Covid-19 : Its Impact On The Telecommunications Sector In India.

11 May 2020

Introduction

As the global economy continues to reel from the shock and the lasting impact of the novel coronavirus (COVID-19) outbreak, “work from home” and “social distancing” have become the buzzwords in today’s business landscape, with the telecom sector being the invisible hand driving this shift. Remote working, video conferencing, and telecommunications technology have quickly emerged as key enablers for business operations during this lockdown, and streaming services such as Netflix have become the go to source for entertainment, putting the telecom sector in the spotlight today.

The importance of having a strong telecommunications network during this lockdown has also been acknowledged by the government in the guidelines dated March 24, 2020, issued by the Ministry of Home Affairs (MHA)[1], which provides that “telecommunications, internet services, broadcasting and cable services, IT and IT-enabled services (ITeS) only (for essential services)” are the essential services and are exempt from the lockdown. This exemption was also provided in the MHA notification dated April 15, 2020 (which extended the lockdown until May 3, 2020)[2] and in the MHA notification dated May 1, 2020 (which further extended the lockdown for a further period of two weeks).

According to news reports, overall traffic has jumped by 10% and streaming platforms have witnessed a 20% spike in viewership[3]. Hence, several analysts now believe that unlike the manufacturing and other sectors that have come to a near standstill, the telecom industry might emerge as the golden child of this economic slowdown. However, the increased dependency on telecom networks, and the other restrictions on account of COVID-19, has raised a different set of challenges for the telecom sector, as highlighted below.

A. Implementation of exemptions for the telecom industry

Although the MHA had clarified that telecommunications, IT and ITeS were exempted from the lockdown, there were instances of local authorities asking personnel of telecom service providers at NOCs (network operation centres) and call centres to shut down operations. In response, the Department of Telecommunications (DoT) had written to chief secretaries of states on March 21, urging them to allow movement of field staff of telecom companies.

It is therefore essential that appropriate instructions are received at the field level so that the services can continue without interruption. The DoT had also written to chief secretaries of all states on March 24, requesting them to designate a nodal officer who can be contacted by service providers and telecom licensees in the event of any difficulty.

This is critical given that on-ground staff need continued access to towers for maintenance, to identify potential risks, and refuelling (for towers using diesel gensets)[4]. This move may help mitigate some of the issues seen at the local level, in ensuring that there are no obstructions in the working of the telecom sector.

B. Rising demand and current infrastructure

While demand for services continues to spike, given India’s dependence on wireless traffic, there is increased pressure on cellular infrastructure.

According to reports[5], the mean mobile and broadband download speeds in India had fallen in March due to strain on the networks. Hence, the Cellular Operators Association of India (COAI) has written to the Government to request streaming service providers such as Netflix, Amazon Prime Video and Zee5 to switch to a lower definition streaming, to reduce advertisements and pop-ups, etc., in a bid to ease the strain on existing networks. Several service providers have already started working on this issue.

Industry analysts have stated that as far as telecommunication networks are concerned, fears of network choking are unfounded since there is sufficient additional capacity.[6] However, the switch in network usage to residential networks as opposed to enterprise networks (which is technologically better configured for the high load traffic) may present another set of challenges on managing network load. This trend may result in deeper broadband penetration for residential use. In order to meet demand, going forward, the COAI has written, vide letter dated March 20, 2020, to the Government to ease norms and expedite approvals for providing services, setting up towers and to instruct state-owned firms (MTNL and BSNL) to not terminate any interconnection points.[7]

C. Impact of the lockdown restrictions

Admittedly, while there is increasing demand for telecom services, the telecom sector is dependent on several other industries, which have been adversely affected by the lockdown.

1. Impact on Manufacturing of hardware and other systems

According to reports, handset and network equipment manufacturers will be impacted due to global disruption in supply chains, which will lead to increased costs and lack of availability.[8] Under the MHA order dated May 1, 2020, manufacturing of IT hardware has been permitted even in red zones, however no such activities can be undertaken in areas designated as containment zones.

According to industry body Indian Cellular and Electronics Association (ICEA), manufacturers may incur losses to the tune of nearly INR 15,000 crore due to suspension of production.[9] Market analysts have recommended easing taxes and levies and relaxing costs on financial aid to ease the burden on the manufacturing sector, which will have a domino effect on the telecom industry.

2. Addition of new subscribers

Given the movement restrictions during this lockdown, there has been a sharp dip in the number of customers purchasing new sim cards (including for migration to 4G networks).

COAI has indicated that during a regular month, the average net addition is 3 million subscribers, but due to COVID-19, the number in March may be below 1 million. We are likely to see impact on revenues only in the first quarter of FY 2020-21. COAI has stated that it takes around 30-45 days for new subscriptions to impact revenue and therefore the impact of a dip in new subscriptions will be seen only around April end or early May.

Additionally, the lockdown is also likely to delay 5G spectrum auctions and its consequent rollout as network operators are currently focused on meeting increased demand without a dip in service quality. Due to restrictions on manufacturing and movement of goods, this will also limit the ability to roll out 5G enabled handsets.

3. Impact on tariffs

Even after the last round of tariff hikes late last year, India continues to have the lowest tariff rates in the world.

The lower tariffs, as a result of increased competition due to new entrants in the market, led to a situation where the revenues of the incumbent Telcos were considered almost unsustainable for their balance sheets.

