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A Wide Spectrum of Problems

The continuing mess in telecom licensing underlines the fact that sectors with government involvement should be given a wide berth by investors...

The government’s recent attempt at auctioning telecom spectrum has met with a sorry fate, fetching far less money than it had expected. However, after the failure, it seems that the government (some parts of it, anyhow) are actually pleased that the auction had failed because apparently, this has proven the CAG, the TRAI and the Supreme Court wrong. The opposition is also pleased because something the government was doing has failed. The media is pleased because they could now say ‘I told you so’ and frankly, any failure is more newsworthy than a success. The telecom companies are pleased because this should eventually mean cheaper spectrum and also because of the same ‘I told you so’ affect. All in all, the failure of the auction seems to have been a source of considerable pleasure to everyone concerned.

However, for equity investors, this latest news is yet more evidence of the deep problems that have afflicted so many sectors in the last few years, and how government interaction of on sort or the other is the source of such problems. Think back to the equity-investing scenario as it was in the mid-noughties. The most exciting businesses were the ones that would build things something that a huge number of Indians—individuals and business—would use every day. It seemed self-evident that telecom networks, roads, power plants and networks and other large pieces of infrastructure were business with near-limitless potential for growth. There were other businesses like airlines that seemed poised to tap a huge amount of unmet demand. Clearly, these were the ones that investors should concentrate on.

And they did. In IPOs as well as secondary markets, these were the businesses that got investors’ attention and money. Now, just a few years later, the whole thing is in a shambles and what has been going on with spectrum allocation is a perfect symbol of it. No investor is willing to touch Indian telecom network operators and with good reason. The sector has been hit with highly unstable policy, seemingly driven alternately by the needs of crony capitalism and revenue generation. At some point, it reached the culmination of these trends, with a large number of unhappy cronies out of whom the government is trying to extract a large amount of spectrum licensing revenue.

In fact, in the context of spectrum, calling this a license fee is just a fig-leaf or a euphemism. This is actually a fifteen-year advance tax on using phone and data services. In the final analysis, every paisa of the license fee will have to be paid by the ordinary phone-using Indian and to pretend otherwise is delusional. The license fee structure is yet another way for the government to fund current expenses out of borrowings against future economic activity. The only difference is that the debt will show up in the balance sheets of the telecom companies and its principal and interest will have to be repaid by people as part of their phone bills.

There are rough analogues of such issues in practically all the problem sectors in which equity investors have had a bad time. A deep sea of debt and unviable products and services don’t make for a bright future as investment-worthy businesses. Underlying many of these problem businesses is yet another potentially big problem—that of public sector banks. Whether its power companies or airlines or telecom, these banks could well prove to be the sting in the tail of this entire mess.

For equity investors, the moral of the last five years’ story is clear—stay clear of the government. This is amply borne out by the way the composition of the Sensex has changed. At the end of 2007, these ‘government-sensitive’ sectors added up to 50 per cent of the Sensex. Today, they are down to 32 per cent. A business could be buying from the government, or selling to it. It could need the government’s permission to do business, or to get at its raw materials. The price of its products or its inputs could be controlled by the government. No such business can provide the visibility that an investor needs over a few years. Maybe this will improve in the future, but for the time being, the sensible investor has to come to the inevitable conclusion.