Can’t have low tariffs & more telecom innovation – The Financial Express

India thrives on its digital strength. The country has witnessed massive growth in data consumption, indicating a transition from ‘digital-first’ to ‘digital-throughout’ lifestyle. To give a perspective of the data wave in India, the quarterly data usage (at ~27.8 exabytes, or EB, in March 2021) is nearly up by 60x compared to June 2016 quarter. Similarly, the share of 4G data stood at 97% (27.1 EB) in March 2021, increasing from ~2% (8 PB) in June 2016, registering a strong growth of ~3,365x. Data usage per subscriber has increased from a meagre 0.15 GB/month in June 2016 to ~12.3GB/month by March 2021.

With the advent of 4G, various digital/tech businesses like e-commerce, food delivery, ride-hailing, streaming services, and fintech, etc, proliferated in India. However, the sector’s service revenue declined at a CAGR of 4.6% between 2016-2020. This is the biggest anomaly in the sector—mobile data traffic is aiming for the moon, while revenue is not proportionally rising. This is largely attributable to the fact that India has one of the lowest mobile data tariffs globally. The price of 1 GB data is $0.1 in India as compared to Indonesia’s $0.3, Bangladesh’s $0.3, the Philippines’ $0.6, Malaysia’s $0.6, China’s $0.8, Brazil’s $1.6, the UK’s $2.7, and the US’s $3.8. This has a direct bearing on the mobile ARPU, which is substantially lower at $1.8 compared to a global average of $7.5.

Today, the telecom sector faces rising input cost. The average prices of petrol and diesel in October 2021 in Delhi were 43.5% and 41.5% higher than their respective levels in October 2019. Day upon day, employee costs are also rising. But, since the launch of mobile services in India in 1995, the tariffs have only gone southwards. Headline tariffs have increased only twice in the last 25 years—December 2019 and November 2021. In every industry, it is essential to have a fair price for the service that is being offered by companies to maintain the financial health of the sector. It is not surprising that the Indian telecom sector has one of the lowest Return on Invested Capital (ROIC) in Asia. The sector had an ROIC of 0.9% in 2020, while it was 8.6% on an average across telecom markets in Asia. Unless there are proper investments, the sector would not be back to its glory days.

It is high time that necessary corrections/measures are required to make the sector more attractive and profitable. A viable cost structure is necessary for innovation to thrive and to foray into adjacent market propositions. To put it simply, the current mobile tariff in India is not sustainable. The ARPU needs to be at least doubled in the next two years to restore sector viability. We have reached a point where tariff hike is not a choice anymore but an inevitability.

Continuous investment is required for 4G network expansion as well as augmenting existing sites. It is important for Indian operators to keep up with cutting-edge technology innovation. Today, India stands at the cusp of a technology revolution. The country is transitioning to become an innovation partner for the world. This is possible through large scale digital transformation initiatives, building intelligent platforms and products, and embracing emerging technologies such as analytics and Artificial Intelligence (AI), robotics and automation, blockchain, IoT, edge computing and AR/VR. 5G is expected to be a catalyst to bring all new technologies together and propel India on the path to high-tech innovation.

Telecom operators cannot delay 5G network investment any further. Otherwise, the country runs the risk of lagging behind global peers on the innovation agenda. For successful 5G implementation, operators need to significantly increase capex, form strategic partnership with leading players in other industries and imbibe a culture of innovation to occupy new value chain positions. The advent of 5G will create several employment opportunities, open-up new revenue streams, and maximise India’s contribution to global value chain by focusing on domestic production and increasing exports.

Consider the fact that, in India, the prices of essential commodities are on the rise. As per the data released by the Central Statistical Organisation, the average consumer food price inflation rate for FY21 (April 2020 to March 2021) was 7.7%, a 1 percentage point increase over FY20. This is largely due to higher input costs, owing to supply disruptions and global inflation. Another example would be property prices. According to the Confederation of Real Estate Developers’ Association of India (CREDAI), residential property prices are slated to increase by 10%-15% on the back of rising input costs.

The power and utilities sector has witnessed periodic upward tariff revisions to minimise losses faced by utility companies. The national Average Power Purchase Cost (APPC) has steadily increased from Rs 3.4/Kwh in FY17 to Rs 3.85/Kwh in FY22, an increase of 13.2%. To top it all, India’s headline CPI inflation was at a six-year high of 6.2% in 2020-21 and remained high at 5.2% during the seven-month period of April-October 2021. We need to ask ourselves how telecom tariff is in a different direction than inflationary trends.

Given the importance of telecom, the current tariff structure in the sector is not conducive for substantial returns for operators. It runs the risk of pushing key stakeholders in the telecom value chain to the fringes. At the expense of reduced tariffs, we cannot afford this imbalance. The bottom line is that if the sector is not attractive, then no global investment is possible. A phased plan of action needs to be formulated to attract more capital and enhance the long-term sustainability.

India is possibly at a point where the entire tariff structure should be relooked. This is perhaps a way to balance the increase in headline tariffs with a tiered, segmental approach. Telecommunications is the backbone of the digital economy. It is our collective responsibility to create a conducive environment for all stakeholders.

TMT Emerging Markets Leader,
EY Global

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