After the tariff hike

Telecom sector is still far from the desired stability

Both private-sector incumbents in the telecom sector have raised tariffs and the latest entrant is expected to follow suit. While most consumers will not be happy, the tariff hike is expected to bring back some financial sanity in the telecom business, which has witnessed a fair bit of disruption in recent years. Bharti Airtel and Vodafone Idea, the incumbents, have increased tariffs by an average of about 30 per cent for the prepaid segment, effective December 3. Reliance Jio has indicated it would follow suit later this week. According to analyst estimates, the hike is expected to boost the average revenue per user by Rs 30 for both the incumbents and enhance profits at the operating level by Rs 7,000-9,500 crore. The tariff hike became essential for the incumbents after they posted a combined net loss of about Rs 74,000 crore in the second quarter of the current financial year. While at one level, incumbents were struggling because of the price war unleashed by the entry of Jio, their problems became more striking after the Supreme Court upheld the government’s definition of adjusted gross revenue, resulting in a demand of about Rs 1.4 trillion from the sector.

From the financial viability standpoint, the first tariff hike in many years is a step in the right direction, but it may not solve the problem for the incumbents. Prices are expected to go up further, though the extent would depend on how consumers and telecom players react to the evolving situation in the coming months and quarters. With increasing tariffs, consumers would move to operators with better-quality services. In this context, Vodafone Idea could suffer on account of network capability in some circles. Although Airtel is in a comparatively good position, paying regulatory dues and sustaining investment in an immensely capital-intensive business would remain a challenge. 

Now that the industry has bitten the bullet, it is time for the government and the telecom regulator to deliberate upon what they expect from the sector. The government can’t be seen to be supporting inefficient state-run telecom companies while pushing private-sector operators to the wall. This is an extremely capital-intensive business and investments made by telcos will have wider benefits for the economy in terms of improving efficiency, raising productivity, and attracting investments. Further, if one of the incumbents decides to leave the market, it will affect future investment and the quality of services. This is not to suggest that the government should go out of its way to save operators, but value destruction in the sector has not happened because of competition alone. Both the government and the telecom regulator need to create an enabling environment to facilitate growth in the sector. At the same time, the competition watchdog will need to ensure that telecom players don’t act as a cartel to raise tariffs indiscriminately. In short, even though telecom operators have decided to raise prices, the sector is still far from the desired financial stability to be able to make next-generation investments. The future, to a large extent, will depend on the policy and regulatory environment.