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Saturday, 06 October 2012 00:00
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Rural telephony is growing well, so why subsidise it?

Given that the Universal Service Obligation Fund (USOF) has R21,840 crore of funds lying unutilised, it’s not surprising the Deepak Parekh committee on infrastructure financing has found a new way to use the money since, for a cash-strapped industry, that’s pretty useful money. More so since the USOF is an unending fund as it gets 5% of all telecom revenues annually. The committee has recommended the fund be used to defray part of the monthly rentals for rural phones and perhaps even pay for the first mobile phone bought. The logic given is a seemingly compelling one, that while urban teledensity is 170 (1.7 phones per person), rural teledensity is a much lower 39% (a little under 4 phones per 10 persons).

There are several problems with the argument. For one, urban teledensity is an overdone concept—it is distorted by offices that have hundreds of connections and individuals who are using multiple SIM cards to take advantage of cheaper call rates by different telcos. Two, a 39% teledensity in rural areas means most people in rural India are virtually next door to a phone—indeed, if you go by the number of rural households (160-170 mn), this could mean each household has a phone. In which case, it is better to go by what the Census showed for 2011—that 54% of rural households had a phone (48% had only mobiles) and 82% of urban households had a phone (64% had only mobiles). That means every rural household is actually next door to a phone. While you could still want to raise this to urban levels, it’s important to keep in mind that rural connections have risen around 40-50% faster than urban ones have over the last 3 years—so the market is growing in a healthy manner, even outpacing the growth of the rural economy, hardly something that requires a subsidy. And there is a natural reason why rural India cannot have the same teledensity as urban India—since there are more incoming calls than outgoing ones in rural areas, telcos earn less from rural phones. Indeed, the fact that Trai is trying to further lower termination charges will make the situation worse—raising rural termination charges would have been a better solution.

Indeed, the Parekh committee would have done well to find out why the USOF has been unable to spend its money. Ideally, it could have been getting mobile towers constructed in rural India and offering these for free use to mobile phone companies to defray their costs—for many years, however, USOF was fixated on paying for landlines that no one wants. While that changed some years ago, USOF’s disbursements didn’t improve that much. In which case, the best solution would have been to recommend scrapping of the USO levy which is a whopping 5% of telco revenues. For the political class, however, it’s a golden opportunity where fresh rural subsidies can be given without any strain on the budget—and it can be packaged as responsible spending on infrastructure.


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