Relaince Jio - A Masterstroke or An Upcoming Nightmare for Indian Consumer?

The SCENE

Probably it happened for the first time ever that “Idea” came in after action!! Are you amazed the same way like I was with this news? Ok, let me come to the center story without beating around the bush. Bharti Airtel slashed its 4G data offering rates by 80% and soon after, Idea cut its 3G/4G rates by up to 67%. Coming up next is Vodafone that is expected to cut data offering rates soon. And guess who is the devil behind this master game… Yes!! You you’re right!! Reliance Jio it is!!!

The Mukesh Ambani-led Reliance Group, with its revolutionary product – Reliance Jio, is giving sleepless nights to major service providers in the telecom sector. Even before its commercial launch, Reliance Jio claimed to have 15 lakh subscribers of its 4G network. The SIM card of Reliance Jio comes bundled with LYF smartphones priced as low as Rs 2,999. Jio is offering 90 days of free unlimited 4G mobile Internet and voice calling in the SIM cards. And now, this offer has been extended to OEMs like Gionee, Karbonn, Lava and Xolo. A pricing masterstroke it seems!!

But the real question here is whether this entire scenario of data rate cuts, driven by Reliance Jio, is really beneficiating Indian consumers!!

Government’s Expectations v/s Expected Reality

The Government of India is expecting to raise $83 Billion from the mega sale of mobile frequencies, the biggest ever auction, starting from October 1, 2016. There have been, however, building doubts on the success of spectrum auction raised by industry experts who say that the base pricing of the base airwaves is quite high.

There is still another big underlying story that is expected to affect the sale of this spectrum.

Aggressive price war to retain the market share has already led the highly debt-laden carrier companies to lower their tariff rates by a highly substantial amount which is expected to give a blow to the revenues of the carriers. (On August 30, 2016 i.e. a day after Bharti Airtel declared a slash in 4G rates by about 80%, its stock fell by about 3%).

(Source: Bloomberg)

Adding to the headache of these companies is the gloomy outlook on the telecom sector. As per a report published by Fortune, between 2012 and 2018, the Indian telecom sector is set to lose $386 Billion due to the increasing usage of services like Skype, WhatsApp, Lync etc. with data tariffs falling continuously as a result of the service providers getting in a fierce price war to retain their market share.

(Source: Bloomberg)

As per Bloomberg’s latest report, India’s 12 wireless companies carry more than $61 Billion in debt. A credit ratings agency – ICRA (A Moody’s Investors Service Company) had recently estimated that in the scenario of high debt already on the books of carrier companies, falling revenues from voice calls and now the aggressive data tariff cuts by the service providers, the carriers may spend just $9.7 Billion in the upcoming auction.

What the Industry has to say…

When asked about their strategy of future business in India due to shift of consumers’ attention from voice calling to VoIP, Vodafone’s Head of Organizational Effectiveness said that, “At the moment we realize that the telecom is increasingly becoming a cut-throat market, our present strategy lies in making Vodafone a leading market player in India.”

On Reliance Jio’s product rollout, Idea’s chairman Kumar Mangalam Birla said in an interview with ET Now that Idea is going to bid very sensibly in the spectrum auction. “We have got a larger player like Jio entering the market with a large presence on the ground, in terms of huge asset base, a player with very deep pockets and it is bound to be disruptive. So, I think for all of us incumbents, it is going to be a tough two years but it will be exciting to see how it plays out” said Mr. Birla in the interview on July 27, 2016.

Worrying on the level of return that the auction shall give, Telenor ASA has said that it won’t be bidding in the auction as the return are not up to an acceptable level.

As per the estimates of International Data Corp., the Indian smartphone base will reach to 600 million by 2020. This requires improving the coverage would hence be crucial for the service providers. While Bharti Airtel has not commented their stance on the upcoming auction, Sunil Sood (Managing Director, Vodafone) has said that Vodafone will bid for the spectrum. It is further expected that Vodafone shall turn out to be the largest bidder in the $83 Billion spectrum auction starting from October 1, 2016.

Government in a deep soup?

While it is expected that the carriers will bid for just $9.7 Billion in the auction, it directly implies that the government will be facing a blow of $73 Billion (a huge amount!!!) leading to failure (87% expected shortfall) of the biggest spectrum auction that has ever happened in India (a major event!!). This in turn will raise doubts on the capability of government to meet/fulfill its projected economic activities. (Doubts on the capabilities of one of the most capable governments?? Definitely not a good news!!)

Blogger’s Comments

Over and above this, recent reports of the least exploration of oil this fiscal year since 1947 has put speculation among market analysts who are taking caveats at meeting the future oil demands. This substantial fall in exploration (least in the past 70 years) will soon lead to a shortfall in the oil supplies. A global spending on exploration has been already cut to $40 Billion this year from about $100 Billion in 2014, and this is in turn mounting more doubts on the future outlook of oil markets. Global benchmark Brent stood at $49.59 a barrel on August 30, 2016. With expected drop in oil supply and growing demand, if oil prices go up by a notable amount, it would further add to the import bill (oil imports make up 80% of India’s import bill), doing nothing but increasing headache of Indian government in addition to its reputation getting hampered as a result of the expected 87% shortfall in bidding participation ($73 Billion blow) in the spectrum auction.

Higher Import Bill & fair exports (in the face of stagnant global demand) => Higher CAD => Impact on Forex Rates => Higher Inflation => Lower Real Interest rates => Lower deposit in banks => worrying bank outlook => lower loan growth => New RBI governor Dr. Urjit Patel will find it difficult to cut repo rates => Market will raise doubts on Dr. Patel as a good governor => Doubtful outlook on Indian Economy => Investments in the economy affected => Dr. Raghuram Rajan’s work goes in vain (No, we don’t want this to happen!!!)

From one scenario, where consumers are seemingly getting an advantage of the gigantic data rate cuts by the carriers, looking at the expected broader macro-economic data, does the consumer actually seem to be getting the advantage? Is Reliance Jio actually benefitting Indian consumer?

Amidst our speculations, let’s wait and watch what actually happens on October 1, 2016. Stay tuned!!   

- Harsh Pathak

  Student and Core Committee Member of Finance Club at MISB Bocconi - Bocconi India