How will India's economy be affected if Vodafone-Idea fails to survive

Even as Bharti Airtel acted on the Supreme Court order and paid a part—Rs 10,000 crore—of its due towards adjusted gross revenue (AGR) on Monday, the response from Vodafone Idea Ltd (VIL) is what the industry and markets are keenly watching. It comes as no surprise because the AGR verdict had only added to the woes of the telecom company's bleeding business in India. 

After inviting the Supreme Court's wrath for not acting upon its October 23 judgment, unless the Centre intervenes, there is no way other than paying the dues if the telecom provider wants to continue its business in India.

According to the Department of Telecommunications (DoT), VIL owes a whopping Rs 53,000 crore towards AGR dues. However, the company's initial assessment, as per reports, pegs the amount at a much lower range of Rs Rs 18,000-23,000 crore. If Vodafone Idea decides to go to court against the difference in AGR calculations, the company will have to gear up for another long-drawn legal battle in India. 

At the same time, speculations are also rife on the possibility of Vodafone Idea defaulting on its dues and filing for bankruptcy. Last week, Vodafone Chief Executive Officer Nick Read had said the situation in India is critical. The British telecom major holds 45.39 per cent stake in Voda-Idea.

If Vodafone Idea chooses to go the bankruptcy path and shuts down operations, the impact on Indian economy will be multifold. The magnitude of debt default, job losses and customer woes will have huge repercussions in the banking and telecom sectors. Country's largest public lender, State Bank of India, has already expressed its concern on the situation and said banks will have to pay the price if any telecom company shuts down. 

According to a recent research report by Motilal Oswal Financial Services (MOFSL), Voda-Idea has gross debt of Rs 1.2 trillion, of which around Rs 900 billion is government’s deferred spectrum debt, while around Rs 250 billion is bank debt. Voda-Idea has 13,500 employees, in addition to multiple vendors and other stakeholders. Hence, payment defaults can have a direct impact on the Indian economy. 

The research note says that the government perhaps saw through this massive impact, despite winning the suit against the telecom players in the Supreme Court. "Even with some relief of AGR liability, Vodafone-Idea would have found it difficult to service debt and capex needs through its operating cash flow," it observed. 

In fact, as the Business Standard reports, India's could see its fiscal deficit rising by as much as 40 basis points in case of a default by Vodafone-Idea. Finance Minister Nirmala Sitharaman has pegged the fiscal deficit at 3.5 per cent of GDP for the current financial year and at 3.8 per cent for FY21.

Will Airtel gain?

Experts caution that even with reliefs and more time, AGR dues wil drag and affect Vodafone Idea's operations due to lacklustre market conditions. It is tough to remain a going concern if there is no change in order, while there is limited room for any change in decision either by government or any other SC bench, observes Axis Capital. 

High fees, frequent policy flip-flops, endless tax demands from an unsympathetic bureaucracy have repeatedly failed Vodafone ever since its debut in India. Hence, it is unlikely that Vodafone will invest more in its India market. Neither will its partner, Idea's parent company, Aditya Birla. As a result, India's telecom sector is headed towards a duopoly market, with Reliance Jio and Airtel consolidating the market, with state-run BSNL at a distant third place.  

That said, Vodafone Idea's loss might prove to be Airtel's gain, but only in the long run. Vodafone Idea has already had a huge erosion in terms of subscribers over the recent months. This will stand to increase in the forthcoming days of uncertainty, which will, in turn, be positive for Airtel.