Up in the air, still
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Friday's decision by the empowered group of ministers on telecom, asking the cabinet to take the final call on the reserve price for auctions of 2G spectrum, shows how carefully the UPA government is treading. Assuming the cabinet will not have reasons to differ, the EGoM's decision could bring enormous relief to the government. On the basis of the recommendations, it will earn far more than the Rs 40,000 crore projected this fiscal, which means it can worry less about the need to push through politically unpalatable measures like the reduction of oil subsidy.
But a decision on the auctions will also mean there will be a huge shakeout in the sector. Any reserve price in the region of Rs 14,000-16,000 crore, bundled with a higher spectrum usage charge, is just another way of restating the Trai recommendation of a price of Rs 18,000 crore and above for a packet of 5 megahertz band. It carries the risk of making the returns on the capital employed for quite a few companies turn negative. Even if we assume that a sunk cost is not the correct basis to judge how a company will do in the future, there are other problems. Telecom companies will need to hike tariffs in the range of 15 to 25 per cent right after they put in the bids, and that will certainly drive away a category of customers. The Trai estimates the hike will be lower, but this is predicated on the assumption that the companies will manage to get around half their revenues from data services in a few years (around 12-14 per cent currently) and customers will start using their phones even more intensively.
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