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Telecom Sector Big Reforms 100% FDI allowed, 4 year loan moratorium a lifeline for VI?

Telecom Sector Big Reforms 100% FDI allowed, 4 year loan moratorium a lifeline for VI?

Relevance:

  • GS 3 || Economy || Infrastructure || Communication

Why in news?

The Cabinet approved several measures to extend a lifeline to the cash-strapped telecom sector, including a redefinition of the much-litigated concept of adjusted gross revenue (AGR).

Present Context:

Union Telecom Minister Ashwini Vaishnaw said the government was keen on ensuring that there were more players in the sector and consumers retained choices, when asked about the fears about a duopoly emerging with just two major telecom players Bharti Airtel and Reliance Jio.

AGR Definition:

  • The earlier definition of AGR, backed by the Telecom Department and upheld by the Supreme Court in 2019, had made telcos liable to pay 1.6 lakh crore.
  • The apex court had granted players 10 years to pay up, starting April 2021.
  • The change in definition that will reduce the burden on telcos, applies only prospectively, so those past dues remain payable.
  • Interest on those dues will now be compounded annually instead of monthly and the Minister said interest would be charged at a ‘reasonable’ rate of MCLR plus 2%.
  • MCLR refers to the lowest lending rate banks are permitted to offer — the marginal cost of funds-based lending rate.

Moratorium:

  • The package, which includes one of the most important decisions approved by the Cabinet as part of the telecom relief package, is the moratorium of dues.
  • A four-year moratorium has been approved on dues of telecom service providers (TSPs).
  • However, TSPs who want to opt for the moratorium will have to pay interest on the amount availed under the benefit.

About Telecom Reform:

  • Rationalization of AGR: AGR was previously interpreted as based on all revenue, not simply revenue from a company’s main telecom operation.
    • The government has acknowledged that this interpretation was flawed, reducing the financial burden on businesses in the future.
    • Telecom businesses must pay the government a pre-determined percentage of AGR (excluding non-telecom revenues) as statutory taxes, but only in the future.
  • Spectrum Reforms: Spectrum auctions will typically take place in the fourth quarter of each fiscal year (fixed calendar). Future spectrum auctions will take place over a 30-year timeframe rather than the existing 20-year one.
    • After completing a 10-year lock-in period from the date of acquisition, a telco will be able to surrender its spectrum.
    • Spectrum sharing is promoted, and the 0.5 percent additional SUC (Spectrum Usage Charges) for spectrum sharing is eliminated.
    • The radio frequencies allocated to the mobile industry and other industries for communication over the airways are referred to as spectrum.
  • Interest Rates to be rationalized and penalties to be removed: The monthly compounded interest on Spectrum Usage Charges (SUC) will now be compounded annually, and the interest rate will be decreased to MCLR + 2 percent instead of MCLR + 4 percent.
    • The Marginal Cost of Funds-based Lending Rate (MCLR) is the lowest lending rate that banks are allowed to provide.
    • In addition, the penalty and interest on the penalty have been eliminated.
  • Foreign Direct Investment (FDI) Reforms: The automatic route has been expanded to allow up to 100 percent FDI in the sector, up from the previous limit of 49 percent.
  • Moratorium on AGR Dues: The previous definition of AGR, which was defended by the Telecom Department and affirmed by the Supreme Court in 2019, made carriers liable to pay Rs. 1.6 lakh crore in AGR dues.
    • The telecom sector is cash-strapped as a result of this payment, which has resulted in Vodafone losing business and establishing a duopoly (reliance Jio and Bharti Airtel).
    • A four-year freeze on all spectrum and AGR dues was agreed in order to help the telecom sector recover.
    • TSPs who choose the moratorium will have to pay interest on the benefit amount.

Significance of these reforms:

  • Further Technological Advancement: These steps, taken together, would pave the door for large-scale investments in the sector, including the deployment of 5G technology, as well as more jobs.
  • Promoting Digital India: The telecom sector is one of the economy’s main drivers, and the government’s efforts will help the industry accomplish the Digital India goals.
  • Reviving Competition: A four-year moratorium on new technologies and customer service would push businesses to invest in customer service. Promoting Ease of Doing Business: The government decided to remove a controversial retrospective tax shortly after allowing 100 percent FDI in the sector (using the automatic way). All of this points to a return to an investor-friendly environment.

Issues with Telecom sector:

  • Limited Spectrum Availability: When compared to European countries, available spectrum is less than 40% and 50% when compared to China.
  • Low Broadband Penetration: The country’s low broadband penetration is a source of concern. Broadband penetration in India is barely 7%, according to a white paper given at the last International Telecommunication Union (ITU) meeting on the topic.
  • Declining Average Revenue Per User (ARPU): ARPU is currently declining sharply and steadily, pushing the Indian telecom industry to consider consolidation as the only way to raise revenues. This is in addition to plummeting earnings and, in some cases, catastrophic losses.
  • Timeframe for policy implementation: The government has taken a number of steps to benefit the telecom sector, but by the time they are implemented in the market, it is too late.
  • Lack of Telecom Infrastructure in Semi-rural and Rural Areas: To penetrate semi-rural and rural areas, service providers must spend a significant upfront fixed cost.
  • High Right-of-Way (ROW) fees: State governments often impose exorbitant fees for allowing fiber to be laid, for example.
  • Lack of fixed line penetration: India has a very low fixed-line penetration in its network, whereas most industrialized countries have a very high fixed-line penetration (telephone line that traveled through a metal wire or optical fiber as part of a nationwide telephone network).

What can be done to improve the telecom sector?

  • Investigate the possibility of a revenue-sharing arrangement between Internet corporations and telecommunications firms.
  • Network maintenance, IT operations, and customer service are examples of non-core tasks that can be outsourced.
  • The separation of tower assets into separate firms will allow the company to reduce costs and focus on its core operations.
  • Introduce new and efficient technologies like M2M (a technology that allows networked devices to communicate data and conduct tasks without the need for human intervention) and cloud computing.
  • Benefits of industry status will be implemented in accordance with other infrastructure sectors in the country.

Conclusion:

While it provides time to put their house in order, the telcos’ overall liability does not come down and ultimately they will have to raise tariffs to generate sufficient cash flows. A long-standing demand for the government’s intervention in setting telecom floor tariffs, as it has done in the civil aviation sector to protect competition, did not find a place in the relief package.