A turning point (The Hindu)

Mains Paper 3: Economy
Prelims level : Adjusted gross revenue
Mains level : Factors responsible for telecom sector sustainability

Context:

• Major telecom operators announced tariff hikes in the range of 15 to 40 per cent across different plans, marking an end to the brutal price war that has bled the incumbents dry.
• For Bharti Airtel and Vodafone Idea, the new tariffs will come into effect on December 3, while for Jio, the hikes will be effective from December 6.

Background:

• This decision, which comes against the backdrop of both Bharti and Vodafone Idea reporting massive losses in the second quarter, after the Supreme Court upheld the government’s position on what constitutes adjusted gross revenue (AGR), could potentially mark a turning point in the fortunes of the beleaguered sector.
• This would have further weakened incumbents, increasing the possibility of a duopoly with a weak second player.
• Statements by telcos which indicated that liquidation was the only option, unless the government eases off demands for spectrum fees, underline the seriousness of this scenario playing out.
• Developments over the past years both the manner in which a price war that bled incumbents was unleashed and the seemingly coordinated manner in which the tariffs have been hiked raise questions.
• They call for closer supervision of an already over-regulated sector to ensure that healthy competition exists, not the mere semblance of it.

Fulfillment of the long term growth:

• Tariff hikes alone are unlikely to be sufficient for long-term sustainable growth.
• The government needs to reexamine its approach towards the sector which is driven purely by considerations of revenue maximisation.
• While a cash strapped government will welcome any additional revenue, sticking to its position on what constitutes AGR in the Supreme Court has grave consequences for the sector’s health.
• The government has tried to soften the blow by announcing a two-year moratorium for telcos in making their spectrum payment for past auctions.

Way forward:

• This would positively impact telcos’ cash flow in the short run, it alone is not enough. The current situation calls for an overhaul of the current licensing regime.
• Telcos have filed a review petition against the Court’s order on AGR seeking waiver of penalties and interest.
• Restoring the health of the sector would be for the government to give up its demand of interest and penalties.
• It should also reconsider lowering the licence fees, and rethink its stance on spectrum pricing.

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Prelims Questions:

Q.1) Consider the following statements:
1. The Gross Domestic Product (GDP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.
2. The modern-day definitions of GDP and GNP can indeed be traced back to Adam Smith.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: D
Mains Questions:
Q.1) Do you think the tariff hikes are sufficient for telecom sector’s sustainability? Critically examine.