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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00:00
 
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.

01:35
 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

01:58
 
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.

02:38
 
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.

03:08
 
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.

03:39
 
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.

04:11
 
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.

04:32
 
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.

04:50
 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"

Mohan

Nov 19, 2010

As everyone is telling "nothing is going to happen" As usual they will form committee, ask CBI to probe etc. This will go on for years and everyone will forget. Then like Quatrochi has been let of the hook, everyone will be free.
When they r asking for JPC probe, Congress is asking for probe from 1998. This great diversionary tactics. Congress willtry to highlight something in BJP period and they will hide discussing the present scam in their period.

Like 

vinod k jhunjhunwala

Nov 19, 2010

on one hand you write "Some of the most powerful people were indicted in the report, including the Prime Minister"
then you write "It appears that this time the government is adamant that the perpetrators will be punished. " Is not it a contradiction ?
If you take into consideration PPP ,then mobile rate in India are not that cheaper as shown in the chart!

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M Manohar

Nov 19, 2010

Karunanidhi is the master of many scams. This is latest. The beneficiary of 2G Spectrum scam is Karunanidhi family. How Prime Minister and Sonia Gandhi allowed free run for Raja and Karunanidhi? Shame, they are solidly backing these corrupt elements. People should awake...

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Ashish mishra

Nov 19, 2010

No doubt overview captured & analyzed perfectly.

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VPERUMAL

Nov 19, 2010

unless some harsh punishment monetarily as well as physically is not given, people will LOOSE FAITH IN DEMOCRACY,JUDICIARY, GOVT.
IT IS A STEP IN THE RIGHT DIRECTION

Like 

sharmilasamant

Nov 19, 2010

action is expected to be taken against mr raja under anticorruption laws.
all 62 licences issued in addition to other licences if doubtfull may be cancelled with direction to auction afresh.

Like 

chanakya

Nov 19, 2010

1.The politicians and bureucrats should get exemplary punishment and shd be behind bars.Howerver,thanks to coalition politics,the scam is likely to be brushed under carpet.
2.What is pathetic is to see how deep the rot has set in.The political corruption which is at least 80 yrs old in India(refer the corruption charges of first provincial govts in British raj and then Suharwardy's open corruption in Bengal)and existed in nooks and corner,started spreading rapidly under Mrs Gandhi.Tjough she was personally honest,the license/quota raj and the nationalisation that she brought in,made this spread to wider political arena and then to bureaucracy.It then spread to Jornalists in 80s(thanks to Dhirubhai vs wadias/kapil mehra battles).In 90s it got to Judiciary.And most worrying over last 10 years it has got to defense.In Adarsh society scam 2 ex army chiefs and 1 ex naval chief have flats.Corruption in defense forces was rarity and at the top was very sporadic...the only noatble case being ex Naval Chief Nanda...whose family owns some of the top hotels in Delhi and Mumbai.
It is good to see the civil society react.Many of these scams have come to notice thanks to pathbreaking initiatives of our PM Dr Singh like Right to Info Act.Without that,Adarsh,Commonwealth games and Raja"s crookery would have been almost impossible to come to press.
3.Hope all the tainted telecom licenses are cancelled.That will be a good lesson.But seeing the strangleho;ld of corporates on both sides of the fence,it is unlikely to happen.Notice that the oppostion,while demanding JPC has not yet asked for cancellation of licenses.

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Subramanya

Nov 19, 2010

Indian politics is in the worst of its phase. It is mediocre in the corruption index. 3 ministers have resigned in a month and PM has to resign in view of his keeping up his morale as well as Supremecourt's directives.
But wait, Nothing will happen. All these scams will be forgotten shortly and next election will come and same politicians or their children get elected and rule the country.
We don't want democracy now!

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Dipak Raut

Nov 19, 2010

We are deeply disappointed and enraged.We have heard that nothing happens in delhi without giving a share to Ms Gandhi and her coterie. when someone is caught the news papers are bought and she publicly disowns that person. What about the loot? what about her share of the loot.
As for our exalted prime minister, even if he were honest, he is surely inept and surely incompetent for the job.India and her poeple have given him much honour and love. Is this his fair return. Question is not whether he will resign. Why has he not done so already? What more ignominy is needed for himto resign ? Surely we had hoped that that might be just might be a difference between Honble Sabu Soren and Honble Manmohan Singh.

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Dipak Raut

Nov 19, 2010

Why are sonia gandhi and manmohan singh still clinging to power. if and just if, they are not scamsters surely they are inept and inefficient and incompetent.why have they not yet resigned and dissolved parliament and let ordinary citizens have their say. is there any difference between Honble sibu soren and Honble ms gandhi and and Honble ManMohan Singh? We gave him much honour and love. Sadly it was misplaced
Dipak Raut

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