InvestorQ : Should the government intervene to resolve the telecom issue and how can the government really help in this case?
Archita Jajjoo made post

Should the government intervene to resolve the telecom issue and how can the government really help in this case?

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Rashi Mehra answered.
8 months ago


That is a major debate as to whether the government should intervene to sort out the issue or leave it to the private companies to sit with banks and sort it out. One can always raise a question as to whether and why the state should intervene. There are multiple reasons for the state to intervene. Firstly, the Indian banking system cannot afford another major bankruptcy. Secondly, this may end up creating a duopoly that will defeat the entire effort of inducing competition in the telecom sector. After all, a duopoly will mean that the telecom service provider will continue to have an upper hand in pricing telecom services. Lastly, state intervention has to strike a balance between systemic risk and moral hazard. Pushing telecom sector at this juncture will be a bigger systemic risk than a moral hazard.

Here is how the government can actually handle the telecom issue. One thing is clear that the government will have to take the initiative in resolving the telecom mess. The government must retain the interest component on AGR but waive the penalty as a special case. That would be a good start to the whole resolution process. Telecom companies must show their commitment by paying the interest amount upfront to qualify for a waiver of penalty and moratorium on principal. If the telecom companies see a business case, even Vodafone and Birlas will be willing to fund the gap. Of course, it does need to make business sense to them too. But the need of the hour is to act fast. The government must act before the downgrades start pouring in, because otherwise it may get too chaotic to handle. It is not really about right and wrong but more about what is required at this point of time.