The Indian telecom sector witnessed a tariff war after Reliance Jio made entry in 2016 with a near zero tariff plan. However, post India’s top court verdict last week over the adjusted gross revenue (AGR) dues, the Indian telecom companies are likely to hike their tariffs to increase revenues and offset losses. The Supreme Court of India has given Bharti Airtel, Vodafone-Idea and Jio to pay 10% of the AGR-related dues by 31 March 2021 and the remaining dues can be paid in 10-year instalments starting from 7 February 2022. 

Out of total Rs 1,600 billion pending AGR dues, Bharti Airtel has to pay nearly Rs 430 billion and Vodafone Idea dues stand at around Rs 580 billion. After the Supreme Court verdict, Bharti Airtel and Vodafone Idea need to pay Rs 26 billion and Rs 50 billion respectively by March 2021 and Rs 35 billion and Rs 68 billion annually thereafter.

Data prices for mobile users in India are the lowest in the world. According to the UK based Cable.co.uk, mobile users in India pay between $0.02 and $2.75 for 1GB of data, depending on the tariff plan they choose, however, mobile users in China pay between $0.61 and $1.76 for every GB of data and the users in the US pay between $12.55 and $99.68 per month for a GB of data.

But at this time, telecom companies including Bharti Airtel and Vodafone Idea have to factor in the massive AGR payments and also focus on the 5G spectrum auctions, expected to take place sometime in the next few months. After the double whammy of a tariff war and a massive revenue-sharing bill, the industry may have no option but to raise prices.

Jefferies, an international financial advisory firm, said after the Supreme Court decision that it could lead to cash outflows of 22% of Bharti's EBITDA (earnings before interest, taxes, depreciation and amortization) and 111% of Voda-Idea's EBITDA. Telcos will require ARPU (average revenue per user) increase of 10-27% to offset this, making tariff hikes imminent, Jefferies added in its research note. 

Unavoidable but should be restraint

Mahesh Uppal, a consultant on telecom regulation told NAR that after Supreme Court’s decision, it is unavoidable to increase tariff rates but it should be restraint as data market currently don’t cover more than 50% of India’s population and the affordability is a big issue. 

“I think that companies will be careful about the price increase and not all companies are in the same financial situation. The prices of Jio are lesser than what it is for Airtel and even lesser than what it is for Vodafone-Idea. So, I don’t expect the prices to go up very steeply but some limited amount of prices will be increased.” Uppal said.

A recent study by JP Morgan has also indicated that since the Indian telcos have the lowest return on invested capital (ROIC), the market repair and expected ARPU recovery can be driven by consumption and gentle price hikes.

‘Prepare to pay a lot more’

Sunil Bharti Mittal, chairman of Bharti Airtel, who has been aiming for better ARPU asked his subscribers to ‘prepare to pay a lot more’. “Subscribers either consume 1.6GB of capacity per month either at this price point (Rs 160) or may prepare to pay a lot more. We are not wanting $50-60 like the US or Europe but certainly, $2 for 16 GB per month is not sustainable,” said Sunil Mittal at an event.

He said that offering 16GB data at Rs 160 is a tragedy and added that the users should get 1.6GB data at this price which translates to prices of 1GB data at Rs 100, 10 times more than Rs 10 right now. "If people are consuming content online, they need to be able to pay accordingly," he said. He expects Airtel's ARPU to cross Rs 200 in the next six months.

Currently, Airtel has a base plan of Rs 45 per month but Mittal said that the subscribers would have to pay at least ₹100 per month, which will be more than twice what subscribers pay now.  

At a virtual briefing, Ravinder Takkar, MD and CEO, Vodafone Idea Limited also hinted that the tariffs must go up in the short term. “Telecom tariffs in the Indian market are unsustainable and companies are selling below cost, something evident from the Profit and Loss (P&L statements) and balance sheets of companies,” he said.

"Consumers are ready to pay additional tariffs which is something they were paying earlier to keep the quality of service up. We believe tariffs have to go up at least in the short term. Getting the ARPU in the first steps up to Rs 200 is an important step and eventually the Rs 300 range," he added.

Earlier, Jio, in its letter to Telecom Regulatory Authority of India (TRAI), bid to increase data prices to Rs 20 per GB, from the existing price of Rs 15 per GB, which could increase the data rates by 461%. 

Amitabh Kant, Niti Aayog CEO, also supported telecom companies and said in his letter to TRAI, "We would like to strongly emphasise that floor prices are the need of the hour to enable the continuation of a multiplicity of firms that is critical for healthy competition. Given the heavy debt burden being faced by the sector and the recent fall in prices to unsustainable levels, there is no option available but to set floor prices."

What is AGR

AGR is an agreement between government and telecom providers where they share a percentage of gross revenue generated from offering telecom services with the government instead of paying license fees to the government. This model of sharing revenues with the government was adopted by telecom companies in 1999. However, telecom companies are in dispute with the government over what revenue consists of AGR, whether it includes only the revenue from core services or the combined revenue of telecom companies along with ancillary income.