TRAI paper on floor prices could lead to tariff hikes, say analysts

Reacting to the Telecom Regulatory Authority of India (TRAI) floating a consultation paper on fixation of floor prices, analysts say it opens up room for more tariff hikes. Citigroup said in a research note that the introduction of floor tariffs is likely to be perceived as positive as it could potentially open up room for further tariff hikes.

While implementing this could be a lot more complicated and challenging, all three operators are seemingly on the same page, which might make it more probable, it noted. "Pricing regulation, however, clearly also has its pitfalls, as we have seen in other industries," it said.

TRAI has issued a consultation paper on `tariff issues of telecom services`, wherein it has raised questions regarding the need to fix a floor price. TRAI has nonetheless noted that telcos have already taken huge tariff increases, thus questioning the need for floor price, ICICI Securities said in a research note.

"While we shall watch how floor prices shape up, we remain enthused by any effort to drive higher ARPU," the note said.

COAI in its representation has stated that the tariff correction in the current level of fierce competition is not possible by any service provider voluntarily and thus the only option available is prescription of a minimum tariff for mobile data service by the Authority. COAI also submitted that all the current telecom service providers in the private sector, namely Bharti Airtel, Reliance Jio and Vodafone-Idea Limited, are in complete agreement that TRAI be requested to regulate tariffs by setting floor price for data services.

Morgan Stanley said in a note that TRAI`s consultation paper seeks comments on telecom pricing regulation from various stakeholders. The paper primarily explores floor pricing on data and voice services, methodology to arrive at such a price and a price ceiling for consumer protection.

The paper looks at countries wherein a regulator driven price control was advocated/implemented such as Sri Lanka, Pakistan, Bangladesh, Nigeria, Zimbabwe and Turkey.

The paper, however, mentions that such an exercise has been generally avoided by regulators in developed countries and even in emerging markets such as Sri Lanka, Nigeria and Turkey where it was implemented, it has been withdrawn. To safeguard consumer interest TRAI is also exploring a price ceiling if a floor price is considered and the methodology to be used to fix a price ceiling as well.

Goldman Sachs noted that, "While we take no view on the likelihood of any potential regulatory changes coming off of this consultation paper, we believe investors are likely to view the potential setting up of floor tariffs, even if somewhat below current prices, as a positive outcome for the industry as this could potentially ensure more stable competition."