Right call to increase telecom tariff

| Updated on: Nov 26, 2021
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Telcos’ tariff hike will spur network investment and keep the existing players going

The recent hike in tariffs for mobile services effected by Airtel and Vodafone Idea augurs well for India’s telecom sector which has been under severe financial crisis over the last two years with mounting losses and increasing debt. Nevertheless, the telecom companies have had to invest in rolling out 4G network, purchase expensive spectrum, and pay out hefty regulatory dues. With tariffs being low, they were not recovering enough revenues from the services to meet these expenses. Telecom companies need more cash to be able to not only address current capital requirements, but also to be ready to invest in 5G technology that is slated to be rolled out next year. In this context, the recent increase in pricing will improve the (monthly) average revenue per user (ARPU) by about 18 per cent for Airtel and Vodafone, which in turn will translate into higher EBITDA margins.

Historically, India has had among the lowest tariffs in the world. ARPUs in India have been below ₹200 for the last 10 years. In comparison, telecom companies in the US get about $50 per user. To be fair, low tariffs have enabled the proliferation of mobile services to the masses, making it available to over one billion people. This model worked when the service providers were given spectrum for free. Since 2010 telecom companies have had to purchase spectrum through an auction mechanism. In addition, they have had to pay 30 per cent of their annual revenues in levies such as licence fee and spectrum charges. Hyper competition in the sector kept back these players from hiking tariffs. As margins got squeezed, several operators have had to shut down business. Telecom companies have not been able to invest in creating a robust network, resulting in poor service quality for consumers.

Therefore, it is a good sign that at least two of the three remaining private sector players have decided to bite the bullet by increasing tariffs by 20-25 per cent. This, combined with the tariff hikes since 2019 should push up the monthly ARPU to about ₹180 a month compared to ₹140 in 2017. But there is headroom to increase tariffs further given that consumers were paying an average of ₹300 every month in 2007 for plain vanilla 2G services. Increasing tariffs alone won’t bail out the sector. Ideally, the Centre should have stepped in with a reduction in regulatory fees and spectrum pricing. The relief package announced in September will provide a temporary respite by pushing back regulatory payouts by four years. That said, the industry should now focus on providing top quality service. Only then the hike in tariffs will be justified.

Published on November 27, 2021

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