Telecom Tariff Hike

Effective from 26 November 2021, Bharti Airtel had announced a 20 to 25% hike in tariff rates. It was the first telecom operator to increase the prices. Other telecom companies also have finally announced tariff hikes. Vodafone Idea raised tariffs by 20%. The basic plan of Vodafone Idea that used to cost Rs. 79 shall now cost Rs. 99 with the same validity of 28 days.

The Telecom Industry has been under financial stress due to a lack of profits after Jio’s blockbuster entry into the market. This was great for customers, but not much for the companies. The firms in the industry have felt the need to improve the Average Revenue Per User (ARPU). ARPU growth will lead to non-linear growth in profitability due to the high operating leverage. The tariff hike will help the firms by increasing their operating profits by at least 40%. All telecoms have to pay 3-8% of their Adjusted Gross Revenue (AGR) to the government as ‘tax’ for using the wave spectrum owned by the government. Vodafone Idea and Bharti Airtel have outstanding payments of Rs. 58,000 crores and Rs. 44,000 crores which they need to pay over the next 10 years. This further eats into their profits. Therefore, the tariff hikes are a much-needed step towards healing the profitability of the sector. It will also help them to invest in rolling out 5G services in the future.

This is good for the balance sheet of the cash-strapped companies in this sector, but it will lead to a further push to Inflation from a macroeconomic perspective. The 20-25% increment in the tariff rates will lead to a 0.4% point to headline inflation over the next year. This in turn may lead to RBI gradually tightening the policy from the second half of the year. What do you think about the tariff hike? Do you support the decision to hike tariffs? Comment down below and share your thoughts.

Thank you.

Regards,

Ankur Shukla (Section P),

Kautilya,

IBS Mumbai.