The Rise of Goliath

by AK Bhattacharya

  However, most value-added services available internationally were introduced in India and the density of PCOs in urban areas had exceeded the target of one such centre for 500 persons. Phone capacity in the country went up from 8 million lines in 1994 to over 21 million lines in 1999. Just about 1 million cellular mobile connections were provided in this period.

  The developments in the telecom sector during the 1990s significantly changed the business environment for Indian companies and brought about a perceptible improvement in the way Indians communicated with each other on the phone. It created new business opportunities for growth and expansion for companies. It offered consumers more choices. The overall quality of telecom service improved. Regulation was strengthened. Yes, private telecom players were financially bleeding as they had overbid without recognizing the rapidly changing market situation. The government-owned telecom service providers had speeded up capacity addition in this period and that was one of the factors that contributed to the changes in market dynamics. The government too kept the policy framework largely biased in favour of the state-sector players and that harmed the private players. But even those distortions got corrected to a great extent by the National Telecom Policy of 1999.

  This is one sector that saw many changes through disruptions at many stages, but there weren’t too many individual protagonists who drove those changes. Yes, Narasimha Rao’s desire to open up the telecom sector and finalize a telecom policy before he left for the US so that he could attract investments from there was certainly a factor responsible for the push that the telecom sector got. Similarly, Atal Bihari Vajpayee, by taking charge of the communications ministry at crucial stages and forcing the rollout of a revised policy in 1999 could also be identified as a disrupter. Contrary to popular belief, Rajiv Gandhi, who had ushered in computerization and a technology-led focus in governance, made little contribution to the telecommunications sector and instead encouraged an indigenous thrust, which only delayed the onset of the telecom boom in the country.

  Without the push from Rao and Vajpayee, the telecom sector might not have seen the pace of policy changes that were witnessed in just five years. But towering above them all, there were two agents of disruption—technology and growing demand from consumers. The pressure of technology and the demand from consumers for more and better telecom services were huge forces that drove the change. It was a confluence of factors, including the momentum of economic reforms, which pushed the telecom sector on the fast track.

  Beyond 1999

  It is largely for this reason that the story of disruptions in the telecom sector did not end with the policy of 1999. The forces of change continued to exert their pressure on the sector, irrespective of the political party at the helm of affairs in New Delhi. Three major developments defined the telecommunications sector in the decades after the roll-out of the Telecom Policy in 1999. Telephone subscribers’ growth reached dizzying heights in the first decade of the twenty-first century, thanks to more competition and falling tariffs. The telecommunications sector also became the centre stage of a major scam over the allotment of spectrum to telecom companies, with huge economic implications for the companies and even bigger political consequences for the fortunes of the UPA government, under whose watch the scandal had broken. And finally, the entry of a new corporate behemoth in the telecommunications sector made competition more intense and the battle for gaining market share even more fierce. The financial health of the telecom companies worsened. The rapid pace of technological change made any recovery from that situation even more challenging.

  Understandably, there was a lag effect of the new telecom policies of 1994 and 1999 on the telephone subscription numbers in India. The first six years of the telecom policy liberalization actually did not see any significant jump in the number of subscribers, although the growth even in this period—between 1994 and 2000—was quite substantial. At the end of March 1993, the total direct exchange lines India had was 6.8 million. By March 1999, this more than trebled to 21.59 million. But the growth in the following decade was truly exponential. By March 2010, the total subscriber base crossed 621 million. The compounded annual growth in the subscribers’ base between 1993 and 1999 was 21 per cent. But this annual rate of growth shot up to 36 per cent in the eleven-year period between 1999 and 2010.

