People's Democracy

Left Parties Rejoinder To

The Govt’s Note On FDI In Telecom – II

First part of this rejoinder was published in previous issue of PD. The remaining part of this rejoinder is being published now.

- Editor

THE NEED FOR LARGE CAPITAL INVESTMENTS IN TELECOM AND FDIs

THE finance ministry has claimed that unless FDI limits are lifted, huge investments required of the order of $28 billion (Rs 128,000 crore if we use the current exchange rate, though the finance ministry also talks elsewhere of investments required to be Rs 160,000 crore) cannot be made. The Note also talks of estimates of $2.5 billion per annum of FDI requirements, though no calculations have been given to substantiate this figure.

The finance ministry does not seem to have interacted with the ministry of communications or has overlooked the calculations that we had furnished in our earlier note. This would have made clear that the internal resources generated by the telecom companies are quite adequate to meet the needs of the sector. Our earlier note also shows that the current annual surplus and reserves of 4 Telecom Companies – BSNL and MTNL, Bharati Televentures, Tata Telecom and VSNL, are in the excess of Rs 15,000 crore. If we include Reliance Infocom in this and project the annual surplus for the next 5 years, we are looking at an average annual internal generation of Rs 20,000 crore, even with the most conservative of estimates. The existing subscribers will pay for almost the entire future expansion of the network!

These figures are not surprising. The Indian telecom sector has been largely self-financing. The entire telecom expansion carried out by the erstwhile Department of Telecom was from its internal accruals. The current surplus of BSNL and MTNL is of the order of Rs 9,500 crore and is ploughed back entirely into further network expansion. Things would have been much better if the previous NDA government had not sold off VSNL, with an additional annual surplus of Rs 4,000 crore. BSNL has made investments of Rs 66,372 ($14.7 billion) crore in the last five years, largely from its internal resources. BSNL has a cumulative outlay in Gross Fixed Assets of Rs 130,000 crore (2004 March), which is growing at an annual rate of 15 per cent. If we take this 15 per cent figure and see BSNL’s projected investment for the next five years, it is of the order of Rs 130,000 crore ($28 billion). And this does not include MTNL’s investments, which are of the order of another Rs 1,000 crore per annum. With the huge cash surplus that MTNL and BSNL today enjoy, they can finance their growth from their internal resources (See Box below).

Even if they need to tap either the domestic or the international loan market, this is not difficult with this magnitude of surplus.

If we look at the last 5 years of telecom expansion of the country, it has had an investment of about Rs 100,000 crore. Apart from the private sector, which had to put in the initial investments and is now generating a surplus, the major part of this investment came from public sector and was through internal generation. Therefore, neither is this sum of $28 billion as daunting as it reads nor is it likely to impact capital formation in other sectors.

The finance ministry has termed the balance sheets of the telecom companies in its Note as “the so-called healthy balance-sheets of Indian companies”. Contrary to the misgivings of the Finance Ministry, the balance sheets of the telecom companies are indeed healthy.

The finance ministry’s Note also talks about the debt equity ratio being of the order of 1.6:1 or at best 2:1, implying that the telecom sector is financially weak and requires more investments before loans can be raised. If the capital investments come largely from internal accruals, the debt: equity ratio is bound to be low; this is not an expression of the weakness of the sector but its strength.

The finance ministry’s note has shown a requirement of $17 billion for public sector and $11 billion for the private sector. The question of FDI in BSNL and MTNL, the two public sector companies, would arise only if the government is considering disinvesting in these companies. This is quite contrary to what the minister of communications, Dayanidhi Maran has said. According to Maran, there will be no privatisation of the state-owned telecom companies. And as we have shown above, the public sector telecom companies do not need outside financing.

The FDI requirements then are regarding private telecom companies, who according to the finance ministry’s calculations require roughly 2 billion dollar per year to enhance their telecom infrastructure. By our estimates, the private telecom companies are projected to generate about Rs 10,000 crore per annum from their internal resources, and therefore do not require such large infusions from outside. The major players here not only are not asking for lifting of FDI limits but also have publicly stated that it is of no concern to them.

