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Dialling a bad idea PDF Print E-mail
Saturday, 14 January 2012 00:00
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Subsidising rural mobile bills only encourages arbitrage, but if government has its heart set on it, there are better ways

 

A fat sum of R25,000 crore sitting in the coffers of the Universal Services Obligation Fund (USOF), and with no great prospects of being used either (see graphic), is a tempting target, so it’s not surprising there’s a proposal this money be used to subsidise telephone bills in rural areas—according to the proposal, the government will pay a fifth of all mobile bills that are below R300 a month for customers in rural India. The logic is a simple one: if increased connectivity raises GDP, as has been shown by enough studies, why not kickstart rural GDP in this manner?

Whatever the pros and cons of the plan, the fact that the government is planning to subsidise more than just wheat and rice represents a quantum shift in the government’s way of thinking. It’s certainly a better idea to subsidise something that can help generate income instead of a food subsidy. Maybe the government will start paying half the fee for kids who go to private schools in rural areas?

 

The good intentions apart, it is a terrible idea. For one, there’s nothing to suggest rolling out rural telephony is facing a big hurdle in terms of costs. In the last three years, from September 2008 to September 2011, the number of rural subscribers has risen 3.4 times versus 2.3 times in urban areas—the number of rural subscribers rose from 90.56 million in September 2008 to 305.51 million in September 2011, while urban numbers rose from 263.10 million to 601.42 million (see graphic). To be sure, rural teledensity is just 36.4% versus 166% in urban areas, but urban teledensity is vastly exaggerated by the presence of multiple phones in each urban home and in offices. A 36% teledensity in villages means most people in rural India are next-door or next-to-next door to a phone. Considering that, at least for now, there are a lot more incoming calls in rural India than there are outgoing ones, it’s not certain that rural teledensity can ever get to urban levels. By the way, the fact that termination charges paid to telcos on calls that are made to their networks are lower than their costs (telcos are in court on this) lowers the incentive to roll out rural networks. Perhaps that can be addressed, at least for rural areas.

But even if you assume that we want to have 2-3 phones in each mid-income rural household, there are better ways to do it. The current plan will just encourage urban users to masquerade as rural ones. Of course, there are ways to police this (just as there are ways to ensure PDS grain doesn’t get diverted to the open market!) but why set up a system that requires another to police it?

The best way to encourage rural telephony, if you want to push it through lowering costs, is to give funds from USOF to building telecom towers in rural areas—apart from one or two tenders, there has been limited work on this. Once the towers are paid for by USOF, rural tariffs will start crashing anyway. Alternatively, USOF could buy up rural telecom towers and

offer them to telcos on a nominal rental, or for free, subject to a certain rollout. There are a host of other such macro solutions that can be tried to achieve the same objective, but without anywhere near the same potential of abuse.

All telcos report the number of urban and rural subscribers—that is where you get urban and rural teledensity numbers from. Why not just charge lower licence fees, say, 1 percentage point lower, when firms have a certain number of rural subscribers?

Another, and better idea, is to simply put USOF in abeyance for a bit. Over the last few years, it has been disbursing less than a third of what it is collecting, which is why it now has a whopping R25,000 crore as a corpus. Since 5% of all telecom revenues go towards USOF, putting USOF in abeyance will bring tariffs down, more so since the government is in any case working on lowering all licence fees to a flat 6% or 8%—it’s ironic that at a time when government is moving towards a uniform licence fee to avoid regulatory arbitrage, it should be looking at a scheme that seeks to enhance it! Once USOF is depleted, the levy can be put on telcos again.

The larger problem, of course, stems from the nature of the fund. For whatever reason, including the fact that not too many bids have been held to finance telecom towers in rural areas, close to 90% of the R14,932 crore that USOF has disbursed from the time it began till date has been given to state-owned BSNL for telephone lines it has set up—another R10,000 crore or so is to be given to it for laying optic fibre networks in rural areas. Right now, USOF is like a 5% tax on private telcos to fund BSNL—that has to change.

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