There’s a fire sale happening in Indian telecom, and that has turned the sector into the hottest destination for foreign direct investment flowing into the country.
In financial year 2018, FDI inflows into communication services touched over $8.8 billion (around Rs 63,000 crore), rising nearly 50% from the previous fiscal, according to the provisional numbers the Reserve Bank of India released last week in its annual report. This increase has for the first time helped telecom dethrone manufacturing, which had received the biggest share of FDI for the last nine years, according to the central bank’s report.
In financial year 2017, manufacturing had received around $11 billion in inflows.
Telecom’s good bad days
One of the key reasons for telecom’s prominence in FDI is the heavy losses the industry has suffered in recent years, particularly since the disruptive entry of Reliance Jio in November 2016. Jio has offered data and voice-calling services at extremely low rates, kicking off a brutal price war that is bleeding the industry dry.
Profitability has nosedived, forcing global players to quit the scene and other smaller ones to consolidate or shut shop.
For instance, Telenor and Docomo have exited India. Aircel is filing for bankruptcy following its failed merger talks with Reliance Communications, which, in turn, has merged with Bharti Airtel. Vodafone India and Idea Cellular have also merged, leaving Airtel as the only major firm standing on its own.
To raise funds and absorb the heavy losses, companies are also putting their assets on the market. This, in turn, has caught the attention of international giants.
“There was an increase in investment by global players such as American Tower Corporation in telecom tower assets. Surviving telecom players such as Vodafone also had to infuse greater private equity to keep going,” said Tanu Sharma, associate analyst at India Ratings.
Boston-based ATC is buying 20,000 towers from Vodafone and Idea. The two firms had put their standalone towers on sale after deciding to merge.
Canadian investment group Brookfield had agreed to buy the telecom towers of the beleaguered Reliance Communications, but the deal fell apart after the latter called off its proposed merger with Aircel. Brookfield is now looking to buy towers from other players in the country.
However, telecom’s FDI share has also been growing steadily over the past four years, since the Indian government lifted the 74% cap on FDI in the sector in 2013.
Bumpy ride for FDI
India’s overall FDI growth has been wobbly since the election of the Narendra Modi government in 2014. That year, annual FDI growth rose over 54%, but by financial year 2017, it had tanked to 0.08%.
In financial year 2018, FDI grew only by 2.89% to $37.37 billion.
“During the initial years of the [Modi] government, there were huge expectations of change,” said Himanshu Srivastava, senior analyst and manager research at Morningstar. “Later, as reality settled in, expectations got realigned.”
Cheap oil prices since 2014 and slow growth in developed economies also made India more attractive to investors, according to Devendra Pant, chief economist and head of public finance at India Ratings.
“Developed markets were not growing. China was slowing down. India was among the best in the world, with robust macroeconomic indicators. Inflation was under control, growth was high, and the trade deficit appeared to be under control,” Pant said. “But once oil prices started rebounding, the country’s true strength began reflecting across these indicators.”
This article first appeared on Quartz.