While we support the increase of Teledensity, we must also point out the skewed nature of the current expansion. With the private sector concentrating on the well-off consumers and the high revenue urban areas, the rural-urban divide is getting even sharper: at present it stands at 1:11. TRAI, in its Press Release, October 27, 2004 has stated, “despite several attempts over the last more than ten years, the gap between penetration of telephony in rural (1.7 per cent) and urban  (19.7 per cent) areas is widening.” Even today, 70,000 villages are not connected to the network. Even the finance ministry’s note accepts that the network coverage in the country is only 20 per cent. While improving Teledensity is important, it is now becoming clear that unless immediate measures are taken, the urban-rural divide would continue to grow.

Increase of competition and new private players has not helped in increasing network coverage or rural telephony. While well-off urban consumers have benefited from the increase in Teledensity, the growth of the network coverage has not kept pace; it is largely concentrated in areas that were already connected.

The issue of FDI limits must be seen in the context of priorities in the telecom sector. The urgent need is to expand the network coverage and extend rural telephony. In both these, private players have very little contribution. The private telecom companies have fulfilled only 10 per cent of their rural telephony commitments. Therefore the issue of raising FDI limits has little relevance to the key issues of improving coverage and rural telephony. Regarding resource constraint, the key constraint is capital for the expansion of the rural network. Raising FDI limits or FDIs are not going to address this.

The only company that has pursued rural telephony is state-owned BSNL. The finance ministry, instead of encouraging BSNL, is hampering its ability to provide rural telephony by not releasing the Universal Service Obligation (USO) Levy, which has an unspent current cumulative balance of Rs 5,500 crore.

Some private operators are not paying BSNL the TRAI mandated Access Deficit Charges, thus hampering BSNL’s ability to provide rural telephony. They are routing long distance calls through their network and hiding the origin, treating it as a local call, which has a lower access charge than long distance calls. Both BSNL and MTNL have filed cases against Reliance. The government needs to expedite the release of USO levy and come down heavily on such attempts to fraudulently bypass legitimate access deficit charges. The government also needs to strengthen BSNL and MTNL’s competitive capabilities by a merger of the two, after proper valuation of BSNL.

The finance ministry also argues that if we do not expand the market for buyers we may be limiting competition and may end up with only one or two large players. This is a very surprising statement as India has already four major players, MTNL-BSNL, Tatas, Reliance and Bharatis, operating with unified licenses across various circles. If we include both GSM and CDMA, there are seven operators in mobile telephony. In most circles, there are three land line operators, four in ILD services, three in NLD services and hundreds in ISP. Apart from mobile telephony, where new license are restricted by lack of spectrum availability, in all other areas, licenses are freely available (see Table License Versus FDI Status).  It is one of the most competitive markets for telecom in the world, allowing competition in the local loop as well. Something, which is yet to take off in the west.

The finance ministry has suggested that the advantages of competition outweigh the cost of duplication of resources. Whether competition will bring down rates or it will lead to needless duplication of infrastructure depends on the degree of competition already existing in that market. Currently, Indian telecom sector is already highly competitive. So much so that TRAI regards tariffs need no longer be regulated. Given the highly competitive environment of the telecom scenario in the country, TRAI, in its consultative papers, has also talked of needless duplication of infrastructure. There is little that competition can do at this stage to bring down telecom rates. It may be seen that the introduction of the 4^th cellular licensee did not bring down rates further.

We have argued in our earlier note as well as here that FDI limits have no relevance in either attracting foreign capital or in expansion of the telecom network. The biggest proof of this can be found if we contrast the mobile and Internet services in the country. In Internet services, 100 per cent, FDI is permitted. We not only have yet to attract foreign capital, our broadband services are 60 times more costly than Korea’s. Our Internet growth rates are stagnant, with VSNL concentrating after privatisation in the more lucrative international long distance telephony. In the same period, with a 49 per cent cap in FDI, we have grown at a phenomenal pace in mobile services. China, with an even more stringent FDI policy also has grown at a staggering pace.

Experience shows that a blind faith in the market coupled with relaxing FDI limits will not lead to increased telecom penetration or expand telecom manufacturing base. The key here is not FDI limits but the cost of services and the thrust that the government is willing to put into these sectors.