  The sharp acceleration in the pace of subscribers’ growth in the Noughties in itself had a disruptive effect on the health of the Indian telecommunications sector. Even as more Indians began acquiring telephone connections, the quality of service did not keep pace with that growth. Necessary investments in creating adequate infrastructure to maintain quality of service were lacking and the problems arising out of spectrum shortage was made worse by the controversy over its allocation. Nobody expected the telephone subscribers’ base to continue growing in the second decade of the twenty-first century, as the telephone density had reached a healthy level of 52.74 per cent by March 2010, compared to less than 3 per cent in 2000. By February 2019, the subscribers’ base rose to over 1205 million—a cumulative annual growth rate of 7.6 per cent. The telephone density, too, had reached almost 92 per cent. Few countries have achieved this level of telecom density in so short a time.

  The post-1999 phase saw even bigger disruptions than the acceleration in the growth of telephone subscriptions. One of these pertained to the manner in which the policy of spectrum allocation was handled. Spectrum is a key raw material for the mobile phone industry—offering a range of frequencies through which electromagnetic waves travel, carrying with them voice or data. Spectrum is a resource that is owned by sovereign countries and much of it is reserved for the defence forces of a country. India is no exception. What is available for non-defence use, therefore, is scarce and mobile telephone companies have always tried hard to corner as much spectrum as possible to run their services and gain market share with better quality and larger coverage.

  The first big controversy over spectrum arose out of the manner in which the UPA government had tinkered with the process of awarding spectrum to the telecom players in 2008. That decision gave rise to a major controversy. In November 2010, the Comptroller and Auditor General of India (CAG) came out with a damning report on how the Communications Minister, A. Raja, under the UPA government, followed incorrect, opaque and improper processes for the award of spectrum to various companies in an arbitrary and inequitable manner. The highlights4 of the CAG report were: Spectrum, in spite of being a scarce national resource, was allocated to new players at throwaway prices; the DoT had kept spectrum pricing issues out of the purview of a group of ministers set up for this very purpose and it did not follow its own policy of ‘first-come first-served’ in letter and spirit; Raja had ignored the advice of the prime minister, the finance minister and even the law minister; based on the revenues collected from the 3G spectrum auctions held earlier in 2010, the CAG report had estimated the notional revenue loss as a result of Raja’s decisions to be up to Rs 1.76 lakh crore. Soon after the CAG report became public, the Central Bureau of Investigation had registered cases against DoT officials, officials of some telecom companies who had benefited from the spectrum allocation and Raja, who belonged to the Dravida Munnetra Kazhagham, a political party of Tamil Nadu that was a partner of the UPA.

  Two years later, the Supreme Court got into the act after taking cognizance of the CAG report highlighting the irregularities in spectrum allocation. Its verdict was even more damning for the UPA government. The apex court held that the procedures followed by the government in 2008 were flawed and it directed the government to allocate natural resources like spectrum only through auctions. The court also cancelled as many as 122 licences and the spectrum allocated to as many as eight companies through that process. The irony of that verdict, however, was that five years later, in 2017 a special CBI court acquitted all the accused in the 2G spectrum allocation case. The judgment said:

  There is no evidence on the record produced before the Court indicating any crimina
lity in the acts allegedly committed by the accused persons relating to fixation of cut-off date, manipulation of first-come first-served policy, allocation of spectrum to dual technology applicants, ignoring ineligibility of STPL and Unitech group companies, non-revision of entry fee and transfer of Rs 200 crore to Kalaignar TV (P) Limited as illegal gratification . . . The charge sheet . . . is based mainly on misreading, selective reading, non-reading and out of context reading of the official record.5

  It must be noted that even though the accused in the 2G spectrum allocation case were acquitted, the special CBI court had taken to task the CBI for its sloppy investigation and the judge, O.P. Saini, even stated that the prosecution had failed to prove any charge made against the accused in its ‘well-choreographed charge sheet’. While criminal misconduct in the allocation of spectrum could not be established in the special CBI court, the earlier Supreme Court order cancelling the licences and spectrum allocations was a big blow to the industry. As a long-term consequence, the system of allotting spectrum was strengthened and a transparent auction process put in place. But not before the Manmohan Singh government had to pay a political price for allowing the spectrum allocation irregularities to snowball into a major controversy that cast aspersions on the UPA’s ability to run an honest administration. Opposition political parties, led by the Bharatiya Janata Party, used the 2G spectrum allocation controversy as a major election issue and cited it as an example of how the UPA allowed corruption to grow under its watch. The 2G spectrum allocation irregularities had a significant role to play in the UPA losing to the BJP in the 2014 general elections. In a unique way, the controversy had caused a major political disruption in the country, contributing to a change of guard in New Delhi.

