India’s telecom success story turns sour

NEW DELHI — Over the past decade, the number of cellphones in India shot up from 6.5 million to 900 million, a prime example of how an industry could exploit the vast consumer market here to achieve breathtaking rates of growth and, in the process, help transform the country.

But that success story is starting to turn sour as a combination of greed, corruption and incompetence threatens to arrest that growth. Instead of being an advertisement for India’s economic potential, the telecom story has become an example for foreign investors of the perils of doing business here.

(The Washington Post/Telecom Regulatory Authority of India; Cellular Operators Association of India) - High volume, low costs for India’s cell users

Latest stories from Foreign

World Digest: June 18, 2013

Haq Nawaz Khan

Suicide bombers strike Shiite mosque in Iraqi capital; blast at funeral in northwestern Pakistan kills 29.

In Israel, mixed signals on prospect for peace

William Booth and Ruth Eglash

As the United States seeks to restart peace talks, Israeli ministers disagree on whether the idea is dead or alive.

G-8 leaders call for Syria peace talks

Scott Wilson

In a concession to Russia, Obama and European leaders do not call for Bashar al-Assad to step down.

Brazil protesters keep up pressure on government

Bradley Brooks

Thousands of demonstrators flooded into a square in Brazil’s economic hub, Sao Paulo, for the latest in a historic wave of protests against the shoddy state of public services.

Afghan forces take security lead

Tim Craig

The transfer of responsibility for securing Afghanistan is soon marred by a bombing in the capital.

It also serves as a parable for the nation as a whole, of how India’s dysfunctional systems of governance threaten to undermine the private-sector success story of the past decade.

“There is a danger of snatching defeat from the jaws of victory,” said Mohammad Chowdhury, an executive director and telecommunication specialist at consultants PwC India.

The first signs of trouble emerged in late 2008, when the boom was still at its height. In what became known as the “2G scam,” an Indian journalist uncovered corruption and favoritism in the way that spectrum bandwidth — the radio frequency bands that companies use to transmit data — was being allotted to individual companies.

Accused of defrauding the Indian exchequer of billions of dollars and of accepting bribes worth hundreds of millions in return for spectrum allocation, the communications minister, A. Raja, and two senior bureaucrats were arrested in February 2011. More than a dozen business leaders also were jailed or charged.

But the slow response to the scandal has threatened the sector’s continued growth.

Last year, the Supreme Court canceled all 122 licenses that Raja had granted in 2008, even in cases in which there was no suggestion of corruption. Companies that had invested huge sums of money in India, many of them not even implicated in the scandal, suddenly found their investments under threat.

Norway’s Telenor, which is party owned by the state, stood to lose about $3 billion, probably the biggest foreign investment loss by a Norwegian company, Trade Minister Trond Giske said last month. “If it is forced to move out of the country, it would have further political implications,” he warned.

Up for auction

But the biggest blow to companies came when the Supreme Court, in an attempt to foster transparency and fairness, ordered that all spectrum be put up for auction to the highest bidder.

The auction system had failed in many countries, including the United States and Britain, with companies often overreaching to bid for spectrum and ending up bankrupt.

Instead, India had decided — wisely, in the view of many experts — to sell the spectrum cheaply in return for a share in eventual revenue. That gave companies the financial headroom to invest in towers across the country and helped make calls affordable for hundreds of millions of poor people.

“There are very strong economic reasons for not auctioning spectrum in developing countries,” said Shyam Ponappa of the Centre for Internet and Society.