Will Reliance Jio's Price Hike Disrupt the Telecom Sector?

The telecom sector is witnessing a significant shift with the introduction of new players and price changes. Airtel and Vodafone-Idea have recently raised their tariffs, effective December 3rd, marking a move towards achieving financial sanity in the sector beleaguered by financial issues for several years. Analysts predict that this action will boost the average revenue per user (ARPU) by around 30 rupees and significantly enhance operational profits by Rs 7000-9000 crore.

Reliance Jio, another major player in the sector, has also hinted at increasing prices this week. This move from the incumbents comes as a result of the entry of Reliance Jio, which initiated a price war, and a legal challenge regarding the definition of adjusted gross revenue (AGR). The Supreme Court's recent ruling upholding the government's definition and demanding Rs 1.3 trillion from the sector has added another layer of financial pressure.

From a financial standpoint, increasing tariffs is a logical step and is expected to address the sector's balance sheet issues in the medium term. However, this solution may not be sustainable in the long run. As tariffs rise, customers are likely to shift towards operators offering superior service quality. This could be particularly challenging for Vodafone-Idea in certain network areas, whereas Airtel, with a strong track record of paying regulatory dues and sustaining capital-intensive operations, may be better positioned.

The industry has learned from these challenges, now placing the burden on the government and telecom regulator to take definitive action. The government cannot support inefficient state-run telecom companies and simultaneously push private firms to the brink of bankruptcy. Telecom is a capital-intensive business where investment fosters efficiency, productivity, and further investment, all of which are beneficial for the economy.

The departure of an incumbent player could significantly impact future investment and the quality of services offered. However, the government and regulator should not actively intervene to help these companies. Instead, they must create an enabling environment that promotes efficient business operations. At the same time, regulators must ensure that companies do not form cartels and raise prices at the expense of customers.

Keywords: Reliance Jio, Telecom Sector, Tariff Hike