Macro-Economic Project

On
Impact of Fiscal and Monetary Policies
on
Indian Telecom Industry

Group Number 8

Contents
Acknowledgement................................................................................................. 2
INTRODUCTION...................................................................................................... 2
Sector Structure & Brief History of Telecom Reforms in India.............................2
Fiscal Policy 2015-2016 Effect on Telecom Industry...............................................2
Digital India Leveraging Information & Communication Technology................2
Changes in Spectrum Licence Fee......................................................................2
Telecommunication Tariff Order - 2015...............................................................2
National Optical Fibre Network...........................................................................2
Tax Reforms for Telecom Operators....................................................................2
Payment Bank Licence to TELCOS......................................................................2
Monetary Policies 2015 to 2016............................................................................. 2
Repo Rate Reduction:......................................................................................... 2
Foreign loan fillip for telecom.............................................................................2
Impact of Bank Rate........................................................................................... 2
Impact of Open Market Operations.....................................................................2
Impact of Monetary Policy on Imports................................................................2
References............................................................................................................. 2

INTRODUCTION
The telecommunications sector has emerged as one of the key sectors that have put the Indian
economy on a revival path. Proactive policies such as opening up the sector to private players and
competition, unbundling the policy, regulatory and operational roles of the government, removal of
restrictions on foreign investments coupled with viewing reforms as a continuous process created an
environment conducive to growth. These reforms enabled induction of new technologies.

India is currently the second-largest telecommunication market and has the third highest
number of internet users in the world
Indias telephone subscriber base expanded at a CAGR of 19.5 per cent to 1022.61 million
over FY0716
Tele density (defined as the number of telephone connections for every hundred individuals)
increased from 17.9 in FY07 to 80.98 in FY16
In September 2015, total telephone subscription stood at 1022.61 million, while teledensity
was at 80.98 percent

Sector Structure & Brief History of Telecom Reforms in India

The telecom sector operated under the purview of the DoT, Ministry of Communications and
Information Technology. Various PSUs, and an autonomous R&D and manufacturing unit operated
under the DoT. The sector structure consisted of government undertakings, multiple and private
service providers, regulator, appellate tribunal, corporatized government incumbent, privatized
government incumbent, universal service obligation fund administrator, government owned special
purpose vehicle for broadband, Indian global players and independent tower companies. The Supreme
Court provided recourse to conflicts that could not be resolved at the sector level. The Competition
Commission of India was the statutory body that addressed competition related issues, including some
that affected the telecom sector.
Reforms began in 1984, primarily driven by the then Prime Minister, Mr Rajiv Gandhi through a set
of missions, one of which was the Telecom Mission. Mr Sam Pitroda spearheaded this mission
under which the customer premise equipment manufacturing was delicensed, private operators were
given licenses to operate public call offices, and services in Delhi and Mumbai, and the overseas
services, were corporatized for better focus and resource mobilization. The New Economic Policy
1991 set the framework for liberalization, including in the telecom sector. The telecom equipment
manufacturing was delicensed in 1991. Few of the major reform processes since then are enlisted
below.

Private Participation in Service Provision (1992)

Formulation of NTP 94 (1994)
Separation of Policy and Regulation (1997)
Restructuring of TRAI (2000)
Corporatization of BSNL (2000)
Development of a Framework for Universal Service Obligation Fund (2002)
Unification of Access Licenses (2003)
Private Participation in International Long Distance (2004)
Introducing Additional 2G Licenses (2008)
Bringing in Wireless Broadband (2010)
Universalizing Broadband Access (2012)

Fiscal Policy 2015-2016 Effect on Telecom

Industry
Digital India Leveraging Information & Communication
Technology
The Digital India program aims to transform the country into a digitally empowered society and
knowledge economy. It focuses on making technology central to enable this transformation. It is
planned to be implemented in phases till 2018. Digital India is an umbrella program to attain ICT
infrastructure targets such as of broadband and mobile connectivity in the country, and further enable
provision electronic delivery of government services to citizens. It is coordinated by DeiTY and
implemented by the Government.

Estimated impact of Digital India by 2020:

Broadband in 250,000 villages, universal phone connectivity

400,000 public internet access points
Wi-Fi in 250,000 schools, all universities; public Wi-Fi hotspots for citizens
Digitally empowered citizens public cloud, internet access
Job creation: 17 million direct and at least 85 million indirect
E-governance and e-services: across government
India will be a leader in IT use in services - health, education, banking
Net zero imports by 2020

Changes in Spectrum Licence Fee

The next round of spectrum auction, scheduled to be held by October 2016, will ensure there is plenty
of spectrum available with operators which will help improve the voice and data services for

customers, in addition to helping government to get mobilise resources to meet its 2016-17 fiscal
targets.
In the NIA, for the first time, the government has also promised to assign spectrum within 30 days of
making an upfront payment by successful bidders, compared with four-five months earlier. While
telecom operators winning spectrum in 700MHz, 800MHz and 900 MHz bands will have to pay at
least 25% of the bid amount within 10 days of the conclusion of the auctions. The rest will have to be
paid in 10 annual instalments after a two-year moratorium. For 1800 Mhz, 2100 MHz, 2300 Mhz and
2500 Mhz at least 50% of the bid amount will have to be paid up front.
Unlike previous auction, this time Government has reduced the interest on instalments to 9.3 per cent
from about 10 per cent. The lock-in period of spectrum holding by an operator before he can trade or
share it is now one year from the date of spectrum allotment instead of two years in previous auction.
This move will smoothen the process of consolidation. The government has fixed 3% of annual
revenue as usage charge for spectrum acquired in the upcoming auction; for existing spectrum, a
weighted average spectrum usage charge (SUC) has been fixed, with a floor price of 3%.