  The entry of Reliance Jio in 2016 was the third big disruption that shook the telecommunications sector in the last two decades. In less than three years, Reliance Jio, backed by the financial muscle of Mukesh Ambani, who controls Reliance Industries Limited, India’s largest company, has already become the third largest player by subscriptions. At 297 million subscribers by the end of February 2019, Reliance Jio is not very far behind the number two player, Bharti Airtel, at 340 million, and the number one player, Vodafone Idea, at 409 million. Equipped with its latest 4G technology, Reliance Jio has triggered another war among the incumbents to retain and grab a larger share in the market with lower tariff and better data service. This too has been no less disruptive than how the 2G controversy changed the government’s approach to spectrum allotment.

  The drop in data tariff plans has led to a spike in data traffic to 1.5 billion gigabytes a month in 2017, making India a country that consumes more data than even the US and China put together.6 Consumers have benefited from the drop in tariffs. The market shares have changed dramatically. Before the entry of Reliance Jio in 2016, there were about ten telecom service providers, with Bharti as the leader accounting for 25 per cent of the total market and the remaining nine accounting for the rest. By February 2019, the industry has consolidated with the three largest players accounting for 88 per cent of the market—led by Vodafone Idea at 34 per cent, Bharti Airtel at 29 per cent and Reliance Jio at 25 per cent. The name of the game has also changed during this period. The focus is now less on voice and increasingly more on data. This shift is driven by the 4G technology. The leadership of the industry is likely to be determined more by who accounts for a larger share of the data market. Not surprisingly, Reliance Jio had finalized by 2018 plans to increase its 4G coverage to 99 per cent, compared to Bharti Airtel’s 4G coverage of 90 per cent and Vodafone Idea’s 4G coverage of just 50 per cent. With the emergence of data as a key driver of the telecom industry, the market leadership race too will be largely determined by who corners more data in the next decade.

  The worrying feature of the new direction in India’s telecom growth is the financial condition of the industry. All the top telecom companies have had to incur huge debts to finance their expansion plans. With the pressure on tariffs, the prospects of profitability for these telecom players do not look too rosy. Only two of the top three telecom companies made profits in 2018. At the end of 2018, Reliance Jio had made huge investments totalling Rs 2.5 lakh crore, but had also run up a debt of Rs 80,000 crore. The debt profile of Vodafone Idea and Bharti Airtel is worse—at Rs 1.2 lakh crore and Rs 1.13 lakh crore, respectively.

  Which direction the telecom industry takes in the coming decades in view of its financial burden is difficult to gauge. What is clear is that India’s telecom story that got a kickstart in 1994 is not yet over. Given how technology-sensitive the sector is and how major telecom players are not showing any sign of relaxing or letting up in their efforts at expanding their market share and consolidating gains, there will be no early end to the story of telecom disruptions either.

  Section 11

  Twin Shocks of NPAs and RBI Autonomy

  CHAPTER 20

  THE GENESIS AND RISE OF NPAS

  A rise in the non-performing assets (NPAs) of banks or their bad loans can be hugely disruptive. They constrain the banks’ ability to make further lending and at the same time put pressure on promoters of the banks to find more capital for them if they want to stay in business. It is a double whammy—the banks don’t earn interest on their bad loans and on top of that, they are required to set aside money to provide for any losses they may incur on those bad loans. Since almost 70 per cent of the Indian banking system in terms of assets is controlled by the government,1 the pressure on the Central government’s finances rises if the volume of stressed loans rises rapidly. At the same time, for a financial system where banks meet close to half of its commercial credit requirement, poorly capitalized weak banks, overburdened by bad loans, can be a big hurdle in reviving investments and growth in the economy.

