Should the government stop milking this sector? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should the government stop milking this sector? 

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In this issue:
» India's economy in critical care unit
» NIMZ do not get a green light
» Despite slowdown, India's luxury sector still in boom
» Cyprus shows Eurozone troubles are far from over
» and more....

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The telecom sector in the country has been on a roller coaster ride. Most of the sector's troubles started in 2008 with the issue of 2G licenses. With license and spectrum being given to many new players, the sector subsequently saw one of the worst price wars ever. The resulting competition, hit the margins of every operator in the industry. Since then things have been more downhill than uphill. And the government with its regulations has not helped matters.

The regulators, Department of Telecommunications (DoT) and TRAI, have been working more for the government than what they have been for the sector. Everyday there are new levies and fines that they inflict on the sector. This has led the balance sheets of all operators to be stretched to the hilt. In a recent shocker, DoT has demanded an additional Rs 27.64 bn from 9 operators. These are the operators whose license was cancelled in February last year by the Supreme Court. The amount that DoT has demanded is towards the onetime charge on the spectrum held by them till their license was cancelled. As per the DoT the onetime charge on these operators is valid because they did hold the spectrum from 2008 till February 2012.

We are not going to try and get into the justification of cancelling licenses and the 2G scam. What we would like to highlight is a typical case of an industry which was doing well. Its fortunes attracted the government which seems to have descended on it like a predatory bird. And now the government and the regulators are trying to milk it for all its worth.

It is true that the government needs funds. Funds to bridge its yawning fiscal deficit. But this should not be at the cost of driving an entire industry into bankruptcy. It has already burdened the sector with higher spectrum charges and spectrum rates. The November 2012 spectrum auction was nothing but a ridiculous display of the government's greed. The levy of such onetime charges is not going to help matters.

Eventually every business will want to earn a return. And if the government continues with its predatory policies, the sector will go into losses instead of earning returns. This would not just hurt the business but would also hurt India's image in the eyes of the foreign investors that it is desperately trying to attract. The latter have already been cribbing about how business conditions in India are difficult thanks to the government. The policies do not help the common man either. If the government continues to milk the telcos for every penny, eventually the telcos will start milking the common man to earn more through higher telecom rates. It is high time that the government changed its stance and started trying to cut its own wasteful expenditures to bridge its fiscal deficit. That would be better than killing a sector that provides a necessary service.

Do you think that the government policies are responsible for the woes of the telecom sector? Please share your comments or post them on our Facebook page / Google+ page

01:20  Chart of the day
Gold has been the shining metal in most portfolios. This was true till recently when the yellow metal's prices started to tumble. As a result the gold ETFs (Exchange Traded Funds) too saw an outflow of funds. As shown in the chart, there was a net outflow of funds in February 2013. This was the first month of net outflows since June 2012. The gold ETFs had provided an easy option for investors looking to invest in gold. However the recent tumble in prices could have been the reason for the outflow of funds. Another reason for this could be simple profit booking by investors.

Gold prices have corrected a bit in recent times more so on global cues. Globally gold prices have corrected as investors feel that the uncertainty related to Europe and the rest of the developed world has eased off. But the truth is far from this. As a result the long term safe haven status of gold remains intact. Therefore investors would do well to have gold at least as a small percentage of their portfolio.

Souce: Financial Express

For quite some time, things haven't been going right for the Indian economy. Slowing growth amidst high inflation and poor reforms. Rising fiscal and current account deficit. As if this was not enough, it is now the political risk that is threatening to disrupt things further.

Just recently the Congress-led UPA government's largest partner, the Dravida Munnetra Kazhagam (DMK), withdrew its support. So now, the UPA government is surviving purely on the outside support of the Samajwadi Party and the Bahujan Samaj Party. This has put the UPA government in a tricky spot.

If either of these parties withdraws support, the government would fall. And this would have an adverse impact on the economy. But even if the government manages to pull off its entire term, the economy is still at risk. Given the unsteady alliance, it is unlikely that the government would be able to make any strong decisions. And without some important reforms and speedy decision-making, investments will continue to remain lacklustre. This, in turn, will extend the ongoing slowdown. So as long as political stability is not achieved, investments and economic growth will remain muted.

The world economic outlook is grim and India is no exception. In order to avoid large job losses and stimulate economic growth, the government had cleared the national manufacturing policy in October 2011. At the core of the policy is the creation of National Investment and Manufacturing Zones (NIMZ). NIMZs are proposed to be developed as green-field industrial townships and benchmarked against the best manufacturing hubs in the world. But 17 months after the policy was cleared, NIMZ are yet to see the light of the day. Contentious issues on labour and environment don't seem to have been resolved yet. But now it seems that the government is keen to clear the roadblocks. The environment ministry has come on board and is ready to rationalize the clearances. This is a significant step. The government should resolve the contentious issues very soon. This is because the NIMZ has potential to create 100 m jobs by 2020. It will also increase the share of manufacturing in GDP to 25% from the current 16%.

