With only 3 serious telecom operators, administrative allocation of spectrum space should take the place of auctions

In 1994, the task was much easier — trying to save the sector from the dominance and abuse of a public sector monopoly that operated largely on fulfilling the demands of the elite rather than the public. The irony of a public sector monopoly serving the elite was largely lost since the public sector was commonly accepted as an instrument of state patronage in India’s dirigiste political economy. In the following years, the combined forces of technology and deregulation helped break the shackles of public sector dominance despite the latter’s stiff resistance. How does one break the monopoly of the private sector that embraces cutting-edge technology and has established its dominance, arguably through the market rather than administrative fiat? Admittedly, it is much harder this time, because neither deregulation nor technology is available today as tools to boost competition. Only redesigning policy will help. But, that as we argue, will require dollops of political will.

Let us begin by asserting that a competitive telecom sector is fundamental to realising India’s digital ambitions. That cannot be accomplished by a sector dominated by a duopoly, always vulnerable to cartelisation, let alone a monopoly. Serious competition needs at least three, if not more, strong and spirited national operators that compete on all aspects of network quality, package availability and service innovation. Monopolies have no incentive to innovate. Competition will guarantee that operators find it attractive to invest in network infrastructure upgradation and offer consumers a wide range of innovative service options.

Competition, however, cannot be willed into the sector. It needs careful nurturing, assiduous fostering and regulatory neutrality. Neither of these features has been available in sustained measure. It has been a case of here today, gone tomorrow. Regulatory uncertainty, henceforth, will be even more catastrophic than ever before. The imminent 5G networks demand massive investment and sophistication of operations. This will not be achieved unless the playing field is level across the relevant operators and honest incentives are provided to operators to embrace new technology.

The near-death of competition signalled by the incipient exit of Vi late last year pushed the Department of Telecommunications (DoT) to announce steps to prevent the premature exit of a sagging operator. It is another story whether the cause was regulatory or market ineptitude or perhaps a combination. Alas, one will never know, but DoT in its wisdom decided it was time to preserve competition. As a part of its support package for the telecom sector, in October 2021, it dispensed with the requirement of performance bank guarantees required earlier as security, increased the tenure of spectrum holding from 20 to 30 years, allowed for the surrender of the unutilised or underutilised spectrum after 10 years and most importantly removed the levy of spectrum usage charges. In addition, the government acquired a 35 per cent stake in Vi in lieu of the dues that the operator owed it.

Preserving numbers is, however, not the same thing as promoting and more importantly nourishing competition. While the package may have prevented the exit of Vi from the market, to embed competition within the sector, structural changes are necessary. In this context, revisiting the spectrum assignment regime is perhaps crucial. There is not an iota of doubt that spectrum auctions have served India well in the past due to the acrimonious political economy associated with administrative spectrum assignment, including the ill-conceived and botched-up First Come First Serve (FCFS) method. Auctions allowed for transparent assignment and served as a revenue-generating tool for the government. Revenue generation, however, was seen only through the lens of spectrum sold but not the opportunity cost of unsold spectrum due to high reserve prices. As we speak, only three serious telcos are remaining and it is highly unlikely that any other player would want to enter at this stage. The auction regime worked well when demand exceeded supply, but if there is an adequate quantity of spectrum for everyone, that constraint would not exist.

Administrative assignments can thus be considered once again. The wisdom of past experience and the egregious fallout of FCFS mode of assignment undoubtedly had a bruising impact on the collective consciousness in the government to the extent that such malfeasance will not risk being repeated. At the same time, an administrative assignment will include the possibility that all spectrum can be assigned at reasonable prices and in the process, a grand bargain can be struck with telecom operators.

There is an ongoing debate between the regulator, TRAI and the Digital Communications Commission (DCC) on whether 5G spectrum should be assigned to companies like TCS, Amazon and Google, among others, for their private enterprise business. Naturally, telcos (and the DCC) are opposed to this but were it to occur the move would impact both the business model of operators and the discovered price in an auction. In a dynamic market such as telecom, operators have always faced and will continue to meet market uncertainty. Recall that in 2014, the emergence of Over the Top (OTT) players damaged the business model of telecom licensees by making all calls and messaging virtually free. 5G spectrum assignment for enterprises would likewise adversely affect the business model of telcos. But there will be enterprises that telcos could serve that are not large enough to purchase 5G spectrum. A grand bargain that allows enterprises to buy 5G spectrum while assigning spectrum to the existing telcos through the administrative route will also serve the revenue needs of the government. Indeed, one could argue that if all spectrum is assigned, direct revenue collections could be higher compared to the auction route, in which spectrum risks being unsold. In addition, a competitive telecom sector would be an indirect source of tax revenue as well.

This is an opportunity to also signal to the public sector operator that 5G business is outside the range of its capability set (for a host of reasons linked to processes, incentives and legacy) and hence like Air India it needs to be privatised in the fullness of time. Its asset stock is worth thousands of crores, but the same cannot be said of its revenue flows. As we said earlier, these are difficult decisions and will need much more political will than in 1994. Happily, the payoffs are also likely to be an order of magnitude higher. For the right set of decisions of course.

(Kathuria is Dean, School of Humanities and Social Sciences at Shiv Nadar University, and Senior Visiting Professor, ICRIER, and Kedia is Fellow ICRIER. Views are personal.)