Financial health of India’s telecom industry – A must for the country’s digital aspirations

The Indian telecom industry has come a long way from a point till early 1990s when one had to wait for 20 years or more to current state with over 1 billion mobile users practically connecting every Indian.

The journey has been arduous to say the least. The sector has been burdened with very high taxes since the beginning. It took a visionary Prime Minister, Atal Bihari Vajpayee in 1998 to amend the then existing license fee of approximately Rs 500 per month, per user to a revenue share regime, enabling floodgates to be opened for massification of mobile with very low-cost monthly plans for the common Indian. Introduction of very aggressive competition, first in 2000, and then again in 2016, defying all costings, was a near-death knell for the industry, as 10 out of 13 companies in operation folded – including Reliance Telecom, a breakaway faction of Reliance Group.

Today, the sector is more stable with four players left – three from the private sector and one government company. In fact, in one private company, Vodafone-Idea, the government owns 49 percent, thereby partly making it a government company. The two leading private companies – Airtel’s and Jio’s financials have improved over time, with ROCE touching double digits. However, it is still far away from being called “financially healthy”, especially considering that nearly USD 5-6 billion needs to be invested collectively by these two companies alone each year. For the industry to remain ready to invest in ever-evolving technologies – e.g., the upcoming 6G – its ROCE must be in the twenties or at least in the high teens.

A few measures that can help achieve that are as under:

CapEx cycle needs to be moderated as the biggest problem for the telecom industry, not just in India but globally, is its extremely “asset-heavy” model. This can be done in two ways:

• Not rushing in for 6G CapEx cycle without fully utilizing the vast capacities created for 5G, and
• Large-scale sharing of infrastructure – not only passive but also active wherever feasible. While towers are already being shared, the optical fiber network needs to be shared to bring down CapEx. Also, since capacities created (especially in rural areas) are poorly utilized, the time has come to think about sharing active network capacities in such geographies too, amongst operators. This could significantly improve capacity utilization and lower capex by each company, thereby resulting in better ROCE.

Industry has also, from the very beginning, incurred very high “customer acquisition costs”. The reason for this is a consistently low percentage of Net adds compared to gross adds, month after month. Today, against cumulative gross adds of roughly 100 million per quarter by the industry, the net additions are only approximately 3-4 million, a pathetic 3-4 percent of gross adds. Accordingly, the industry sees a “churn,” i.e., the percentage of the customer base existing on an operator each month, of over 4-5 percent. This means that more than 50-60 percent of the entire customer base of a company leaves the network of every operator in a year. Churn percentage of customers leaving within 2-3 months of joining is even higher – almost double the overall average.

This sounds bizarre, as typically a customer sticks to the operator due to inertia to change, unless other operators are significantly superior in network quality or pricing. This certainly is not the case in India.

The reason for such high churn is that the commission paid for a new connection is many times more than that for a recharge. For instance, if a customer were to recharge, say, Rs 300, the retailer and distributor would earn about Rs 7-8. However, if the customer reenters as a fresh addition, they could make Rs 200-250 per connection.

To put it in perspective, the actual “Rotational Churn” for three private sector telecom companies in FY25, based on reported numbers, was 342 million as under:

At a conservative net acquisition cost of Rs 150-175 per gross add (i.e., the difference between the initial amount paid by a new entrant and the cost of commission and SIM card incurred by telcos), the total cost for the industry on account of this would be approximately. Rs 5000-6000 crores. The industry needs to introspect in this regard and avoid this wasteful cost.

Finally, the ARPUs are too low and need to be at least Rs 300 per month. Even at this, i.e., <USD 3.5, we would be amongst the lowest. With average data consumption at over 30 GB per month per customer, the data rate of US 10-11 cents per GB is certainly amongst the lowest, if not the lowest, globally.

A robust telecom infrastructure is a must for Digital India. For that, a financially healthy telecom industry in India is an absolute necessity.