Floor Price For Telecom, A Boon For Ailing Telcos, Could Disrupt Digital India

The telecom regulator’s consultation paper on the need for a floor price for mobile services has come as welcome news for ailing telcos who see this as key to restoring the financial health of the sector. However, with half of the country still on 2G networks, a floor price will create new barriers for those without access to data from reaping the digital dividend at a time when India dreams of a $5-trillion economy by 2024.

“Setting a floor price for mobile services is a retrograde step. It is a bad idea despite all telcos being unanimous in their demand. No mature regulatory regime has prescribed price floors. They ultimately reward inefficiency. Setting a floor price will raise the price barrier for new subscribers putting digital services even more out of reach for half of the country which is still not connected to the internet. This can hardly help realize the Digital India dream,” Mahesh Uppal, director at communications consulting firm ComFirst India said.

The Telecom Regulatory Authority of India last month floated a paper to determine if regulatory intervention is required in fixing tariffs and sought views on issues such as the methodology to fix a floor price and how to ensure that it does not benefit a section of operators with windfall profits.

The Cellular Operators Association of India, which represents Bharti Airtel, Reliance Jio and Vodafone Idea, has welcomed the development.

“Tariff correction is necessary for improving the financial health of the industry. The only option available is for the regulator to intervene and correct the anomalous pricing situation prevailing in the market place,” Rajan Mathews, director-general of COAI said last month.

To be sure, mobile tariffs are currently under forbearance, which means operators have a free hand in fixing rates. A floor price would mean an end to free services.

This is not the first time the industry has demanded a floor price. Following requests from telcos, Trai had reviewed the policy of forbearance in 2012 and 2017, but no change was made.

Market watchers view the proposal as a positive outcome for the industry as this could potentially ensure more stable competition.

“The challenge for Trai is to strike a balance such that no operator makes windfall gain from floor price and, at the same time, they make enough profit to invest in infrastructure,” ICICI Securities said in a note dated 18 December. “While we shall watch how floor prices shape up, we remain enthused by any effort to drive higher ARPU,” the brokerage said.

The regulator, however, believes that falling revenues of mobile operators and rising pressure for investment is a global phenomenon and setting a floor price could be anti-consumer.

“It (floor price) artificially makes the telecom services more expensive for the consumers and can, thus, have a cascading effect on the other sectors of the economy that ride on telecom for the provision of their services,” Trai said in the paper floated last month.

The demand for a floor price comes a time when two out of the three private telcos have posted record losses after being hit by an unfavourable court verdict post a 14-year battle between telecom companies and the department of telecommunications on the definition of adjusted gross revenue (AGR) in the sector.

Bharti Airtel swung to a Rs. 23,045 crore loss in the September quarter from a profit of Rs. 118 crore a year ago as it set aside money to pay the dues. Vodafone Idea’s loss for the September quarter widened to Rs. 50,922 crore from Rs. 4,874 crore in the year earlier.

“Any price floor or ceiling is against free market and should be avoided, but in the current sector dynamics, out of the three private players, Vodafone Idea faces a risk of bankruptcy which could cause chaos in the banking system. A floor price looks like a non-budgetary temporary bailout option. There has to be balance between financial health of telecom companies and also not disrupting the India data consumption story which has been successful so far. This is a tricky situation but a floor price could solve the problem if rolled out for a defined time period,” said Harsh Gupta, chief investment officer of Ashika group, a financial services firm.―Livemint