  That was the nature of the challenge the Indian economy faced from rising bank NPAs in the first decade and a half of the twenty-first century. The annual report of the RBI for 2017–18 revealed that the gross NPAs plus restructured loans of Indian banks had reached 12 per cent of their gross advances by the end of March 2018. The higher the share of NPAs in the banks’ gross advances, the lower is their ability to sanction fresh loans to the productive sectors of the economy. A higher NPA ratio also requires banks to pump in more capital to make them financially sound. Within the banking sector in India, the NPAs of private-sector banks were much lower—in single digits—than the NPAs of the public-sector banks, which were over 15 per cent (a few of the PSU banks had run up NPAs of more than 25 per cent), reflecting how the state-owned banks were in a deeper financial mess than their private-sector counterparts.

  The rise in bank NPAs is directly attributable to the enforcement of more transparent and stringent norms for recognizing bad loans, a practice that was not followed as diligently in the past as was in the three years that ended in March 2018. Thus, the aggregate gross NPAs of scheduled commercial banks increased from Rs 3.23 lakh crore as on 31 March 2015 to Rs 10.35 lakh crore as on 31 March 2018.

  What went wrong? The root of the problem can be traced back to the pursuit of a borrowing-led investment and growth strategy between 2005 and 2010.

  The Economic Survey for 2016–17 explains the phenomenon succinctly:

  The origins of the NPA problem lie not in the events of the past few years, but much further back in time, in decisions taken during the mid-2000s. During that period, economies all over the world were booming, almost no country more than India, where GDP growth had surged to 9-10 per cent per annum. For the first time in the country’s history, everything was going right: corporate profitability was amongst the highest in the world, encouraging firms to hire labour aggressively, which in turn sent wages soaring. It seemed that India had finally ‘arrived’, earning the long-awaited reward for the efforts made since 1991 to establish a modern, competitive economy. And the next step seemed clear: the country was going to join the path blazed by China, in which double-digit growth would persist for several decades.

 
; This mood was infectious. Indian companies began dreaming big and launched new projects worth lakhs of crores, particularly in infrastructure-related areas, like power generation, steel and telecommunications, where there was a perceived capacity gap. Large Indian companies also went on a global acquisition spree, helped of course by lending from banks. The Tata Group acquired European firms like Corus, the global steel giant, and JLR, the internationally famous luxury and high-end passenger vehicle manufacturer. The Aditya Vikram Birla Group acquired Novelis, the US aluminium maker. In a short period of just four years, the country’s investment–GDP ratio rose to 39 per cent by the end of 2007–08, compared to 35 per cent in 2004–05. This was a measure of how rapidly investments in the country were growing in relation to the overall size of the economy. Make no mistake about the source of the funds that fuelled the investment growth. The bulk of these investments were financed by a bank credit surge. The flow of non-food bank credit had more than doubled in just four years—from 2004–05 to 2008–09. Those were the days of relatively high growth and moderate inflation. Annual credit growth during this period ranged between 17 per cent and 36 per cent, much higher than the nominal GDP growth in this period that ranged between 12 and 17 per cent per annum. Wholesale price-based inflation, on the other hand, stayed moderate, ranging between 5 and 8 per cent.

  Making this slightly risky was the fact that the domestic rise in bank credit was supplemented by a sharp rise in foreign capital flows, which rose to about 9 per cent of GDP in 2007–08. A rise in the share of foreign capital flows made the economy and its growth vulnerable to exchange rate fluctuations and external uncertainties. The cost of such capital carried the extra burden of any depreciation the Indian rupee suffered, which in turn jacked up the cost of the projects undertaken with that money.