Should mobile prices in India be forborne?

India, like many other countries of the world, have adopted a gradual approach to telecom sector reform through selective privatization and managed competition in different segments of the telecom market. The mid 1990s saw the emergence of private GSM mobile operators on the telecom scene of India. Earlier the cellular market was dominated by only two players who had comfortably carved out the market between themselves. The telecom regulator in India (TRAI) regulated prices to ensure that the entire consumer surplus was not cornered by the private telecom operators.
The average airtime tariff in year 2002 was at Rs.1.8 per minute against the peak ceiling tariff of Rs.16.80 per minute when the NTP (National Telecom Policy) 1999 was announced. Nation-wide, average mobile tariff is Rs 1.5-2 per minute for airtime and Rs 295 as rental. The TRAI ceiling is much higher at Rs 4.65/minute for airtime and Rs 422 for rental. Thus the entry of BSNL and Reliance in Indian mobile market in year 2002 increased competition and coupled with the declining prices - in terms of duties, tariff and mobile phone sets - made the Indian cellular industry a low margins and high volume game. Till the entry of these players in 2002 though the ARPU-Average Revenue Per Unit (Subscriber) for mobile services was very high (as compared to what it is today i. e. approximately Rs 400) because of cartel formation in deciding the prices of mobile services, yet the operators were making losses as the volumes of operations were low. The position in the 2002 changed considerably when all the operators started fixing their tariffs as per actual market prices. The tariffs for all the operators were much less than the ceiling fixed by TRAI.

The overall result of tremendous competition was that the pricing of mobile service became truly market dependent. Realizing the same, TRAI decided to deregulate the pricing of mobile services in India. Since 2003, the mobile tariffs are forborne in India.

Presently the tariffs for mobile telephony in India have all the more turned one of the lowest in the world. Some reports suggest that tariffs in India are about 50% lower than that of its neighbors, Pakistan and Sri Lanka. This is the reason for high mobile growth in that country. The number of telephones in India, the world’s fifth-largest telecom market, has crossed 100 million connections and the customer base is likely to touch 250 million by 2007. The rates seem to be further going south wards. It would be interesting to note that the current rates in India in March 2006 are as low as 0.01$ per minute. In March 2006 - a one-minute call anywhere in country is costing just Re 1 compared with Rs 2.49 earlier.

The role of regulator in determining the pricing of mobile service in India has been appreciable. This has served the twin purpose of customer satisfaction and development of the industry. Over the period of time while the customers have been benefited by the decreasing prices, the operators could also make profits based on the volumes. The airtime rates have fallen from about Rs. 17 per minute in mid nineties to as low as 40 paise per minute in 2006. The Telecom industry ARPUs have consistently fallen from a healthy Rs.1300 per month in 1999 to Rs 386 in 2006, primarily as a result of decreasing rentals as well as airtime rate, which has increased affordability and aided the 100% + growth in subscriber base and consequent increase in tele-density of India. Operational costs also mirrored the downward trend, dropping from a level of about Rs 1000 in 1999 to the current Rs 210 per subscriber per month. Reaping benefits of economies of scale due to the burgeoning subscriber base and cost efficiency measures adopted by the operators, the Industry EBITDA margin at the current 33% has shown a constant northward trend except for the year 2003 when most 4th operators started operations.

India has set ambitious targets for telecom growth. To achieve these high targets the profitability and sustainability of telecom players has to be ensured. In last 3-4 years Indian telecom market has witnessed mergers and acquisition of small players by big operators as these small players could not cope up the competition. The Indian telecom market today has been virtually divided between 4-5 big operators. Now there is serious concern for too competitive rates. If the competition continues in the way it has been going on for last 3-4 years, the feasibility of the operations of some of the players may become questionable. When the author has questioned one of the members of TRAI on the issue, he opined that the sustainable revenues per month per subscriber have been as low as $5 in some parts of the world. But the same can be questioned in the Indian scenario for following reasons –
A) The telecom market in India is divided amongst very few large players and the role of most of other players is negligible.Further within a year or too the peripheral players will be taken over by the big players. The subscriber wise break-up of Indian mobile market is shown below –



The break-up reveals that the 85% of the mobile market in India is cornered by five major players. March 2006 itself saw that their were three major sell outs of holdings (Two by TATAs and one by HUTCH) in Indian mobile market. Thus the possibility of one or two players taking over and dominating the Indian mobile market will become high if the prices and hence the profit margins of companies keep going south.

B) In last two months i.e. January and February 2006 almost 10 million new mobile connections were added in India. The main reason for this growth was the release of life time free connections by the operators. Though most of the new connections were given in this life time free schemes, in absence of concrete figures let us assume that half of the new connections that were given in these two months were life time free connection. This means that every second connection given by operator may not yield any monthly revenue ( in fact operators are riding on premises that many of them will convert into regular connections over a period of time, which may or may not happen). The average monthly revenue per subscriber in Indian mobile market is around Rs 380/-. If 50% of the new connection do not yield any monthly revenue then this means that the average revenue per month from each new connection will be around Rs 190/-. This is below the lowest sustainable revenue per month per subscriber in any part of the world. Further, since the One India tariff has been launched by the operators, the revenue per month per unit (RPU) figures for coming months may come down.

This indicates that the possibility of decrease in profitability of operators is very high and will lead to selling off of the business by least viable operators to the more viable ones. The discussion opens a new direction for regulator to act in. While in the initial years TRAI has been fixing ceiling tariffs, it is now felt that TRAI should once again regulate the pricing of cellular services in India, but this time it should fix floor prices in tariff. If this is not ensured the viability of few operators may suffer and this will give a setback to the future plans of Indian government for increasing the tele-density in country. Any operator going out of the Indian mobile market scene in coming years will result in market failure. This will not only increase the prices of mobile services but will also give a setback to customers faith in other operators.


The GSM cellular Industry is nearly in top gear and is set at the right pace to achieve the envisaged targets. The regulator has been instrumental in bringing the right policy at the appropriate time to fuel this growth. It once again has a major role to ensure that the momentum of growth is not disturbed by over competition and should step-in to suggest floor prices for the tariff for mobile services in India, in absence of which the growing telecom bubble in India may burst.