INDIGENOUS MANUFACTURE

The Left had also raised concerns that unless equipment manufacturing is indigenised, the cost of equipment will not come down, impinging ultimately on the cost of telecom services. The Left had pointed out that at present we offer reverse protection in the Indian market; we have higher duties for raw materials than for finished goods, leading to the destruction of the indigenous telecom industry. The Chinese example is just the opposite. They have used their very large internal market to develop a manufacturing base, which is now one of the largest in the world. The finance ministry calls it the “infant industry” model, ; but the fact is that this Chinese “infant” is currently the biggest player in the global cellular market. It, manufactures the largest number of handsets in the world, and is giving global MNCs a run for their money in the more sophisticated equipment such as switches and routers, etc. Having 100 per cent FDI has not attracted significant capital into Indian telecom equipment manufacturing sector. In contrast, China, has secured very substantial FDIs in manufacturing, with the presence in China of almost all the major telecom equipment manufacturing companies such as Nokia, Erricsson, Alcatel, etc.

The manufacturing sector in China is growing enormously and it is likely to be major supplier of telecom equipment internationally – from mobile handsets to more sophisticated network equipment. This has been possible due to a holistic view of the telecom sector it took: from manufacturing to services. This has not only helped China in building manufacturing capabilities, but also resulted in cheaper telecom equipment and thus cheaper expansion of the telecom network.

In India, in contrast, we are providing negative protection to indigenous industry: we have higher duties on raw materials and intermediate goods than on the finished products. No wonder Indian industry is in the doldrums while huge amounts flow out of the country for import of almost every thing in the telecom sector, from mobile switches to handsets. The premier switch manufacturing company, ITI is now sick. There is no manufacture of mobile handsets taking place, in spite of the huge cellular market. One can understand this being the policy of the NDA government, where the trading interests had a strong lobby, but not for a government that has promised employment and support to indigenous industry. These polices of continuing discrimination against Indian industry must be rectified if Indian industry has to grow and prices of telecom services brought down.

Apart from the issue of manufacturing protection or the infant industry argument, we need to be clear about certain fundamentals. We believe that unless telecom equipment costs are brought down, the telecom services costs will remain high. We look upon domestic manufacture as a means of lowering costs. This is the Chinese model. If India has a market for 150 million new subscribers, then this means a larger market for new subscribers than that of the US and the EU put together, less only to the Chinese market in size. If we do not use this market to build our manufacturing strength, not only will the cost of telecom services not come down, but it will also lead to huge outflows of foreign exchange.

Let us take a quick look at the foreign exchange outflows that would take place if we do not build up telecom equipment manufacture. Out of the 150 million additional lines, about 120 million is expected to be cellular. For handsets alone, this means an outflow of  $24 billion! If we add to this the 50 per cent of the $28 billion as cost of equipment, we are talking of another $14 billion. In other words, we are talking about an outflow of the order of $38 billion for not having telecom equipment manufacturing sector of the type that China has built. While the finance ministry is concerned about how to secure foreign capital of the order of $11 billion, it does not seem to be worried about this much larger outflow that is projected to take place.

The telecom equipment manufacturing, telecom services and their cost must be seen in a holistic way. This is what the NTP 94 and 99 had promised. This is what the Left is arguing the government must do.

LEGALISING VIOLATIONS OF THE 49 PER CENT FDI CAP

The key question here is whether the breaching of FDI limits by Bharati and Hutch illegal or not? If it is legal, then there does not seem to be any argument for lifting of the caps. If it is not, should violators be rewarded by legalising their illegal acts? Unfortunately, the finance ministry’s Note adds little light on this question.

The issue of lifting FDI limits in telecom services needs to be de-linked from that of violations of the existing cap of 49 per cent on FDIs. The violations are a matter of law and the government needs to take appropriate steps of either penalising these companies or plugging the existing loopholes. After plugging the loopholes, the concerned companies should be asked to dilute their foreign holdings and bring it in line with the 49 per cent FDI cap. Policy should not be changed because there have been violations.

We must also emphasise that if foreign capital comes in to buy existing shareholder holdings, this does not go towards new telecom investments of the type that the finance ministry has stated the country requires. Instead, it is a kind of portfolio investments that go to the pockets of the existing shareholders and generate windfall profits for them. Good policy should encourage productive investments. Instead, the current proposal of lifting FDI will encourage speculative profits and reward those who have violated the existing FDI caps.

(Concluded)