Government should protect mobile consumers

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SummaryThe response to the much-hyped 2G auction due to the cancellation of 122 licences has been muted, resulting in much lower revenue for the government.

A cup of coffee or tea (depending on which part of India we live in) and a one-minute mobile phone call used to cost the same during the late 1990s. Remember the days when incoming calls were charged? All that has changed. And now, thanks to the paisa-fication effect, even inflation has no impact on tariff. India’s call rates are perhaps the lowest in the world and it is not surprising to see India ranked among the highest in minutes of use (MOU) compared to other global markets.

Along with attractive tariff rates, availability of phones and the ease of obtaining a phone connection have helped India witness unprecedented growth in the telecommunications market, leading to a tele-density of over 77%. This transformation in communication must be lauded. Now that the government is trying to maximise revenue through auctions, should we get ready for increased call tariff going forward?

It appears as if the government is obsessed with the R1.76 lakh crore loss (as noted by the CAG) and that the regulators are trying their best to reduce this loss through exorbitant spectrum pricing. There are arguments substantiating such high prices. But, can this be justified considering communication is an essential service and should serve the larger interest of the society?

Indian telcos are required to pay one-time spectrum charge, and this price is realised now through auctioning (earlier through administrative pricing) and an annual licence fee. Overall, regulatory levies in India are far higher compared to other parts of the world. While the Indian telcos end up paying 17-20% of the gross revenue they earn as tax, their Chinese counterparts pay about 3-5%.

Although the 3G auction held in 2010 resulted in the government landing a huge booty, the operators are still struggling as 3G service is yet to pick up momentum. All the mobile operators have stretched balance sheets, with debts running into thousands of crore of rupees. Reports indicate that the operators will continue to struggle as higher debts will significantly reduce the operators’ credit-worthiness, thereby bringing down their ability to raise money for future auctions. A report states that almost all the Indian mobile operators are loss-making. It is quite unclear if 3G uptake would turn them profitable or if the operators need to wait for efficiency due to mergers or acquisitions.

The response to the much-hyped 2G auction due to the cancellation of 122 licences has been muted, resulting in much lower revenue for the government, against the target of R40,000 crore. While there were no participants for CDMA auction, for GSM there were no bidders in four key circles. The base price for pan-India spectrum was set at R14,000 crore, and R18,200 crore for 1800MHz GSM and 800Mhz CDMA spectrum, respectively. This base price is 4-7 times higher when compared with the base price during the 3G spectrum auction held in 2010 or during Raja’s allotment to companies in 2008. The telecom regulator has justified the high price by citing that tariff would go up only by a few paise. However, a report by PwC shows that the tariff can go up by 90 paise in metros. In general, most analysis indicates an increase of anywhere between 25-50 paise per minute. This is quite substantial considering the current call rates and could reduce phone usage due to the highly elastic nature of the Indian market.

Due to intense competition, the average revenue per user (ARPU) for mobile operators is less than R100 and this is among the lowest in the world. The ARPU in advanced countries is over R1,500-2500, and even China’s ARPU is over R500. A news report indicates that the reserve spectrum price for the November 2012 2G auction is costlier by many folds, when compared with other countries, when ARPU is used to compute the purchasing power parity of operators.

In the book Telecom Revolution in India, Dr V Sridhar explains that the operators experienced “winner’s curse” during the 1995 spectrum auction. Due to excessive pricing, the operators who won the bids could not afford to pay and the government had to bail them out later. The government should ensure that the 1995 situation is not repeated. In fact, the ill-effects of high 3G spectrum prices in Europe and elsewhere are well known.

The tepid response to the 2G auction could be a dampener for the government’s plan to levy an auction-determined one-time fee of over R25,000 crore aimed at creating a “level-playing field”. Even a lower fee is bound to hit the operators hard, especially some of the larger players who have to pay both prospective and retrospective charges. This will only accelerate the increase in tariff. Government’s plan on the partial refarming of the efficient 900MHz spectrum is expected to add over R1 lakh crore to the exchequer (http://goo.gl/Ae73k), but this again is likely to increase the tariff by over 60 paise.

The telecom industry contributes to 3% of India’s GDP and the government appears to have found a sweet spot to maximise revenue through exorbitant pricing. However, the government’s greed should not push the industry into oblivion. Considering the response to the 2G auction, will the government learn a lesson and take a pragmatic win-win approach?

The broadband wave is yet to pick up, but the expectations are very high and it is proven that broadband penetration contributes positively to the GDP. The National Telecom Policy (2012) has envisioned a “Right to Broadband” and the mobile phone will undoubtedly play a key role in realising this goal.

It is perhaps time for the government to be less aggressive and consider the welfare of the consumers. The government should strike the right balance that would benefit both consumers and the telecom industry. This is the only way India can sustain its claim to fame in the telecommunication sector over the coming years.

The author is vice-president of Symphony Teleca. Views are personal

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