The Finance Bill 2016, proposes to insert a new section that provides with the provision that
payments made towards spectrum would be accorded treatment akin to license fee payment.
Accordingly, for existing businesses, starting with the year in which payment is made, spectrum fees
paid shall be allowed as deduction spread over no. of years for which the spectrum would be in force.
Other provisions dealing with situations like transfer proceeds for spectrum being more or less than
un-amortized expenditure, would continue to apply as it applies in case of license fee payments. Tax
treatment for claims made in the earlier years, where the proposed section did not exist, ought not be
covered by this amendment.

Telecommunication Tariff Order - 2015

In 2015, TRAI passed the telecommunication tariff (16th amendment) order, according to which,
every service provider should offer a special roaming tariff plan to its prepaid and post-paid customers
and on payment of fixed charge for special roaming tariff plan national roaming should be free.

Mobile calls while in roaming will be cheaper by up to 23 per cent, while sending SMSes will cost up
to 40 per cent less. Under Roaming Tariff Plan (RTP) clause, the charges for outgoing voice calls
and outgoing SMS, both local as well as long distance (inter-circle), did not change with the location
of the subscriber within the country.

National Optical Fibre Network

In line with global NBPs, the Indian Government has also introduced its National Optical Fibre
Network (NOFN) project, with an aim to provide an impetus to rural broadband growth. The NOFN
project seeks to bridge the connectivity gap between the Gram Panchayats (GPs) and block levels. At
present, optical fiber cable connectivity in India is available up to the block levels.
The project aims to provide connectivity of 100Mbps broadband service to 250,000 GPs in the
country.48It is estimated that a total of 600,000 km. of optical fiber cable, i.e., incremental fiber of 2.4
km/GP has to be laid under the project.49 To achieve this, the Government has estimated a project
cost of INR300 billion that is to be funded through Universal Service Obligation Fund (USOF) in a
phased manner.50 A special-purpose vehicle, Bharat Broadband Network Limited (BBNL), has been
set up to execute the project.

Tax Reforms for Telecom Operators

The telecom operators had a long pending demand to provide relief from the litigation on account of
allegations of the revenue authorities that the independent distributors appointed for distribution of
pre-paid products are agents of the telecom operators and thus, margin paid to them qualifies as
'commission' subject to the tax withholding at the rate of 10%. While the industry argued this to be in
nature of discount, the tax authorities have alleged it to be commission liable to tax withholding under
section 194H of the Income -tax Act, 1961 ('the Act').
The government has reduced the tax withholding rate on commission/brokerage under section 194H
of the Act from existing 10% rate to 5% w.e.f. June 01, 2016. While this does not provide complete
relief in regard to the long pending demand of the telecom sector to reduce the tax withholding rate to
1%, the proposed reduction to 5% shall still reduce the exposure to the litigation significantly. It
should also reduce the cost in cases where tax withholding on commission payments is grossed up and
paid by the telecom operator.

Payment Bank Licence to TELCOS

Payment Bank in India is a type of bank which is a non-full service niche bank. A bank licensed as a
Payments Bank can only receive deposits and provide remittances. It cannot carry out lending
activities. Thus, Payment Banks can issue ATM/debit cards.

Telecom operators can leverage their large customer base as well as wide reach across the country,
especially in the semi-urban and rural areas. As a payment bank, telcos will be able to accept deposits
and remittances.
All Mobile Network Customers (100% of the customer base) have the ability to pay with
Mobile Unlike Credit / Debit Card.
Payments are processed within a few seconds as Mobile Network Operator has all the
relevant information within the network to process
Increase in revenue for the Telecom Operators and enhanced banking reach for customers.
Telecom companies having payment bank licence are: Bharti Airtel, Vodafone, Reliance (RIL)
in partnership with SBI

