Why revenue sharing is the right payment mechanism for governments to adopt regarding telecom operators?

Allocating spectrum through auction is a fundamentally wrong method as it creates entry barriers for new entrants. Allocating spectrum through auction creates oligopoly/trigopoly type situation. The type of situation which we are seeing in India where we have Oligopoly with just 2 key players.  This goes against interest of consumers due to lack of competition. It leads to frequent price rise and consumers are at disadvantage due to lack of choice.

It is more prudent for government to go for revenue sharing mechanism as spectrum inherently has no monetary value. Its commercial value comes when it is used for wireless communication. The revenue generated from such operation is often difficult to predict and so unwise to get into spectrum related obligation by telcos. Howevr, the government across the counties and more importantly in India have chosen auction method and led to the dismal state of the Indian telecom sector where just 2 key private players have corned around 80% revenue markets hare.

Priorities for the Indian Government

India needs more focus on Health, Education and Infrastructure

 As India progresses ahead, the income inequality has increased over last 10 years across the length and breadth of the country. Common man have been found struggling for basic needs. It was seen in the case of reservation seats in the case of Indian Railways, or the rising incidents of cyber crimes affecting millions of people, or several cases of accidents in which several innocent people have lost their lives, or the ludicrous taxation system putting unnecessary burden on millions of people.

The government needs to get its focus back and prioritize top 20 issues which need to addressed in the 1st year. The government had a chance to refresh the administration by selecting fresh faces to head different ministries. However, in many cases, old hands have rejoined the administration. It would be still nice if they can set up an advisory body that can advise the ministers on key aspects. This time, the stakes are high as incumbency will rise with every passing year and this might affect reelection chances in 2029. The anger of the common masses over pervasive corruption is palpable and was seen in the last election in 2014

Consistency is the only way to bring real change

If a person wants to grow, he needs to get out of his comfort zone. He needs to embrace challenges and should not fear any one. As fear creates doubt and and impacts performance. The best way is to approach an expert in the government area and follow the directions given by him/her. He would need to ensure that the expert he follows is the right one. Initially, he might have certain motivation to proceed in this change initiative but ultimately it is the consistency which can bring about the change and the task can include activities like building a superb body, improving one's communication skills etc.

Remember, no gain without pain; and this is not just a proverb but a real phenomena. I would say that many people lose their motivation after few days but those who  are able to maintain even 75% consistency level are able to reach goals.  For people, who find it difficult to sustain motivation level for long, I would suggest to have smaller goals and then accordingly build towards larger goals. So, lets embrace challenges; go out of comfort zones and achieve our goals.

It can appear initially that our effort are not bearing any meaningful results. This usually happens in the beginning; but it just a matter of time before we get to see the fruits of our actions.  Also, I would advise to have child like enthusiasm to achieve ones goals in  faster way

Reforms in Taxation system

 The taxation system of India is a complete mess and  it increases the cost of compliance for individuals and businesses. The income tax laws of India are full of exemptions with significantly higher tax rates that promote tax evasion due to lack of clear rules. The government can increase existing tax slabs and reduce exemptions and this can also increase tax compliance with overall increase in tax collection

Similarly, many corporates are still using old taxation system with several exemptions. The government should accelerate the shift towards the simplified tax rate of 25.2%, which has no exemptions

It would be a big mistake if we omit discussing about the capital gain tax which are inconsistent across asset classes and sometimes point towards serious lack of competence in those officials framing these taxation rules.

We hope that the government understands that these complex web of taxation laws which has been created over last several years often results in wastage of time of citizens in understanding these rules and often breeds corruption

Emergence of Gig economy

 The emergence of digital India has supported the Gig economy in India as more and more workers embrace this idea that gives them greater flexibility to manage their time and certain working conditions. It helps workers to augment their income by taking such assignments which are generally temporary in nature. In most cases, such tasks( if related to IT sector) can be executed from remote locations, thus enabling workers to cater to demand from across the Globe. On the other hand, companies find it convenient to hire gig workers for routine tasks like admin/ delivery of goods, etc. during periods of seasonally high demand. Gig economy has its  own pros and cons. It helps a significant number of informal workers to participate in the formal economy in their own desired time slots. It helps companies to be adequately staffed to manage seasonal variation in demand without having to hire permanent workers. The disadvantages include concerns around data privacy of sensitive client data as gig workers come from various backgrounds. Also, many times, companies often make these workers work under challenging working conditions with little benefits. To summarise, Gig economy is here to stay and thrive and would provide a source of employment to people who cannot take up regular jobs.

Outlook for Indian Telecom sector for 2023

 I remain positive on the Telecom sector as  2G to 4G migration, increased data monetization and expected tariff hikes would support ARPU growth for telecom service providers in near term. Tariff hike of around 15-20% is expected in near future as telecom companies try to achieve more sustainable level of ARPU.  Bharti Airtel remains on strong footing with industry leading ARPU, growing subscriber base and excellent track record in business execution and is expected to deliver superior result going ahead. The financial condition of VIL remains precarious as it continues to lose subscribers and has the lowest ARPU in the industry (implying weak customer mix) and we expect it to underperform. It urgently needs massive capital infusion to augment its capex to catch up with peers in terms of network quality.  Reliance Jio is expected to maintain the steady growth trend in subscribers and ARPU, through the increase in subscribers might moderate going ahead.  However, at the sector level, there is overhang of 5G related capex for telecom service providers and it might adversely impact their free cash flow generation. Also, the telecom operators would have to come up with newer ways to monetize their investment in 5G technology. In terms regulatory provisions, we expect the draft Telecom bill, that consolidates three separate acts governing the telecom sector — Indian Telegraph Act 1885, Indian Wireless Telegraphy Act 1933, and The Telegraph Wires, (Unlawful Protection) Act 1950 to be passed by the Parliament in 2023.

Outlook on Indian IT sector for 2023

 I continue to be cautiously positive on the IT services sector as  it faces near term challenges due to macroeconomic concerns in the US and Europe (key markets of IT companies). This has led to more time in decision making on the part of clients and it can lead to near term moderation in deal booking/revenue growth. The clients have become cautious especially in sectors like Retail, Hitech and Mortgages etc. regarding evolving macroeconomic situation and many of them are trying to optimize their cost structure and consequently, we expect an increase in work volume related to cost optimization projects for Indian IT companies.  However, the current valuation of IT companies(down 30-40% from peak valuation) captures most of near term headwinds.  The medium to long term demand environment remains strong led by accelerated adoption of technologies such as cloud computing, artificial Intelligence, machine learning, etc.  by enterprises.  We expect employee hiring to moderate for most IT companies in near term as they focus on training/utilization of recently hired employees. The operating margin has mostly bottomed out for the sector and we expect EBIT margin should improve sequentially during Q3FY23 and Q4FY23, led by improving employee pyramid(amid increased fresher hiring) and positive operating leverage. The costs related to travel and admin have started coming back to an extent but IT companies should be able to manage these margin headwinds through  operational efficiency measures. We prefer Tier 1 IT stocks over Tier 2 IT stocks given that they are better placed to manage near term macroeconomic headwinds.