Don't fix telecom tariffs

Telcos' demand for a floor price is a bad idea

Reeling under growing debt and a huge strain on profitability, several telecom operators got together last week to seek a floor price for voice and data tariff. Operators across the spectrum — from Vodafone (a multinational) to Idea Cellular (an Indian private sector firm) to BSNL (a state-owned firm) — sought the attention of the Telecom Regulatory Authority of India (Trai) as well as an inter-ministerial panel, set up to hasten the resolution of financial stress in this sector. The demand for a floor was based on the argument that Reliance Jio’s rock-bottom data tariffs, coupled with free voice calls and zero billing for the first six months, were the key reason for the financial stress.

A floor for tariffs, it was argued, would ensure that revenues did not get into a free fall anytime in the future. The older networks also demanded reduction in the charges that the government collected from them. Some even asked for an extension of the period over which they can pay the government for spectrum. However, Reliance Jio queered the pitch by telling the inter-ministerial group that the crisis was of the networks’ own making as they had chosen to make investments through debt and not equity. And hence there was no need to give them a bailout package.

It is true that the quarterly revenues of older telecom networks have shrunk by up to 20 per cent after Reliance Jio launched in September. In fact, only one of the five listed networks, Bharti Airtel, reported a profit in the March-ended quarter. The various charges that the government collects on the adjusted gross revenues of the networks have also shown a decline. The fall in revenues has happened at a time when operators' debts have grown to over Rs 4.5 lakh crore. The telecom sector is looking increasingly vulnerable from the standpoint of adding to the growing mass of bank non-performing assets (NPAs), and the Reserve Bank of India (RBI) has already advised banks to treat this sector with caution. 

However, there are many reasons why the demand for a floor price should not be entertained. For starters, at a time when several other sectors are facing financial duress, acceding to fixing prices in one sector could trigger a similar demand from other stressed sectors such as steel, real estate, and mining. Moreover, setting a floor price is bound to breed inefficiency and slow the adoption of technology as it would disincentivise reducing costs through efficiency gains. Such a move would also impinge on the consumers’ interest. Of course, if there is predatory pricing, the matter should be looked into by the Competition Commission of India. It is noteworthy that a similar situation had arisen around 2010, under the UPA government’s first-served policy, when a host of new players had entered the market with very low tariffs. The average revenue per user (ARPU) of the incumbent networks fell sharply. 

However, the low tariffs proved unsustainable and slowly the ARPUs began to recover. No intervention from Trai was required. To its credit, Trai has so far stayed away from tariff fixation. It should continue to show forbearance in the future.