When Arun Sarin, Vodafone Group Plc’s India-born former CEO, was charting the British telecommunications firm’s expansion into emerging markets in the mid-2000s, his home country with more than a billion potential phone users seemed a compelling choice.
Sarin wasn’t alone. Norway’s Telenor ASA, Russia’s Mobile TeleSystems PJSC and Malaysia’s Maxis Bhd were also among a slew of companies that flocked to this fast-growing market. The carriers banded with local partners, bid for airwaves and licences, spending billions of dollars to prepare their networks.
But what once appeared to be their most-promising Asian wireless market has turned sour. Vodafone’s Indian venture with billionaire Kumar Mangalam Birla, saddled with $14bn of debt, is said to be seeking to revamp its borrowings amid mounting losses and a tariff war. Tycoon Sunil Mittal’s Bharti Airtel Ltd is rated junk by Moody’s Investors Service.
In a market that had a dozen carriers two years ago, just three are left standing today – two of them, barely.
High fees, frequent policy flip-flops, endless tax demands from an unsympathetic bureaucracy that treated carriers as cash cows have driven most of the operators aground. The industry has become the latest cautionary tale for investors in India, showing why despite moving up the global rankings for ease of business, the burgeoning $2.7tn economy with a massive consumer base remains a tough, unpredictable place for those who still dare.
The latest blow to the survivors came last week. The nation’s Supreme Court, ruling on a years-long dispute, ordered several carriers to pay the government an additional $13bn in past fees. The British firm’s venture, Vodafone Idea Ltd, faces a bill of $4bn, a burden that could sink the company.
“The government is becoming greedy and extracting the maximum from them,” said Mohan Guruswamy, a former finance ministry official and now chairman of the Centre for Policy Alternatives in New Delhi. “The whole sector is in the doldrums. This judgment will effectively destroy Vodafone Idea, and what you’ll have is an emerging duopoly.”
When India announced its New Telecom Policy in 1999, it said the industry was of “vital importance” with “widespread ramifications on the entire economy,” and vowed to create an “enabling framework for the development” of telecommunications.
While that worked in theory, policymakers also realised that the auction of airwaves and sale of licences could fetch billions of dollars, a revenue source key to narrowing the government’s budget deficit. For instance, in a 2015 auction, India raised a record $18bn, after getting almost $10bn in the previous year. But in 2012, a plan to collect as much as 400bn rupees ($7.3bn at the then exchange rate) flopped as bidders baulked, prompting it to cut prices later.
Spectrum costs in India are among the highest in the world, according to data compiled by Analysys Mason Spectrum Tracker. The leading telecom operators in India pay the largest share of their aggregate revenue for airwaves at 7.6%, followed by Thailand at 7.3% and Bangladesh at 7%, according to Moody’s Investors Service.
While the government set high prices, the carriers had themselves to blame too. Competition drove the operators to outbid each other at spectrum auctions, driving up their costs.
As a result, companies took on billions of dollars in debt to stay in the game even as competition among a dozen operators for a slice of the market drove down tariffs to less than a cent, weighing on their earnings. Then came Reliance Jio Infocomm Ltd in 2016, offering free calls and cheap data on its 4G network, backed by the deep pockets of billionaire Mukesh Ambani’s oil-to-petrochemicals empire.
Jio’s entry shook up the industry that was already hobbling.
In the past two years, two of India’s larger telecom operators – Malaysian tycoon T Ananda Krishnan’s Aircel Ltd, and Anil Ambani’s Reliance Communications Ltd – went into bankruptcy. Vodafone’s India unit announced its merger with Birla’s Idea Cellular Ltd in 2017 to take on Jio, but it has reported losses every quarter since.
“The Indian telecom market had three major challenges,” said Sanjay Kapoor, former CEO of Bharti Airtel’s India and South Asia operations. “Intense competition, high cost structure with exorbitant spectrum prices coupled with government charges and lowest average revenue per user.”
But there were other equally daunting hurdles too. Some examples of policy flip-flops here:
Tax demand: When Vodafone entered India by acquiring Hutchison Whampoa’s Indian operations in 2007, the government slapped the buyer with a tax bill of $2.2bn. Vodafone disputed the tax and India’s Supreme Court agreed that no law upheld the levy of the tax. But the then Finance Minister Pranab Mukherjee amended the tax rules retrospectively, and the carrier is still fighting the demand.
Licence cancellations: In 2008, the government allocated 2G airwaves and licences without auction. The Comptroller and Auditor General in 2010 said that method caused a presumptive loss to the government. Two years later, the Supreme Court cancelled 122 mobile-phone permits won by companies including Etisalat DB, Sistema and Telenor.
A decade after its struggle in India, Newbury, England-based Vodafone Group has one foot out the door. CEO Nick Read said in September that the company isn’t keen to plow any more money into the local venture, in which Vodafone holds about 44%. A Vodafone Group spokesman declined to comment for this story, while Idea said on Thursday that it isn’t aware if its British partner is looking to exit India.
Former Vodafone CEO Sarin didn’t immediately respond to requests for comments.
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