100% FDI in Telecom – Is it a change for the Better?

During the last decade, foreign investment has rapidly increased in developing countries like India and enhanced the economic growth. To maintain balance between economic gains from foreign investment and national telecommunications sovereignty is a challenging task. Liberal foreign investment on telecommunications will promote more economic gains including new and improved telecommunication products and services with lower prices and additional investment in other industrial sectors. 

Reasons for Increasing FDI in Telecom

Indian Telecom industry is suffering from a debt burden. Banks have already lent so much that they cannot stomach lending more. Indian telecoms today owe around INR 185,000 Cr to Indian and foreign banks. The burden is despite the fact that India has one of the largest telecom subscriber bases – around 897 million. Raising the FDI cap is expected to turn around things for the industry. With FDI gates opened, the telecom sector can garner the much-needed additional funds in coming months. The fresh inflow of money and reduced burden on local entrepreneurs will help the industry provide better quality services as well as adoption of the latest technologies. The industry is likely to have further consolidation with foreign players, who may eye the smaller players in the country.

India has already entered the last leg of a three-staged launch into telecom orbit. After the investor sentiments in India’s burgeoning telecom sector had hit all time low on account of cancellation of 122 odd 2G licenses and regulatory uncertainties. Things have never really looked up in the earlier two legs—of 49 percent and 74 percent FDI caps respectively. Experts predict that there won’t be any major changes to India’s telecom sector on account of change in Foreign Direct Investment into telecoms service from the current level of 74% to 100%. 

The return on 3G investments has obviously been too small to be worthy of being an offsetting factor. It was only after the failed 2G auctions that the government realized the magnitude of industry’s problems. That however, has not helped the industry recover from debts, which has also kept the stock prices as well as overall valuations of major India-based telcos under much pressure. It is unlikely to see a significant lift-up, given that the new FDI norms could increase the near-term competitiveness in the industry without a level playing field being in place.

It won’t therefore be unreasonable to say that a full FDI in telecom may not be enough to improve the overall health of the sector at this juncture.

Major reasons for Foreign Investors not to invest in India :

Regressive Government Policies

The infamous Vodafone tax case is a perfect example depicting the flaw in government policies. The policies being changed as and when needed is the signal that went out to foreign investors. The government needs to bring more clarity in its policies in context to regulation, licensing and taxation. 

Corruption

The 2G scam is an example for corruption in Telecom sector in India. Licenses were distributed on first cum first serve basis, but more pertinently, shifted the dates of application, allowed the entry of many foreign players. That had brought in fresh investment in the telecom sector in India, but also led to hyper-competition, with prices falling drastically, and some telcos offering free minutes just to get consumers on board. The falling prices were beneficial from a common man’s perspective but the signal that went out to the foreign investors whatever the Government of India decides, it might not hold up in court. Many foreign investors burnt their hands in this process, and decided to withdraw their business from India. Spectrum allocations have to be made in more transparent manner.

Aggressive Regulatory Policy

The Government bodies and regulators have been hyperactive recently regarding 3G roaming pacts, Vodafone 2G licenses in India.

However, the government’s consent on 100 percent FDI in the Telecom sector has definitely raised hopes in terms of growth and jobs. But the total effect of this policy change is yet to emerge. To retain talent is the main concern as per Dr. Sandeep Gandhi, chief human resource officer, Aircel. One needs to have patience and passion for technology and innovation to have a long-term career in this sector as suggested by him.

Well considered steps taken today will have a long term effect on the Indian telecom sector. So even if 100 % FDI is approved immediate miracles may not be expected. 

Aditya Yerunkar

Class of 2015