Higher Inflation is Taking a Toll on Mobile Services

Inflation is bad news is what every economist worth their salt would tell us. Which is why India is following several other countries in jacking up interest rates, a measure that could impede fresh investments as cost of capital goes up. However, it appears that everyone is convinced that the post-pandemic period is one of consolidation and not growth. 

A recent report suggests that inflation is now having a negative impact on mobile phone services and could reduce the revenue growth of telecom giants during the April-June quarter by as much as two to four percent. Higher cost of smartphones and phone services is slowing down the growth of data usage by customers. 

What’s cooking? 

A report published in the Economic Times quoted an analyst at BNP Paribas to suggest that besides data usage, device upgrades is another area where growth has slowed down. Higher mobile tariff and costlier smartphones are causing this phenomenon leading to a lower growth projection in Q1 of this fiscal year compared to over 8% in the last quarter of FY2022. 

Just to put things in perspective, revenues in the telecom sector saw a 1% growth in the first quarter, 4.5% in the second and 4.2% in the third before registering the 8% spike in the final quarter of the last fiscal year. The final quarter numbers represented a blip as it was caused by the steep tariff hikes by telcos in the third quarter.

But that’s not all. Two of the three major networks reported a decline in active users during April. Bharti Airtel lost 3.1 million of them and Vodafone Idea saw 3.8 million desertions and neither of this bunch actually shifted to Reliance Jio, which seldom reports customer losses. Analysts said higher 4G costs and costlier entry-level handsets were the root cause.

What does the future hold? 

That depends on how long telcos can hold on to these inflationary pressures? Their own input costs are going up at a time when customers are going out. Can they bite the bullet and go for another hike in tariff that may reduce the number of customers but increase per-unit revenues? Or will the existing business model of increasing footprint continue? 

Which now brings us to another convoluted issue. Will the telcos be going for massive capacity expansion on the 5G networks following government’s auction program later this year? If there is a drop in 4G connections, what happens when a bigger chunk of them shift over to 5G? Does it make sense to have two sets of infrastructure? Especially in an inflationary setting? 

Analysts believe that telcos have no choice but to go for another tariff hike, on top of the 20-25% increase that they effected last November-December. And what would be the impact of such a step on the government’s efforts to expand the digital footprint across the country? 

As we said earlier, inflation is a killer and if not kept in check, India’s grand plans could turn into a distant dream.