If Vodafone Idea disconnects, India picks up the bill
India faces a multi-billion-dollar hit to its economy and a tarnished reputation as a place for multinationals to invest unless it can keep Vodafone Idea in business.
Vodafone Idea, a joint venture between Britain’s Vodafone Group Plc and India’s Idea Cellular, is the most vulnerable of the mobile carriers ordered on Friday to immediately pay billions in unpaid government dues and interest following a Supreme Court ruling.
It has said it cannot immediately pay the $3.9 billion it owes and its ability to survive was contingent on the government agreeing a flexible payment schedule.
With 13,000 direct employees and loans from banks of about $3.8 billion, Vodafone Idea’s potential exit would send shockwaves through India’s economy, which is already growing at its slowest pace in 11 years.
“A default of such a large scale could increase India’s fiscal deficit by about 40 basis points,” Aliasgar Shakir, a research analyst at Motilal Oswal, said.
A 40 basis point increase in fiscal deficit roughly translates to a revenue loss of about 1 trillion rupees ($14.01 billion) for Prime Minister Narendra Modi’s government, when it is facing the country’s first fall in direct taxes in decades.
former executive at Vodafone Idea, who asked not to be identified, said the risk of deterring investment was high.
“They have been beaten down by the environment here,” the executive said. “We’re sending investor) a very negative signal – it says the trust factor between the government and the industry doesn’t exist.”
Two official sources said the government was seeking to come up with a plan that did not violate the court’s order.
“(The government) is concerned with what is happening in the sector and its impact on the investment climate,” a top Finance Ministry official said
In the meantime, Vodafone Idea has said it will pay 35 billion rupees ($490 million) in dues to the federal government by 21 Feb.