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Telecom Pitch: Budget focuses on creating a digital economy

March 17, 2017
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The Union budget made only one direct reference to the telecom industry. While presenting the budget, Finance Minister Arun Jaitley said, “The telecom sector is an important component of our infrastructure ecosystem. The recent spectrum auctions have removed spectrum scarcity. This will give a major fillip to mobile broadband and Digital India for the  benefit of people living in rural and remote areas.”

There were, however, multiple references to “digital economy”, “digital services”, “digital payments”, etc. For example, the minister said, “Under the BharatNet project, optical fibre cable (OFC) of 155,000 km has been laid. I have stepped up the allocation for the BharatNet project to Rs 100 billion in 2017-18. By the end of 2017-18, high speed broadband connectivity on optical fibre will be available in more than 150,000 gram panchayats, with Wi-Fi hotspots and access to digital services at low tariffs. A Digi-Gaon initiative will be launched to provide telemedicine, education and skills through digital technology.”

The repeated references to “digital” emphasise the policy thrust on the creation of a digital economy. Such a vision requires rock-solid telecom infrastructure at its foundation. In fact, for this to happen, the telecom industry has to grow strongly.

As per Prashant Singhal, global telecom leader, EY,  “The Union budget 2017 paves the way for the government’s aim of a less-cash economy, financial inclusion and Digital India. The launch of the Aadhaar-enabled payment system without bank accounts, increase in Aadhaar-enabled point-of-sale (PoS) machines, sops for PoS machines and iris readers, smart Aadhaar cards for monitoring the health of senior citizens and high speed broadband for gram panchayats are likely to strengthen the digital ecosystem. An additional outlay of Rs 100 billion for the BharatNet project, the creation of Digi-Gaon for telemedicine and education, Aadhaar-enabled payments, the use of information and communications technology in the education sector, and a focus on cybersecurity are encouraging steps for the telecom sector.”

For the sector to grow quickly, both capital and an enabling environment are required, in addition to demand for services. The environment is not perfect with litigation across the industry and some confusion regarding the policy structure. There is room for subscriber growth only at the rural level, with all urban networks saturated. However, there is room for growth in data usage across the board.

The telecom industry’s biggest issue is financial viability. Every operator has taken on massive debt and invested huge amounts to buy spectrum and licences, and roll out networks. They are struggling to survive the intense price war. ARPUs are flat or falling. Consolidation is guaranteed, with many mergers on the cards.

Nevertheless, it is undeniable that the entire concept of going cashless (or less-cash) will be dependent on the telecom industry’s ability to deliver fast, reliable data services everywhere. There are a host of digital cashless options. But each of these relies on strong telecom infrastructure and services.

Rajan S. Mathews, director-general, Cellular Operators Association of India (COAI), says, “Pro-people announcements have been made in this budget in order to promote nationwide telecom connectivity. Rural connectivity has been given the necessary thrust and it will be a beneficial move for the telecom industry, which will find itself in a better position to carry forward some of its ambitious network roll-out plans. We agree that there is no scarcity of spectrum. We support the allocation and harmonisation of spectrum through a fair, transparent and open auction process. The primary issues are pricing, quality, deployment and how soon the bidders will be able to access the allocated spectrum. Spectrum availability is no longer an issue and we agree with the finance minister on this.”

The overall banking system depends on the internet, which must be built on the availability of 3G/4G-compatible spectrum and OFC. All digital financial apps and transaction channels like RTGS/NEFT transfers, credit cards, debit cards, ATM withdrawals, cheque clearances, the unified payment interface, BHIM, mobile wallets, Paytm and SBI Buddy are accessed over the internet.

Jay Chen, chief executive officer, Huawei India, is upbeat about the opportunities that have been created. “The current budget strongly supports the progressive vision of a digital India. The allocation of Rs 100 billion towards the BharatNet project will give an overall boost to broadband connectivity. The success of the BHIM app and announcements related to its promotion, Aadhaar-based swipe machines and tax exemption to those using Aadhaar-based PoS machines will help accelerate the acceptance of digital payments. Furthermore, initiatives like Digital Village and Digi-Gaon will significantly extend the benefits of digitisation to rural India.”

