Trai's dilemma

Regulator must balance reducing IUCs and mobile industry health

The Telecom Regulatory Authority of India, or Trai, will soon decide on the vexed question of the interconnect user charge, or IUC. The IUC is a payment, per minute of a completed call, from the network where the call originates to the network where the call terminates. The essential idea behind the IUC is that it compensates the company where the call terminates for its investment in last-mile connectivity, since part of the call will naturally be carried over the infrastructure that the call receiver’s chosen mobile company has installed. Currently, the IUC is 14 paise a minute; the question is whether, and if so by how much, this should be reduced. Many incumbent companies, including the largest — Airtel, Idea, and Vodafone — have in fact asked for the IUC to be increased, perhaps doubled. Meanwhile, the cash-rich new entrant Reliance Jio, which has shaken up the industry through its various user subsidies, has demanded that the IUC be halved.

There are good reasons, grounded in economic theory, against having the IUC at all. The International Telecommunication Union (ITU), for example, the United Nations agency that deals with telecom-related issues, has generally made the case that a high IUC “can distort competition, become a barrier to new entrants, and be harmful to end users”. On the other hand, eliminating it “could lower consumer prices and spur innovation in the entire telecommunication sector”. The ITU’s point is not difficult to see: High IUCs clearly favour large incumbent mobile companies, which will constantly receive payments from new entrants since their large customer base will receive more calls than the new entrants’ smaller customer base. In the last financial year, Airtel, for example, received more than Rs 10,000 crore as interconnect charges.

While the economic case for low, or even zero, IUCs is clear, there are other considerations too, mostly dealing with the sustainability and the health of the overall industry. Many incumbent operators are reeling under high spectrum charges, heavy tax bills, or overburdened balance sheets. A policy that appears to favour the cash-rich entrant, Reliance Jio, could further stress the incumbents and lead to a dangerous build-up of market power. The Indian telecom sector presents additional unique challenges, because of the segmentation of the market between urban and rural areas. The chief executive officer of Vodafone has written to Trai, arguing that 15-20 per cent of the company’s cellular sites are running at a loss, and without the income from the IUCs, the firm may have to shut down these locations — which are primarily in rural areas.

Thus, Trai will have to perform a delicate balancing act between ensuring the health of the overall network and the competitive nature of the industry, and make space for growth and technological innovation. Policy cannot perpetually favour obsolete 2G circuit-switching technology over cheaper and more efficient 4G mechanisms. But clearly, an immediate change to “bill and keep” a zero IUC will decimate the industry. Thus, Trai should work on creating a glide path to reducing the IUC so that the goal of zero interconnection charges is achieved in time, but market players have adequate time to adjust. Such a policy would not favour one company at the expense of all the others.