Investors and the general public were in for a shock on November 14, when Vodafone Idea reported the largest quarterly loss in Indian corporate history. The third-largest telecom service provider in the country posted a loss of Rs 50,991 crore for the quarter ended September. Industry peer Bharti Airtel had shared something similar with the market earlier in the day. The telecom major had reported a loss of Rs 23,044 crore for the quarter. The gargantuan losses reported by the second and the third largest telecom companies is a fallout of a Supreme Court ruling. The apex court upheld the government’s definition of adjusted gross revenue, which has resulted in a Rs 1.3 lakh crore liability for the Indian telecom sector.
Vodafone Idea and Bharti Airtel bore the brunt of the ruling with pending spectrum usage charges and license fee of Rs 39,000 crore and Rs 41,000 crore, respectively. The telecom industry was already reeling under a huge debt pile and falling profitability. With a huge debt burden and profitability under pressure, both Vodafone Idea and Bharti Airtel announced an increase in mobile tariffs from December. Industry leader Reliance Jio Infocomm too announced a tariff hike, even though the apex court ruling had a minimal impact on its finances.
Source: The Times of India
Tariff hike rationale
A hike in mobile tariffs has been announced after a gap of three years. The entry of Reliance Jio in 2016 with dirt-cheap data packs had forced incumbents like Vodafone and Airtel to substantially lower their mobile charges to retain subscribers. Even though cheap data and availability of phones under Rs 10,000 boosted internet penetration, incumbent telecom companies witnessed deteriorating financial health due to extreme competitiveness. The revenue, profitability and the average revenue per user or ARPU, a key industry metric, of the entire sector has been declining for the past three years. All the three major telecom operators have huge debt loads, but Reliance Jio is least affected due to an increase in revenue, profitability and the support from its cash-rich parent Reliance Industries Ltd. On the other hand, Vodafone Idea with net debt of over Rs 1 lakh crore and Bharati Airtel with net debt of Rs 93,000 crore are facing difficulty in servicing the debt. The only option for the incumbents to survive in the capital-intensive sector was to increase tariffs.
Tariff hike impact
Even though the new tariffs will be applicable from Dec 1, the operators have not announced the quantum of the hike. Some analysts forecast that the hike could be as high as 30%-45% in the near term, while tariffs could triple in the next two years. The hike in tariffs is expected to give the debt-laden telecom companies a breather, but it would have an adverse impact on the Digital India Mission. The number of internet users has risen sharply in the last three years, but over 50% of the country’s population is still left out of the internet cover. Digital India envisages internet connectivity for all, the delivery of government services digitally and universal digital literacy. Digital cover can only be increased by coupling affordable data with easy availability of phones under Rs 10,000 or cheaper. You can buy a smartphone online conveniently through the Bajaj Finserv EMI Store with exciting offers like no-cost EMI. The availability of a wide range of smartphones on the Bajaj Finserv EMI Store with flexible payment options could help many first-time users access the internet, boosting the digital India programme.
But a steep hike in mobile tariffs has the potential to derail the digital India mission as it will make the overall cost of owning a smartphone unaffordable for a large part of the population. Expensive data could put the brakes on the internet penetration boom and low penetration would make seamless delivery of government services impractical. The government cannot dictate tariffs to telecom operators but it can make the business environment more conducive for the companies. A weak telecom sector could be detrimental for the digital India plan, and also for government finances as the sector is a rich source of taxes and levies.
Taking cognizance of the situation, the government recently announced a two-year moratorium on spectrum payments for telecom companies. The step is likely to provide a near-term cash flow relief, but it may be too little for the stressed sector. India has one of the cheapest data prices, but one of the highest spectrum costs. The imbalance in the cost of operations and revenues will have to be addressed. Operators are turning out to be the weakest link in the otherwise well-developed telecom ecosystem.
Today, it is extremely easy to get a smartphone under Rs 10,000 or buy a smartphone online. You can buy a smartphone online through Bajaj Finserv EMI Store in easy monthly instalments. Customers can also avail offers like no-cost EMI on the Bajaj Finserv EMI Store, which has lowered the bar for smartphone ownership. The hike in tariffs could swiftly undo all the progress the Digital India movement has achieved.
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