Wrong call? Reduction in call termination rate will lead to revenue losses

The decision of the Telecom Regulatory Authority of India (Trai) to slash international call termination rates by 43 per cent with effect from February 1 may be a case of missing the revenue-bearing wood for the grey-market trees. Trai’s explanation for this cut — from 53 paise to 30 paise per minute — is that it eliminates the possibility of arbitrage from grey market calls that pose a national security threat. Prima facie, cheaper incoming international calls may also appear to be consumer-friendly, which is, after all, the focus of Trai’s mandate. Facts on the ground, however, suggest that both arguments are weak. For one, this cut comes at a time when voice calls are increasingly being made via the internet through apps such as Skype and WhatsApp. These apps also come embedded with similar “security” threats, so merely cutting rates for calls made in the non-grey market may not address the safety issue adequately.

To be sure, it is possible to argue that the sharp cut in international termination charges may see a spike in legal incoming calls, improving on an incoming-outgoing call ratio that has slipped from 1:5 in 2011 to 1:20 in 2017. But it is worth noting this slippage has occurred even in a regime in which Indian termination charges for incoming international calls were among the lowest in the world — 53 paise a minute (pre-February 1) compared extremely favourably with Rs 1.01 per minute for the United States, Rs 15.44 for Oman and Rs 8.36 for the United Arab Emirates. Given this, there is little reason to suppose that incoming traffic is likely to surge as a result of this cut. On the other hand, the stress for telecom service providers, most of which have protested strongly against this move, has increased manifold. The industry has already seen its revenues being pinched when Trai inexplicably reduced domestic termination charges - that is, the amount one operator pays another for calls terminating on their networks - from 14 paise a minute to 6 (paise a minute) with effect from October last year, a move that benefited newcomers over established incumbents. Coming soon after that decision, this steep cut in incoming international termination charges is unlikely to help.

By rough estimates, telecom service providers stand to lose about Rs 20 billion of the Rs 50 billion they earn from international call termination charges in a year. In an industry with annual earnings of over Rs 2.4 trillion, this is certainly a significant amount. Also given the accumulated debt — at Rs 4.7 trillion, it is double the industry's revenues — and the heightened competition from a deep-pocketed Reliance Jio, it is worth wondering whether the move was warranted at all. The impact on struggling telecom service providers' revenues is one element of the argument. Equally, this sharp cut is likely to impinge on government revenues in terms of the goods and services tax, in terms of its revenue share of licence fees and in terms of foreign exchange earnings at a time when North Block is struggling to bridge a widening fiscal deficit. All told, the argument for sharply reducing international call termination charges is weak, and Trai will do well to walk it back while it has the time.