Does Government Need to Intervene in India Mobile Market?

Generally speaking, equity analysts tend to favor mobile industry consolidation, not because it improves consumer outcomes but because consolidation is believed to ease pricing pressures and allow the remaining suppliers to earn higher profits.

That is not to say ability to sustain profits is unimportant. If competition is good for consumers, ruinous competition actually is not, as it results in fewer suppliers, less competition, and therefore fewer of the benefits competition is supposed to provide.

The trick, for policymakers, is to promote and maintain an environment where competition exists, and creates consumer benefits, but without creating so much competition that firms go out of business, thereby reducing competition.

Industry structure is a concern of regulators nearly everywhere, including India, South Korea, Japan, the European Community and the United States.

The Indian telecom sector, for example,  has been under pressure for the last eight years because of rising competition and capital intensity, some would say. Others also would note that government policies are not perhaps as conducive to investment as might otherwise be the case.

Between 2009 and 2017, for example, the contribution of telecom services to India’s gross domestic product  has declined from two percent to just 1.2 percent.

Over the same period, profits also have dropped, “and all the telecom companies do not manage to earn their cost of capital because of continuous investments in spectrum purchases,” says Naveen Kulkarni, Co-head of Research at Phillip Capital.

Consolidation of the market, already occurring, might not be enough, he argues.

“The government might need to step in to improve the industry profitability to ease the exit of players and solve the structural debt issue,” says Kulkarni. “The government has many levers to improve the industry profitability, which include reducing service tax to spectrum usage charges.”

Questions about competition, market structure and consumer benefit are quite likely to emerge soon in the U.S. market as well, as another round of mergers and acquisitions might bear directly on the matter of how to create optimal conditions for both investment and competition.