Monetary Policies 2015 to 2016

The Indian telecom industry is currently facing a challenging financial environment. Its bourgeoning
industry debt is a rising concern. In FY14, the sectors total sector debt stood at INR2,500 billion
higher than the industrys gross revenue of INR2,338.5 billion.15 The sectors rising debt-equity ratio
is also a key concern. Furthermore, financial over-leveraging, largely on account of the high costs of
spectrum pay-outs, exerted a downward pressure on revenues and earning capacities in the industry.
In addition, multiple taxes and levies have added to the financial woes of operators. Currently, levies
account for around 30% of revenue earned by telecom companies in India, as compared to around 5%
in other APAC countries. High price-related competition and low tariffs have also led to low ARPUs
exerting pressure on margins. These issues are likely to further decelerate operators investments and
put a brake on their plans to expand their networks and provide new services.
The financing needs of the telecom sector are increasing rapidly with the rising cost of input required.
India has been witnessing high pay-outs for acquisition of spectrum at all the airwave auctions since
2010. Moreover, with debts mounting on operators balance sheets, Indian banks have also been
reluctant to lend money to the sector. The Twelfth Five Year Plan projected investments of around
INR94 billion in the telecom sector. However, it is envisaged that more than 90% of these investments
will be from the private sector. This is a difficult proposition, given that operators balance sheets are
already stretched.

This is cause for a major concern, since telecom is a capital intensive sector. The need for financing is
bound to rise, given the massive outlay required to acquire spectrum. It is estimated that the recently
concluded round of spectrum auctions (March15) will add an additional debt of INR1,000 billion on
the industry. Moreover, rollout of next generation 4G services and expansion of 3G services will
require additional investment by operators.

Monetary Policy: refers to the use of monetary instruments, regulated by the central bank,
used to control the availability, cost and use of money and credit.

Statutory Liquidity Ratio: It is the percentage of deposits that a bank has to

invest in cash, gold or Government securities. When SLR rate increases, correspondingly
money supply in the economy reduces.

Cash Reserves Ratio CRR: It is the percentage of deposits that a bank has to
keep as reserves with the RBI. When Government increases CRR, the bank has to keep a
larger percentage of its deposits as reserves. When CRR increases, correspondingly money
supply in the economy reduces.

Open market Operations: RBI buys and sells Government securities in the
open market to maintain the money supply in the economy. Selling securities will reduce the

money supply in the economy.

Bank rate: Bank rate is the rate at which RBI lends funds to the commercial banks. If
this rate increases, it becomes expensive to borrow from the RBI. When bank rate increases,

correspondingly money supply in the economy reduces.

Repo rate: Repo rate is the rate at which RBI lends funds to the banks against

securities. When repo rate increases, correspondingly money supply in the economy reduces.
Reverse repo rate: Reverse repo is the rate at which banks keep their excess funds
with the RBI. With increase in reverse repo rate, money supply reduces in the economy.

Key Rates
Repo rate
Reverse Repo rate
CRR
Bank rate
SLR

In Sep-2015
6.75%
5.75%
4%
7.75%
22.0%

In Aug-2016
6.5%
6.0%
4%
7.0%
21%

Repo Rate Reduction:

Reserve Bank of India has cut its key interest rate by 0.25% in its first monetary policy review for the
year 2016-17. The repo rate, the rate at which RBI lends money to commercial banks, now stands at
6.5%. Therefore, when the interest rate is low, lending by banking system becomes a bit cheaper,
leading to a fall in EMI, thereby providing a boost to industry and economy in overall.
As the industry is high capital incentive, any ease in the monetary rates will have a direct impact on
the industry as the cost of capital to raise funds will reduce.

The DoT plans to make available overseas borrowings, subsidies and grants to TELCOS to stimulate
investments in green energy technologies. If these materialize, they will provide companies
commercially viable options for deploying green solutions. The financing options being considered
include:
External commercial borrowings (ECB) from the World Bank and the Asian Development
Bank
Subsidies from the Ministry of New and Renewable Energy (MNRE) and the National Clean
Energy Fund (NCEF)
Easy bank financing for tower companies (soft interest rates; increased loan tenures)
Increased overseas borrowing limits, reduced import duties and excise exemptions on telecom
infrastructure equipment

Foreign loan fillip for telecom

The government has modified the overseas borrowing norms to allow infrastructure companies,
especially telecom firms, to raise short-term foreign debt. The move will help cash-strapped telecom
companies to raise funds for the spectrum auction in October16 at a time when rising bad loans have
impacted banks' appetite for lending.

Government has modified overseas borrowing for core sectors

Infrastructure companies and NBFCs allowed to raise external commercial
Move will allow TELCOS to raise short-term foreign debt
Borrowings should be fully Hedged

Impact of Bank Rate

When RBI reduces bank rate, interest charged by the bank also reduces. This in turn leads to increase
in investment expenditure, which in turn increases the industrial growth. RBI has reduced the bank
rates to 7.0%, thus leading to increased investment in telecom industry.

Impact of Open Market Operations

This mechanism influences the reserve position of the banks, yields on government securities and cost
of bank credit. The RBI buys government securities to increase the flow of credit and increase
industrial growth.

Impact of Monetary Policy on Imports

Monetary policy has an indirect impact on imports of country as in expansionary policy is being
applied by RBI, the purchasing power is more and the import of machines, parts and technology
would increase to a great extent and the industrial growth becomes better. Over 90% of telecom gear
in India is imported thus an expansionary policy followed by RBI will boost the infrastructure and
investment in the industry.

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