NEW DELHI: The Department of Telecommunications (DoT) has asked the finance ministry to slash the non-tax revenue targeted from the telecom industry for this fiscal year by over a third. Plunging tariffs due to promotional offers and the limited ability to invest in capital expenditure are set to erode telecom companies’ financials, which have already taken a hit in the past two quarters.
The telecom department has asked that revenue estimates from the debt-laden sector be reduced by 37% to Rs 29,524 crore for the financial year ending March 2018, instead of the Rs 47,304 crore set out in the Union Budget in February, member, finance, Anuradha Mitra, wrote to secretary of economic affairs Tapan Ray. ET has seen a copy of the June 1 letter.
Challenge for government
The call for a sharp cut in revenue collection estimates from a sector that fetched Rs 78,715.01crore for the government in FY17 comes after the government had already reduced its expectations once earlier.
In the Union Budget early this year, telecom sector revenue projections were set at Rs 44,342.2 crore for FY18, down 55% from the year-before expectations of Rs 98,994.93 crore.
The department expects licence fee estimates for this fiscal to plunge by nearly half to Rs 9,255 crore and the spectrum usage charge (SUC) to drop more than 35% to Rs 17,056 crore.
It also expects zero revenue from spectrum sales even if there is an auction this fiscal, as service providers may not bid for airwaves given their highly leveraged balance sheets, Mitra said. FY17 gross revenue for the sector fell Rs 26,000 crore, or 11%, to Rs 2.1 lakh crore from the year earlier.
“In view of the severe financial stress in the sector and rapidly declining revenues of all major telecom service providers, revenue targets for DoT for budget estimates 2017-18 will actually require a downward revision,” Mitra said in the letter.
Any cut in the revenue target from telecom would make it more challenging for the government to meet its overall non-tax revenue target of Rs 2.88 lakh crore, which also includes proceeds from disinvestment. The fiscal deficit target for FY18 is 3.2%.
The communication from DoT to the finance ministry comes in the background of an inter-ministerial group (IMG) — set up to look into the deteriorating health of the sector — meeting all telcos and banks to come up with solutions for revival of the industry reeling under a debt of about Rs 7.29 lakh crore and facing huge pressure on revenue and profitability, intensified by the entry of Reliance Jio Infocomm last September.
Some banks have already raised concerns of loan defaults while the industry itself has been pushed into consolidation mode.
Vodafone India and Idea Cellular are merging as are Reliance Communications, MTS and Aircel to better fight competition.
‘Service providers struggling’
“With service providers struggling to retain customers, it is expected that there will be some more downward adjustments in tariffs in the first three quarters at least, which may not be adequately compensated by a rise in traffic volumes,” she explained.
The department pointed out that telcos have introduced bundled voice and data plans and cut data tariffs by 45-67% amid intense competition.
A clear indicator of the rough times in the present fiscal comes from an 8% decline in advance collections of SUC for June quarter from the preceding three-month period.
This would make one full year of a drop in SUC revenue to the government — which has also seen a consecutive fall in licence fee revenue in the three quarters beginning July 2016-17 — the first since the revenuesharing regime was introduced in 1999-2000.
In its communication to the department of economic affairs, the department has argued that the revised estimates should take into account the last three consecutive quarters of declining licence fee and SUC revenue in FY17. Licence fee fell by 25% in the January-March period from the December quarter, and is set to drop to Rs 9,255 crore, while SUC is expected to be “significantly lower” at Rs 4,970 crore in this fiscal, excluding installments for spectrum bought in auctions.
Mitra, who is also a member of the Telecom Commission, the highest decision-making body in the telecom ministry, said, “It is expected that these trends of falling revenue will persist for some time.” She could not be immediately reached for comment.
Carriers have asked for government support by cutting licence fee, SUC, scrapping the Universal Service Obligation Fund (USOF) and deferring payments for spectrum over 20 years, among others.
While the government panel has three months to come up with solutions for alleviating the financial stress in the sector, DoT has raised concerns that stress is likely to thwart telcos from paying up for spectrum sales, highlighting the fact that the 2016 auctions were completely funded by bank debt.
“The RBI advisory and stress in the sector put a question mark on the carriers’ ability to pay for airwaves in future spectrum auctions. In the circumstances, spectrum auction proceeds for 2017-18 are being taken as nil,” DoT said.
The department has also raised concerns that any fall in revenue will adversely impact operators’ ability to invest in capex.
This could affect growth as the capital-intensive sector would require investments of Rs 2.5 lakh crore till 2020 to constantly upgrade networks and adopt new technology, thus hurting future earnings potential.
Funding capex through debt or other borrowings could also be constrained due to the sector high leverage, it cautioned.