The northward trend of telecom tariffs is likely to pinch a sizeable bracket of Indian consumers accustomed to one of the cheapest telecom prices in the world.
This week, both Vodafone Idea and Bharti Airtel hiked their tariff plans by 25 per cent. In a scenario where Reliance Jio follows suit, experts believe that there will be temporary downgrading in the user market that opts for monthly recharges. Moreover, lower-end subscribers are likely to face the heat, especially in the entry-level price point for 2G users.
Furthermore, while telcos were calling for major tariff hikes to generate enough cash flows to invest in networks, experts believe that ARPUs need to go up further before telcos become financially secure to build sustainable network infrastructure, either through upgrading to 5G or building on the existing 4G networks.
Will Jio follow suit?
So far, two of the three major telecom operators, Vi and Bharti Airtel, have announced back-to-back tariff hikes, which will be implemented from November 25 and November 26, respectively. Analysts also believe that it is likely that Jio will be announcing its tariff hikes soon. This is the much-needed step towards the ₹300 average revenue per user (ARPU) goal that Sunil Mittal, founder of Bharti Airtel, believes is required for the sector to have healthy cash flows.
While the price hikes give the sector a much-needed boost, according to experts, this will cause a portion of the telecom user base to feel the price pinch.
According to Isha Chaudhary, Director, Crisil Research: “Lower-end subscribers, who use 2G feature phones will face more heat as the entry-level price point has further been increased to ₹99. This is the second hike for the segment in over six months, effectively doubling the price. Roughly 30-35 per cent of the wireless subscribers are on 2G networks.” In addition to this, according to Chaudhary, 4G subscribers, who recently upgraded from 2G and 3G services, are also likely to be affected.
The entry of Reliance Jio to provide extremely affordable 4G services in 2016 revolutionised digital adoption, adoption of data services, as well as consumer behaviour around data consumption for the Indian market. Now, with an average monthly data consumption of 13.5 GB, according to Mobile India Traffic Index (MBiT 2021), India has one of the highest data consumptions in the world. However, experts believe that consumer behaviour is likely to change temporarily. “These tariff hikes may result in temporary downgrading, especially by users who opt for monthly recharges. They are likely to switch to 1 GB/day plans, instead of 1.5 GB/day. This also coincides with the workforce returning to offices, which is likely to result in lowering of data consumption and hence result in downtrading,” said Chaudhary.
Overall data usage of the industry, which rose to 17 GB/sub/month in Q2 FY22, is likely to lower and settle at around 15 GB/ user/ month, as a result of the price hikes and employees returning to offices, according to Crisil.
Rajat Katuria, Dean, School of Humanities and Social Sciences, Shiv Nadar University, said: “The immediate impact of the price rise is going to be negative in the short term, with consumers either rationalising their consumption, switching to other operators, or protesting against the tariff hikes. In the long term, the demand could be more elastic, however, with the general inflation being high, the room to manoeuvre other cost buckets to go back to pre-tariff hike consumption levels is going to be much lesser, especially for people on borderline income levels.”
So, while the party is over for consumers at the pricing level, will this translate to a better network quality that telcos promised once their cash flows increase?
Experts suggest that it is too soon to tell. According to Prashant Singhal, Tech Media and Telecom, Emerging Markets Leader, EY: “After a long trend of telecom tariffs going down, this is a much-needed reprieve for the telecom sector for tariffs to increase.
“However, starting from an extremely low base ARPUs, ARPUs need to improve further through a combination of tariff hikes as well as upgradation of the consumer base to 4G for the sector to have enough cash flows to make sustainable investments into building higher quality networks.”
Another expert told BusinessLine on conditions of anonymity: “Starting from such a low base of cash flows, these tariff hikes alone are likely to have a small effect on the network quality. Right now the return on capital is in single digits, and this is likely to bump it up to 10 per cent. In the current regulatory regime, this is still not enough to have longstanding sustainable investments into network quality,”
Impact on consumers
Another key caveat is whether Jio is going to follow suit and increase their tariffs also. Analysts are closely watching Jio in order to ascertain the extent of the impact on consumers’ pockets.
BK Syngal, former Chairman and Managing Director of VSNL, said: “It is all contingent on whether Jio and BSNL follow suit with their own tariff hikes, otherwise there can be migration of the consumer base away from Bharti and Voda Idea to these operators. However, tariffs needed to be increased in order to take care of the ground realities of the investment makers.”