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Indian telecoms in hell's kitchen

Nov 19, 2010

In this issue:
» The impact of monsoon on rural spending
» India's growth revised to 9.1% by OECD
» Bears are wrong. US economy to rebound: Siegel
» Bernanke turns defensive, accuses China
» ...and more!!

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All hell has broken loose since the CAG has come out with its report on 2G spectrum issue. No heads were spared. Some of the most powerful people were indicted in the report, including the Prime Minister. Everyone who had turned their face the other way was brought in attention. People thought it was just another storm that would blow itself away in time. But this time it was different. It appears that this time the government is adamant that the perpetrators will be punished.

Mr. Raja, the erstwhile telecom minister who started it all, was forced to resign last week. The Supreme Court rapped out at the Prime Minister for turning a blind eye towards the misdoings of Mr. Raja. The latest is that the telecom regulator TRAI has asked the government to cancel 62 of the 122 licenses issued by Mr. Raja. The CAG report has stated that 85 of the licenses issued during the period were illegal. The companies holding these licensees include Uninor, Videocon, Loop Telecom, Etisalat DB, S Tel and Allianz (now a part of Etisalat).

These companies are accused of producing fake documents to get the license. While the companies maintain their innocence on the issue, they are facing the possibility of losing their license to operate in the country. TRAI has further requested the government to cancel licenses of those companies who have not met the rollout obligations.

This stance by TRAI although very late is pertinent nevertheless. The whip is cracking and all those who have erred are facing the heat. Just a few months back, the telecom sector seemed as if it were in a structural decline. Will the current episode change things for the better? Well, only time will tell.

What do you think will be the outcome of the telecom scam? Share your views or post them on our Facebook page.

 Chart of the day
The issue of telecom licenses to several players in India has led to intense competition in the sector. Each player vies for a share of the subscriber pie. Each has resorted to all sorts of methods to get a larger share. Be it offering free minutes to innovative pricing. This has resulted in tariffs that are one of the lowest in the world. Today's chart of the day gives a comparison of mobile tariffs in India vis a vis its Asian counterparts.

Data source: Presentations of incumbents in each country, September 2010

On one hand spurt in food prices in India is one of the biggest concerns for the government, the central bank and most middle and lower income households. On the other hand a section of population is witnessing an improved standard of living like never before. This again thanks to rise in food prices. We are referring to the large farmers who have fetched handsome gains from the cultivation of crops like sugarcane. While their incomes already doubled last year, FY11 too is expected to multiply their earning and spending power. So much so that the farmers have started splurging on expensive cars and consumer durables. While better income is rural households is certainly desirable, the fact that it is unevenly distributed is a concern. Also being ignorant about saving avenues, most of the wasteful expenditure end up adding very little to the rural GDP.

The Organization for Economic Cooperation and Development (OECD) has raised its growth forecasts for the Indian economy from 8.3% to 9.1% for FY11. The Paris-based organization said that there were signs that the economy was shifting from the recovery phase to one of sustained growth on the back of a strong rebound in the agricultural sector. However, the OECD growth forecast should not be confused with Government of India's projections for this fiscal at 8.5%, since the methodologies differ. While India calculates GDP by excluding indirect taxes, OECD includes these taxes for its calculation of GDP.

Meanwhile, the grouping has projected the global economy to grow 4.6% this year and 4.2% in the next. However, OECD has warned that risks to global recovery could be higher in the wake of speed and magnitude of capital inflows in emerging market economies and instability in sovereign debt markets.

The US and China just can't get enough of each other these days. While the US keeps accusing China of manipulating its currency, the latter is lashing out at the US attempt to devalue the dollar significantly. The latest to jump on the bandwagon is Ben Bernanke. The Chairman of the US Fed is firmly of the belief that he certainly does not deserve all the flak coming his way on account of the quantitative easing. In an article in FT, he argues that he is being forced to do so because China is refusing to appreciate its currency and reduce its surplus.

"Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals", Bernanke is believed to have said. While we agree that China does indeed need to reduce its surplus and boost consumption at home, the US has not done itself a huge favour either by letting things go out of hand. Its loose monetary policies helped build this giant financial bubble at home and now it conveniently shifts the blame on China as it tries to rebuild its economy and put millions of employees back to work.

