A sensible call

Tariff increase by telcos was long overdue

Telecom companies, both incumbents as well as the disruptor, have shown maturity by announcing hikes in mobile phone tariffs in the first week of December. Though the amount is not known as yet, the first mobile phone tariff hike in close to a decade could be a turning point for the sector, saddled with record losses and debt, largely due to rock-bottom prices, triggered by unhealthy competition. The move can be the first step in getting the telecom sector back on track, though a lot will depend on how it plays out in terms of subscriber movement affected by the tariff change.

For the time being, the telcos’ decision to raise tariffs is expected to improve sector pricing by 15-30 per cent even though there will be some customer churn based on tariff revisions. While telcos said in the past that revenue or ARPU (average revenue per user) was more important than volume, they found it hard to resist the temptation to increase their subscriber count at any cost in a competitive market, which was turned upside down by a cash-rich entrant. With portability to another operator an easy option now as the subscriber gets to retain his or her phone number, telcos would be careful to change tariffs in a responsible way. 

Also, while higher tariffs should bring a semblance of order in the industry, which has been in a race to decrease prices without looking at its financials, it will need relief from the government to mend things immediately. The government has announced a two-year moratorium for the telecom companies in making their spectrum payments for the past auctions. This is estimated to bring a relief of around Rs 42,000 crore to the three private players — Bharti Airtel, Vodafone Idea, and Reliance Jio — during FY21 and FY22. However, in the subsequent years, interest will accrue on the amount, increasing the overall spectrum payout for the companies. But the immediate relief in cash flow that the moratorium will offer cannot be ignored, especially as Bharti Airtel and Vodafone Idea, with a total net loss of Rs 74,000 crore in the second quarter, raised the risk of not being able to continue as going concerns in the absence of a potential remedy from the government.

That said, the two-year moratorium may not be a long-term solution to address the leverage concerns of the telcos. At this point, there’s a lack of clarity on whether the government, based on recommendations of an expert panel, will roll out further steps to give relief to the stressed telecom industry, facing a demand of an estimated Rs 1.4 trillion as a result of a recent Supreme Court order upholding the government definition of adjusted gross revenue (AGR). In line with the industry expectation, the government should look at rationalising fee for the companies, a step that will possibly go a long way in boosting the financial health of the stressed sector.

The wish list of telcos, which failed to make provisioning in their books for the long-pending AGR dues, plunging the industry to record lows, is long. Several operators, including Bharti Airtel and Vodafone Idea, have filed a review petition against the apex court’s AGR order, seeking waiver of penalties and interest. Irrespective of the outcome, both the government and operators will need to look for ways to make the sector financially sustainable as developments in the sector will have far-reaching consequences for the economy at large.