Both good infrastructure and high smartphone penetration are necessary. The transition from feature phone to smartphone seems to be taking place. Cheap smartphones in the sub-$30 range are already available and handsets are becoming cheaper by the day. As of now, there are 250-300 million Indian smartphones, compared to 650-700 million feature phones. But feature phones are being phased out and replaced by smartphones.

The policy push towards digital will eventually lead to a payoff for service providers. Data usage should expand, offering new revenue streams. Apart from financial transactions, mobile wallets and payments banks are two possibilities. Besides this, smartphone usage is driven by entertainment and by location-specific, e-commerce businesses.

A smartphone can access videos and live sports coverage. Social media access to platforms like WhatsApp, Twitter and Facebook is also popular. Users who switch to smartphones from feature phones are also likely to develop a taste for social media, e-commerce, and entertainment consumption. However, there are roadblocks in terms of infrastructure inadequacies. Urban users complain of slow data transfers and dropped calls. In rural India, large areas lack acceptable mobile networks and reliable power supply, thus impacting banking services and internet connectivity.

Another issue is that mobile wallets and credit/debit cards charge high commissions, which adds to user costs as compared to all-cash deals. These commissions will reduce only if volumes rise sufficiently. Rural telecom penetration stands at about 51 per cent and most rural subscribers use feature phones. In urban areas, there is 100 per cent or more telecom penetration in most towns, so there is a huge urban-rural divide.

As of December 2016, four out of five villages did not have a bank. The issue is not about setting up physical bank branches, banking correspondents or ATMs. The constraints are poor networks and power supply, which render all PoS machines and ATMs useless. The Reserve Bank of India reckons that bank account penetration stands at only about 53 per cent across India.

Telecom networks will have to be built at a faster pace since all other infrastructure depends on them. The roll-outs will also have to have a rural focus and be accompanied by offers of cheap smartphones and digital literacy/familiarisation programmes. This must be accompanied by better data security and updated data protection laws as a precaution against data hacking.

If telecom roll-outs are speedy enough, a surge in data volumes (and new subscribers) could happen. In that case, data ARPUs will rise, along with new subscriptions. Telecom service providers can also offer mobile wallets and set up payments banks, creating more revenue streams. But if network roll-outs do not take place quickly enough, the cashless drive will fall flat due to infrastructure constraints.

One implication is that the number of internet-enabled users must double in a relatively short period. The internet user base currently stands at about 350 million. If every bank account is to be net-enabled (as implied by a digital economy), about 700 million account holders will need to be capable of going online within, say, the next 12-24 months.

Smartphone penetration has to also increase at somewhat similar rates. Prior to demonetisation, estimates (by Gartner and others) suggested that India would hit 55-60 per cent smartphone penetration by 2020-21 only. For “cashless” to work, that sort of penetration would be required by 2018-19.

There were 936 million active telecom subscribers as of end-2015-16, 74 million more than the 862 million recorded in 2014-15. In absolute terms, this was higher than the addition of 71 million subscribers in 2014-15 over the 791 million subscriber base in 2013-14. However, in percentage terms, growth slowed down due to the high base. Churn was also high. By November 2016, active subscribers numbered around 968.83 million.

Industry revenues hit Rs 1.93 trillion in 2015-16, up only 5.5 per cent from Rs 1.83 trillion in 2014-15. Of this, data contributed about Rs 410 billion or about 21 per cent. Pre-demonetisation estimates had suggested that total revenues would cross Rs 3 trillion by 2020-21, with data contributing Rs 1.4 trillion or about 45 per cent. If “digital” is to work, data usage has to accelerate even quicker.

The coming fiscal year could be make or break for many telecom service providers. Tariffs cannot be increased and may, in fact, fall given Reliance Jio’s proposed pricing structure. ARPUs are low, and the cost of subscriber acquisition and retention is high.

Most corporates have debt overhangs due to commitments in the past two spectrum auctions (in March 2015 and October 2016). Most companies are cash negative (or making net losses, as the case may be). Mergers such as Idea-Vodafone and Reliance Communications-Telenor-Aircel are already on the cards as financially weaker operators are finding it difficult to go it alone. Further consolidation is very likely.

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