You might have been hearing for long that the US economy is in doldrums and crafting a recovery would be painstaking task for the Federal Reserve. Rising unemployment rates, worsening fiscal deficit and increasing debt burden have all been making the headlines very often and for the right reasons. However, we seem to have found a contrarian who believes that the US economy is ripe for a positive up move despite the pessimism projected by noted economists. He is none other than Jeremy Siegel, a professor at the University of Pennsylvania's Wharton School. Siegel is of the view that," long term economic growth depends on productivity growth and not on the debt load of the consumers". And the productivity growth in the US has been accelerating above the long term average which should generate the income necessary to propel the economy forward. Strong thoughts indeed.

However, we slightly digress with Mr Siegel's views. Agreed that productivity growth will generate the income necessary to propel the economy but for an economy to prosper over a longer term that income has to be invested to have a multiplier effect. And the US consumer right now is lacking that much needed confidence to part with his income.

Columbia professor and Nobel Prize winner Joseph Stiglitz was pessimistic about economic decisions in the US in his aptly titled book 'Freefall' in the beginning of 2010. However, in a recent interview, he claims that things have recently become even worse. He believes that QE-2 will prove largely ineffective. And since the US is moving to a political gridlock, instead of stimulus packages, only cutbacks will now be in order.

Regarding Eurozone economies, he believes that their problems will not go away very easily. Greece has a debt/GDP ratio of 113%, and has been facing huge pressure in servicing its debt. Japan on the other hand has a debt/GDP ratio of 200%. But, it has been able to repay debt quite easily. Why is that? According to Stiglitz, the main reason the Euro nations are in trouble is that their interest rates are high. Thus, servicing existing debt and raising further debt becomes more difficult. Either way, without strong structural reforms and market discipline in these countries, any solution will be short-lived. The actual recovery may take years.

In the meanwhile, the Indian markets have continued their downward journey. The BSE-Sensex was trading 119 points lower at the time of writing. Stocks from the realty, energy and banking sectors were the major losers. The sentiments in rest of Asia were mixed with China and Hong Kong closing the day in the red while Korea and Indonesia ended the day on a positive note.

 Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch

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43 Responses to "Indian telecoms in hell's kitchen"

Valerian Menezes

May 18, 2011

Our Prime Minister is an ideal person to rule in an honest country. The cunning selfish people in our country gobble up all the wealth in the country. Our political and legal system help those who are more corrupt. Hence why blame Mr. Manmohan Singh alone for the corruption in the country? All our leaders are equally responsible for it. Our justice system cannot deliver quick judgements.

Like (1)

Manoj Kumar

Nov 24, 2010

On this issue, you will find me in the category of cynics. Removal of a minister from here and another from there just to cool down the tempers and to get the image of the party cleaned in the public's eye and then business as usual with no body being punished.

Like (1)


Nov 22, 2010

Why are we blaming only the mantris and babus. Sure, haul them over the coals. What about those revered industrialists who sought sought to pervert the entire system ? Mantrijis and babujis are only instrumentalities. The BIG MONEYBAGS are at the ROOT of the real corruption and they will stop at nothing. Does the MEDIA have the gumption to take them on and act as real catalysts in bringing about change ?

Let all the guilty be punished in a manner convincing to the aam janta.

Like (1)


Nov 22, 2010

Every person who can be suspected to be in the know of the fraud, should be held responsble and severly punished, even if the peson has not participated in the actual crime. The onus to prove the innocence should be on the person who is suspcted to be in the know of it. Same should be the case for every person who is suspected to have directly or indirectly participated in it. The policy of Singapore Government is for every crime the punishment must be certain and severe. And the whole world can see the benefits of the policy.

Like (1)

Rabindra Nath Dutta

Nov 20, 2010

In INDIA 10% politicians r honest, 80% chor, & rest 10% beiman, Fir be desh ki Janata kahenga mera BHARAT Mahan. Unless we Public become cautious & take a drastic steps, Supreme Courts overactive steps(alas many Judges r also corrupt) country will face many more scams & go to ashtray.

Like (1)


Nov 20, 2010

The congress doesn't have any will to take on the corrupt either within their own party or in the alliance. If they have not put their party interest before country ex ministe raja should have gone home long time back.

Like (1)

Vasant Vora

Nov 20, 2010


Like (1)


Nov 20, 2010

Total system is corrupt,politician,babus,Judiciary,army,media.In short whole society is corrupt.who is responsible for this.C of congress stands for corruption.BJP & other parties are also in race for corruption.Pawar is allowed to rot wheat in FCI godown & disobey SC.Still he is in power.No politician or babu is punished till date.Who will stop this ??

Like (1)


Nov 19, 2010


Like (1)

GP SIngh

Nov 19, 2010

Nothing will happen as corruption & earning money by any & all means has become the social responsibily of all.

Like (1)
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