Consumer inflation. This has become the bane of contention between the Reserve Bank of India (RBI) and the government. While the central bank claims that this is evil holding back India's growth story, the government chooses to ignore it. But amidst this, luxury retailers are the ones laughing their way to the bank. For inflation, if any, seems to be hurting only middle income households the most. As per Mint, the Indian luxury goods market is valued at about Rs 70 bn! Also, it is set to grow by 20% in five years. The luxury consumers in India belong to three categories: old money aristocracy, new money affluence and the professional elite. It seems that no inflation number is hurting the demand of these classes. Not that this niche consumption will boost the country's GDP to a sizeable extent. But the taxes on the rich levied on this year's budget certainly show that the government has its eyes set on them.

Eurozone's troubles are far from over. In fact, they seem to be getting worse. And the latest victim is Cyprus. So grim has the scenario become there that there are queues outside Laiki, the country's second largest bank, wanting to withdraw cash. Not surprisingly, Cyprus is seeking a bailout. But will the European Central Bank (ECB) relent? For starters, there is a restructuring plan for Laiki doing the rounds. This includes splitting the bank into two, wherein a 'bad bank' will take over its soured investments, and a 'good bank' will retain the healthy ones. Also, Cyprus has been told it must raise EUR 5.8 bn if it is to receive EUR 10 bn from other Eurozone countries and the International Monetary Fund. If it does not find a way by Monday, the ECB intends to cut off emergency support to the banks. This means that banking system will collapse. So far countries such as Greece, Italy and Spain have been 'bailed out'. But this has hardly solved the region's chronic debt problems. It has merely postponed it. Thus, letting Cyprus collapse would actually be a good thing from a long term perspective. Sure, there will be pain in the medium term. But the only way for companies or countries for that matter, which have amassed huge debt and unable to repay it, is to let them collapse.

In the meanwhile after opening the day on a flat note, Indian equity markets have slipped into the negative territory. At the time of writing, the Sensex was down by 54 points (0.3%). Barring China, the other major Asian stock markets have closed the day in the red with Japan and Indonesia leading the losses in the region. Europe too has opened the day on a negative note.

04:55  Today's investing mantra
"Investment success cannot be captured in a mathematical equation or a computer program." - Seth Klarman
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10 Responses to "Should the government stop milking this sector?"


Mar 24, 2013

Telecom sector has to blame for most of their ills. They concentrated only in adding nos and hoarding spectrum. Services were not commensurate with what they have. They were cock sure GOI will rescue them. Alas this time courts also they have to deal with. This will be the norm than an aberration as more and more people are taking informed calls.


Krishna Kanth

Mar 23, 2013

Conveniently ignored by the author, are the days when this sector "milked" its customers. For that matter, any sector or industry, as long as it is "healthy", it's fine even if it is "milking" / exploiting its customers. If the industry "milks" its customers - it is no wrong, but if the govt. does it - it's a crime.

Very simple business logic: Many businessmen entered the Telecom sector, to make money out of it, keeping in view the phenomenal demand for communication networks in a country which starved over decades for sufficient infrastructure.

They want to profit from the gigantic potential for communications, in populous country - nothing wrong in it. ON the same analogy, the govt. also wants to profit from their profitability by charging for their license fees - what's wrong in that?

After all, how can we overlook the role of the govt. in releasing more spectrum & enabling the service providers to tap the huge potential customer base? Is it not because of the govt.s initiative, that the telecom services have extended to almost all corners of the country & the rural side?

If the industry is not so lucrative, why are so many players craving to enter it? In such a scenario, what's wrong if the govt. make money out of it?


Shiv Shankar Ranganathan

Mar 23, 2013

Yes, I think the Govt.should stop "milking" this sector and play the role of an enabler helping this sector to gain financial health and provide good service the millions who are their customers.



Mar 23, 2013

Desoite slowdown why the flouring sectors are booming, it is just because of superfluous money with the persons who cannot show them under IT category or illegally earned



Mar 22, 2013

Every penny paid as kick back need to be recovered in full with interest at market rate. Moot point is "how do you recover the money received by the Government Officials as kick back?"


Sudip Parikh

Mar 22, 2013

Surely,your assessment is correct. Instead GOI MUST cut it's expenditure drastically.



Mar 22, 2013

The articles appears one sided, only in favour of industry and the author has not gone into justification of other side.


Abhay Dixit

Mar 22, 2013

All growth is in spite of government.



Mar 22, 2013

Well said. The best example of telecom sector in Govt sector are two namely BSNL and MTNL which are running in to losses though being given all the govt support.
The fiscal deficit should be controlled by reducing the Govt expenditure by reducing the white collered workforce and withdrawing all the perks on one hand and linking all wages to productivity.


V S Gurumani

Mar 22, 2013

If the government is strapped for funds, all it has to do is to take a leaf from what smart companies do. In most situations, if you tighten your belt by 15%, nothing goes wrong. Things improve, people develop a sense of urgency and deadwood starts leaving you. And, does anyone in the finance ministry headed by our smartest and sharpest lawyer- politician have any explanation on how the fungibility among line items is used to splurge on the politicians and bureaucrats? There are nearly a million vacancies--and these are all budgeted positions. Where are all those savings going? Each time when the government says it wants more money and kills something working well with its extravagant demands, does someone do even basic arithmetic?

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