Sunday, March 3, 2013

Another huge reduction in spectrum prices needed

The Indian government was counting on one major source of revenue to bridge the fiscal gap for the financial year 2013 (FY13). This source was the spectrum auction. It had a huge target of Rs 400 bn that it had planned to garner from this auction. This is why they had priced the 2G spectrum at the level that they did in November 2012. It is not news that the round of auction fell flat. So it decided to slash the rates by nearly 30% and tried again last week. Unfortunately this round fell through as well since only one operator participated in the auction. Now Goldman Sachs feels that the government needs to slash the spectrum rates by 50% if it plans to get close to its target of raising Rs 400 bn from the telecom sector. But the question is will a price cut of 50% excite the operators and get them to participate actively in the auction?

Given the troubles that the telecom sector is facing; even a 50% cut may not be enough to get the operators to participate. Their reluctance in shelling out large sums of cash comes from their stretched balance sheets and low margins. Thanks to the intense competition in the sector and rock bottom tariffs, operators have been suffering a loss of margins. Most of the new guys on the block are still bleeding. At the same time, the regulatory costs and one time payments have just been mounting up. This has forced most of them to take on huge quantum of debt to meet the payment requirements. Unless things improve for them, they are not very keen to shell out more cash. But they do need spectrum to continue or expand operations. So it is not that the demand is not there. The government needs to keep its targets on the back seat and instead sit down with the operators and listen to them. This will help it to arrive at a conducive pricing. Only then will the spectrum auctions be successful

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