Reports indicate that a second round of tariff hikes had been planned in the April-June quarter of 2020, however, given (i) the impact of COVID-19 on spending ability (especially of low income subscribers), (ii) the benefits required to be extended by Telcos (as stated above) and (iii) the dip in subscriptions, the planned tariff hikes may be delayed to the second half of 2020.

TRAI had floated a consultation paper on the need to set floor price (so as to ensure reasonable return on capital) and the COAI had written to TRAI, requesting that an open house be conducted digitally to fix floor pricing. This would, while being within the authority of TRAI, be a departure from the existing regulatory forbearance maintained by TRAI in relation to tariff fixation. The proposed discussions on setting up the floor tariff has been deferred until the current situation eases.

4. Subscriber Retention

Market share is one of the most important performance metric held closest to the chest by Telcos. Given the challenges of increasing market share in such times, focus would automatically move towards preserving the existing subscriber base. This is most challenging with respect to low ARPU (Average Revenue Per User) subscribers. During this lockdown period, there are reports that Telcos have granted dispensations to their subscribers – like extended validity, additional talk time benefits, etc., as attractions to continue service.[10] TRAI, raising concerns around price discrimination, has, on April 7, 2020, written to Telcos, alleging that they were selectively increasing validity of prepaid users during the lockdown. However, the Telcos have written back to the regulator, contending that they have provided benefits worth at least INR 600 crores to subscribers who are at the bottom of the pyramid to ensure connectivity during this time. These initiatives would be towards reducing drop-outs for low ARPU subscribers, who otherwise would not necessarily have be in a position to make timely recharges, either due to monetary reasons or access to online recharging facilities. This initiative also helps towards ensuring connectivity of larger masses and for widespread information dissemination, which is critical at this point. This is consistent with the representation by the Telcos to TRAI, where they have stated that if these benefits were offered to an extended pool, this would amount to “an unjustified subsidy” to the customers who can afford these services and cause a steep loss to the industry.

Subsequently, TRAI has undertaken a detailed review and has decided not to issue any further directives at present.[11]

5. Power tariffs

Given the increased burden on the existing telecom infrastructure, the Tower and Infrastructure Providers Association (TAIPA), which includes Bharti Infratel, and Indus Towers as its members, has written to various states, seeking relief in power tariffs. The Maharashtra State Electricity Regulatory Commission (MSERC) has proposed to reduce tariffs in the state by up to 10-15 percent. TAIPA has stated that similar relief from other state authorities would support telecom infrastructure providers in the present situation.[12]

D. AGR and other existing issues in the telecom sector

The COVID-19 outbreak and the resultant lockdown has come at a time when the telecommunications sector was already grappling with the issue of payment of Adjusted Gross Revenue (AGR). The Supreme Court had recently rejected the self-assessments of AGR dues undertaken by a few Telcos and had refused to take up the Centre’s submission to allow telecom companies an extended period of 20 years to pay the AGR dues, stating that the matter will be listed in two weeks.

Now, due to COVID-19, there is uncertainty around the listing of the matter in the Supreme Court. However, reports state that as of now, no notices have been sent to the Telcos for AGR dues and the focus of DoT is to ensure smooth operations during the pandemic.[13]

In the event the sought relief is not granted by the Supreme Court, and the Telcos would be required to pay the AGR in full or without any deferment, the financial impact on Telcos could be severe. If the revenues and available cash are not sufficient to pay the license fees (based on the revised interpretation of AGR), Telecos may be forced to consider increasing debt to meet demand. But, given the precarious financial conditions, lenders willing to extend financial assistance will be scarce and cost of borrowing will be higher (as compared to the pre-COVID situation), given the impact on the sector, creating a vicious cycle.

To help the industry and the economy, the RBI has issued certain relaxations to ease repayment and access to working capital, such as a moratorium of three months on payments of all instalments falling due between March 1, 2020 and May 31, 2020.

A recent report by ICRA[14] also indicates that the debt levels in the industry, which moderated to around Rs 4.4 lakh crore as of March 31, 2020, may rise further on account of the AGR dues to almost Rs 4.6 lakh crore.

Other ongoing issues include exemption of GST on licence fee and payment for spectrum acquired in auctions, and exemption from service tax on amount of licence fee payable pursuant to the order of the Supreme Court. While these were ongoing discussions (with the government), the lockdown and the pandemic will lead to a delay in outcome.

E. Outlook and way forward

The general outlook, globally as well as in India, considers the telecom sector to be one of the few that may escape unscathed from the pandemic and the resultant lockdown. The government and all stakeholders are also cognizant of the importance of these services, given the current scenario. We are seeing steps being taken to address short-term issues as and when they come to light. Despite the issues, the increased demand for services may help offset any dip in revenues, especially the high-end subscribers and other people who have been working from home and those who need strong and reliable network to continue functioning.

An additional area where Telcos may be able to help is in assisting the government with outreach and analytics to spread awareness about COVID-19, and to provide anonymised data to the government for analytics, which could be used for developing plans for combating the pandemic. The DoT and mobile phone operators are working to track location details of calls to closely track movement of COVID-19 patients as well as to monitor migrant labourers to help them with food and employment.[15] Several Telcos have already started taking steps in this direction. Further dialogue between regulators and service providers would go a long way towards, firstly, resolving some of the issues highlighted above, especially considering the importance of the telecom sector today, and secondly, toward developing effective strategies against the pandemic.