Invest in Credit Risk Mutual Fund or not?

Reforms enthusiasts have been thrilled by the series of reforms that have been unleashed by the Indian government since the start of the pandemic. One of them includes the recent changes to the FDI policy where the government has allowed for 100% FDI in telecom.

Telecom sector has had its own share of ups and downs in India. The sector witnessed an impressive expansion with several players entering the industry with the objective of penetrating into India’s large domestic market. The sector also got adversely impacted by the 2G Scandal and subsequent cancellation of spectrum. This was followed by auctioning for spectrum which inevitably increased costs for operations, while the dispute on AGR dues. AGR is essentially a fee that telecom operators were supposed to share with the government.

Entry of Jio

Even as the incumbent players navigated through these challenges, entry of Jio into the sector caused a major disruption. It reduced tariffs drastically making data much more accessible. As a consequence, India has one of the lowest data costs in the world – which is enabling a faster digitization of the economy. However, its entry also resulted in consolidation in the sector and gradually, the sector now has only three players.

Given the critical nature of the sector, more so for innovation and knowledge economy, a healthy competition is required to ensure efficiency. This is where the new FDI policy comes in as it enables companies to set up their 100% owned subsidiaries in India with the objective of tapping into one of the world’s fastest growing telecommunications market. The increased FDI limit also allows Vodafone to potentially take over the Indian entity and infuse fresh capital to prepare for the eventual roll out of 5G. Moreover, the FDI policy should not be viewed in isolation as it comes along with a resolution of the AGR dues issue. Therefore, the government has perhaps taken a comprehensive view of the challenges faced by the telecom sector before the increased capping on FDI.

Entry of new players in India’s telecom sector will be difficult as most firms may not be able to compete at the existing low tariffs. However, the new FDI policy should make it easier for existing players to bring fresh capital for the next generation of spectrum auction. Meanwhile, eventually at some point the telecom services prices will increase to a more sustainable level. At that point, there may be several players who may wish to invest and enter the Indian market with the objective of diversifying their operations and revenue stream.

Lowest Tariffs

One thing is for certain though, that Indian consumers will continue to have a choice in terms of their telecom providers and that their telecom services tariffs are likely to remain the lowest when compared to anywhere else in the world. Service providers that are able to provide good quality service at these prices are likely to thrive, while for the others we may experience a recuring cycle of entry – exit – entry into the sector as we have with many MNCs in core & non-core industries.

Government too will get its own fair share from the expanded capping on FDI as it is trying to trigger greater competition for spectrum auctions. Perhaps, somewhere at the back of their mind they have recognized that greater players benefit them as they will be able to better realize the value of the spectrum in auctions.

As far as telecom companies are concerned, they should be prepared for the prospects of further competition in the sector – along with the prospects of new entrants coming in at some point in the near future. While some tariff increase may happen for now, but competition may likely become a norm for the sector and therefore, existing players must focus on improving their overall efficiency.