Right call, wrong timing

In reducing the IUC, Trai could have been more practical

The decision of the Telecom Regulatory Authority of India (Trai) to slash the interconnection usage charge (IUC) – for calls terminating on another network – by more than half to 6 paise per minute from October 1 and to abolish it for all local calls from 2020 is an outcome of an extensive academic exercise. The regulator cannot be faulted for following a glide-path of declining IUC, as it has done in the past. The formula modeled on the long-run incremental cost to derive the IUC figure is a global practice, and not by any means arbitrary. The first IUC regulation came out in 2003 and was introduced in 2004 at 30 paise, which was cut to 20 paise in 2009 and implemented in 2010 after telecom companies and Trai battled it out in courts. The regulation was amended again to fix the IUC at 14 paise in 2015.

Trai has also rightly argued through the 60-odd pages of the regulation that without effective interconnection, the market will develop as “discrete islands” and economic benefits associated with market expansion and liberalisation will be limited. It is true that the incumbent telecom companies have mostly relied on less sophisticated technology, while the newcomer, Reliance Jio, has been able to bring down cost by using the latest technology. After all, the technology used for carrying calls has changed or is changing rapidly from circuit switching to packet switching. Since the cost of terminating a call that comes along as packets is relatively small compared to the cost of terminating a call using circuit switching, Trai is right in arguing that its mandate also is to promote technologies with lesser costs.

It is debatable, however, whether this should be the only consideration for the regulator for taking such an important decision. No regulator can be expected to operate from a silo and reach a conclusion based on a formula followed around the world without looking at the overall domestic context. The timing of the Trai move could have surely been better in view of the severe financial stress that the telecom industry is facing. The estimated industry debt to banks is around Rs 4 lakh crore, with some operators on the brink of closure. Reduction in the IUC to 6 paise could translate into a setback of around Rs 5,000 crore for the incumbents. Was this financial blow desirable at this point for an industry already in stress and in the midst of intense competition?

In the past, reduction in the IUC may have resulted in lower call rates, but at this point it is anybody’s guess whether the Trai move will mean a cut in tariffs, which have already hit rock bottom, resulting in declining profitability for leading telecom companies. Sensing what was coming, incumbents have been pressing for the status quo in the IUC in case Trai refused to raise it to 30 per cent — the latter being an unreasonable demand. Reliance Jio, with an estimated 90 per cent outgoing calls to other networks as against a more balanced ratio of outgoing-incoming traffic in the case of other telecom companies, was asking for abolition of the IUC right away. If all telecom operators were more or less of equal size, net revenue from termination charges anyway would have been zero. But that is surely not the case. Trai could have perhaps exercised more caution before doing what it did.