Global economy is passing through an unprecedented slowdown. There is uncertainty everywhere. The USA government came to the rescue of giant banks like Citigroup and Merrill Lynch by giving emergency funds from the federal government. On Friday, both announced new multibillion-dollar write downs of their portfolio of mortgage investments, taking their combined credit losses to $100bn. Moreover, Citigroup revealed that the pain was now spreading more widely through its consumer business. This is a clear indication that the worst is yet to come.

Many European nations and Japan have already announced war chest to bail out their leading banks. People in these countries have lost faith in the financial system. No wonder, analysts are banking on high growth of the Chinese economy to bail out global economies.

Indian economy is also reeling under the impact of great the slowdown in global economies lead by the USA, Europe and Japan. Companies have stopped all expansion plans. Only existing plans are continuing. IMF has already reduced estimated growth rate to 7% from an earlier estimate of 9% for the next year.

Telecom sector is the poster boy of the economic liberalization of India. All major players – Government, Manufacturers/software developers, Value Added Service (VAS) providers and operators – have mega plans. For instance, Bharti Airtel is investing close to $2 billion on its expansion plans during this financial year. Five new telecom operators are slated to set up network and launch services during this financial year.

We have tried to gauze the impact of slowdown on telecom sector – policy and corporate:

3G Auctions to be delayed:

The government will certainly review its decision to auction 3G services in such a scenario. Bidding will not be as competitive as one would have expected if the bidding had taken place about six months ago. Finance ministry has set a deadline of December 31, 2008, for auction of spectrum. What is certain is that auctions will not take place during this year.

Earlier, the Finance ministry had said that it expected to collect about Rs 40,000 crore through 3G spectrum auction. Reserve price of spectrum is Rs 2,200 crore.

Existing big players such as Bharti Airtel, Vodafone, Idea, Reliance and Tata have to bid for the spectrum as 3G is an expansion of their existing services. In the absence of new global players, they will get spectrum at about the reserve price.

New operators will get low valuations:

Economic slowdown has an impact on the valuations of new service providers such as Unitech and Datacom. Both will get low valuations for their companies. Valuations will be much lower than what they would have got if they had sold their equity about three months ago. Swan was lucky as it sold its 45% equity for $1.1 billion.

The new operators will also face problem in raising funds for the project at least in the short term. They will have to depend on the investment brought in by their foreign partners.

Existing players will have to curtail their expansion plans:

All the existing telecom players will keep a check on their expansion plans. In last few years, the operators had drastically expanded their networks. With credit becoming difficult and rupee depreciating to the new low of Rs 49 to a dollar, they will have to limit their expansion plans.

Equipment manufacturers will not be able to offer sops to operators:

In view of rupee depreciating by about 20% in last few months, equipment manufacturers will not be able to offer equipment at a cheaper price to the telecom operators. Generally, Indian telecom service providers get equipment at a competitive price. Under the new scenario, the prices are set to go up. It will also be difficult for them to offer vendor’s credit to telecom service providers, which is a common practice in the industry.

Therefore, the global economic slowdown will have serious implications on the growth of telecom sector in India.

VAS companies will have to earn revenues:

Most of the VAS companies are playing valuation game. The management was more focused on the valuations rather than the revenues and profit. Now with the meltdown in stock markets and grim situation in the USA, VAS companies will have to earn revenues to sustain their operations.