When someone as learned as Meghnad Desai chooses to cite the telecom sector as the platform for sounding off general deficiency of policy change, as he recently did in his column in the Indian Express, we know something is seriously wrong with it.

Have we managed to completely kill this erstwhile poster-boy of the Indian economy, buzzing with rapid growth, super profitability and spectacular stock market gains or is there something that we can salvage from the mess of today?

The transformational effect of the growth in the telecom sector in the last 15 years has been tremendous for the Indian economy. The significance of telecom’s growth for the economy in general can be gauged from the facts that from under 4% in 2001, tele-density reached 77.04% in September 2012 according to the telecom regulatory authority of India (TRAI) with urban voice penetration at 161.03% and rural voice penetration at 40.36%. We can imagine the role of telecom in aiding the growth of the nation by referring to a recent study by the department of electronics and information technology (DeitY), which conclusively proves that every 10% increase in mobile penetration leads to a 1.5% growth in GDP.

The telecom sector has faced ups and downs since the liberalisation process started in the early 1990s. The national telecom policy (NTP) of 1994 did not bring the desired results. The auction process was used to determine license fees in a duopoly regime leading to a high cost regime which did not result in affordability and spread of network. NTP 1999 addressed these issues to a certain extent leading to an era of high growth resulting from enhanced competition and affordability. However, certain subsequent events caused turmoil in the sector, which had hitherto been touted as the showpiece of reforms.

Now the sector needs to be provided with a package which can facilitate the spread of access to the remotest corner of the country. For doing so Budget 2013-14 needs to provide certain palliatives as under:

(I) The telecom sector in India is burdened with a very high cost regime of fees and taxes, perhaps one of the highest in the world. These are:
(a) Licence fee on an average 8% of the aggregate gross revenue (where revenues include all earnings, including non-operational earnings);

(b)Spectrum usage charges on an ascending scale where the fees increase with the increase in spectrum used; in addition there are charges for micro wave usage;

(c) Service tax of 12.33%

(d)Earlier there was an entry fee for getting a licence; now spectrum is auctioned adding to the costs; and it is also proposed to charge a one-time entry fee for spectrum beyond start-up spectrum.

All these would bring the total impact close to 28% as compared to around 5% in many of the Asian economies. In fact, in most countries where spectrum is auctioned, other fees are related to cost of administration which is nominal. Therefore, there is a case to reduce the impact of fees and taxes so that the impact is close to the Asian levels.

For instance, if spectrum is auctioned in adequate  chunks which optimise network planning, there would be no need for a subsequent onetime fee and usage charges as well as licence fees (apart from USO levy at 5% of the licence fee, which could  also be progressively reduced as coverage becomes increasingly universal.) The impact of all fees should be brought down drastically so that affordability is ensured and the telecom operators get more volumes so as to compensate for a low margin arising out of low tariffs. Bad debts should be excluded from service tax. As it is, most of the operators have heavy debts in their balance sheets – a fact which does not reflect well on their health.

(II) Declare the entire telecom sector as an infrastructure sector, including the telecom infrastructure service providers enabling it to avail all the facilities associated with it.

(III) Cenvat credit should be available for towers/tower parts including the radio and other components since they are used purely for providing telecom services (and not get converged as immovable property)

(IV) Remove special additional duty (SAD) since telecom service providers are not manufacturers and do not get credit of the SAD paid.

(V) Since the government wants to provide universal broadband services there is need to have zero import duty for optical fibre cables.

(VI) To encourage the domestic ICT industry, excise duty should be removed for such items, particularly since under ITA we are bound to have zero import duty for IT items.

(VII) The telecom sector popularly is guided by the ‘rule of four’, whereby the optimum level of operators in a licensed area is four. Anything less is not conducive to competition; anything more generally leads to chaos. Therefore, there should be a soft regime for acquisitions and mergers so as to encourage consolidation.

(VIII) The regulatory regime should allow for mortgaging spectrum for obtaining more funds for investing in the network, particularly for accelerating growth of 3G, LTE and 4G network services.