Explained: Hike in Telecom prices

Reading time: 6-8 minutes.

The price war in the telecom industry has arrived at a temporary halt as all the major network service providers (NSPs) have announced a significant hike on receiving a blow from the Supreme Court regarding the clearance of dues of around Rs. 93,000 crores as license fees.

Major telecom players like Bharti Airtel and Vodafone-Idea have been the victim of huge losses in the past months and in order to provide a boost to the sector in terms of top line and bottom line, the hike in the prepaid plans became a necessity.

The increase in tariffs may range from 15% to 41% across various plans of different providers. The plans with longer validity, i.e., 84 days or annual bundled plans are more prone to the raised tariffs.

These enhanced charges are targeted towards mitigating the losses from Adjusted Gross Revenue (AGR) pay-out and increase profits. The increased tariffs will also supplement the ARPU (Average Revenue per User) amongst the telecom sector.

Background of this issue: When prices fell suddenly in 2016 (Jio was introduced)

On September 5, 2016, India’s telecom sector witnessed the inception of Reliance Jio which completely changed the dynamics of the industry. It is the brainchild of Mukesh Ambani. The sector observed numerous records after Jio’s entry which clearly indicated the impact which it had on the industry. Jio can be considered as the main force in making India one of the highest consumer bases of mobile data around the globe.

It is a known fact that service providers not only compete on providing best quality services to its customers, but also provide these services within an aggressive price segment. Jio not only raised the bar in providing high quality services at an ultra-reasonable price, but also pushed its market outreach by providing free services for a limited period of time.

This resulted in the stimulation of a price war among the conventional industry leaders and the prices fell drastically ever since in order to ensure adequate market share.

Effect of Jio in India:

Substantial outcomes after Jio’s arrival:-

  • Inexpensive Data- The data prices were very costly before Jio and users had to shell out more money for even 1GB of internet. The operators had to cut-off the rates as Jio provided better value-for-money high speed data packs.
  • Unlimited Voice Calls- Voice calls accounted for a major portion of income for the operators as the calls were on a minute basis, but after Jio these were made unlimited as there was no cap on minutes.
  • Enhanced Participation in Online Activities- The average consumption of online facilities and content saw a huge jump after Jio’s entrance.
  • A New Era of 4G Smartphones- The demand for 4G handsets skyrocketed as the availability of 4G network was made accessible on a larger scale.
  • Consumer Acquisition- Within 6 months of its launch, Jio was able to garner 100 million customers for its services. This growth was even quicker than most of the popular telecom players.
  • Refined Broadband Internet Access- Anything in excess of 512kbps of data is defined as broadband speed and with millions of users in its consumer base, Jio became India’s largest broadband services provider.

Reasons for current hike in price: SC’s Judgement on ‘Adjusted Gross Revenue’

The Supreme Court on October 24, 2019, delivered a phenomenal judgement regarding the agreement for licensing linking various telecom companies with the Department of Telecom (DoT). The end result of the verdict saw an acceptance of the interpretation to Adjusted Gross Revenue as made by the DoT. This affected the telecom companies on a very large scale as the judgement concluded in imposing a burden of around Rs. 92,000 crores on various telecom operators.

The SC ruled that the service providers are bound to include non-core revenue to ascertain levies. Furthermore, while interpreting the proper meaning of AGR, SC clarified that it will include dividends, handset sales, rent and profit from the sale of scrap besides revenue from services. Earlier, the AGR was just limited to license fees and spectrum charges, but now it has a wider scope and the telecom companies are bound to function and operate in accordance with it.

The landmark judgement concluded the 14-year old legal battle between the operators and the government regarding the ambit of AGR. The bench headed by Justice Arun Mishra directed the operators to shell out the dues within three months of the verdict.

Adjusted Gross revenue:

The first liberalisation phase for the telecom industry came with the introduction of National Telecom Policy, 1994, according to which the licenses were granted to operators in return for a pre-determined license fee. The revenue sharing fee model was introduced by the government in 1999 in order to tackle the high license fees and reduce the burden on the service providers.

Under this model, the telephone operators were directed to split a proportion of their gross revenue with the government in the form of annual license fees and spectrum usage charges. The share of the government from the company’s gross revenue came under the head of “Adjusted Gross Revenue”.

Agreements of licenses were then duly made between the DoT and telecom companies and the AGR was computed accordingly after allowing for certain deductions mentioned in these agreements.

The question in dispute was the extent of AGR as DoT was of the view that it should include all revenues from both telecom and non- telecom services whereas the operators claimed that AGR should only be inclusive of revenue generated from core services. AGR plays an important role as it carries big financial implications for both the companies and the government.

Conclusion: A probable way forward

The introduction of limitations on off-net calls (calls to another network) is a new obstacle for the telecom companies. TRAI (Telecom Regulatory Authority of India) may lay the groundwork for commencing a consultation paper on setting floor prices which may come as a big shock to the average consumer.

Consumption patterns will be observed thoroughly by the operators so as to detect hefty data usage post the hike which will further give them the confidence to increase the prices. There is a fair chance that post-paid plans might get caught in this situation, but it won’t make much of a difference as the post-paid consumers account for around 5%-10% of the wireless telecom market.

The sudden shift in the tariffs may result in SIM consolidation. It means that people using multiple SIMs at a particular time may opt for a single SIM only. A radical deviation in data consumption can be witnessed when prices are altered as the consumers will have no choice but to use the internet judiciously.

Nevertheless, there is some relief in the form of waiving-off of spectrum dues for the financial years 2021 and 2022 duly approved by the Union Cabinet (Cabinet Committee on Economic Affairs). This has provided a pardon of around Rs. 42,000 crores to the telecom companies.

The total liability on the operators accounts for Rs. 93,000 crores in license fees, penalties and interests along with around Rs. 42,000 crores in spectrum usage charges. The relief has provided the companies some breathing ground as the time for recovery from debts has been minimized.

This is a tough phase for the telecom industries as major players are already facing huge losses and on the top of it the interpretation of AGR has piled up major dues for the operators.

It is true that some relief has been provided, but for the time being the consumers as well as the service provider have to cope up with the changing scenario and hope for a stable relationship amongst the government, the telecom companies and the consumer.

Author: Jatin Bhudhiraja from Amity Law School, Noida.

Editor: Farsana Sadiq from Faculty of Law, Jamia Millia Islamia.