue totals up to more than two per cent of GDP, is to take a leaf out of the airline industry -- let excess capacity go out of the market, and allow the industry players that remain to jack up tariffs from today's low-low levels and build viable businesses.

In the mobile business, there are only seven players that count nationally, and they account for more than 90 per cent of industry revenue.

But there are well over a dozen others who have licences; some of these are non-operational, the rest are essentially price-warriors who add little to customer choice but force the main players to charge too little and compromise on service quality.

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Photographs: Jorge Silva/Reuters
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From boom to doom: Story of India's telecom sector

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There is a phase in every new industry's life when you see a proliferation of players as everyone chances his arm -- it has happened globally in everything from cars and aircraft manufacture to soft drinks and TV sets.

Proliferation has to be followed by consolidation, and the government should focus on how best to achieve the transition.

India is still at an early stage in setting up its communication infrastructure, and you need a handful of strong players to be able to get that done.


Photographs: Reuters
Tags: India

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