Driven by powerful technological and market forces, and supported by regulatory and policy reform, the telecommunications revolution in India has come a long way. From a low of about one telephone per 100 persons in 1996, the aggregate penetration of fixed and mobile phones is touching 20% today. A simple extrapolation of the current growth trends will ensure that the government target of 250 million phones by end-2007 will be met. Another simple extrapolation will guarantee that the target to increase rural telephony from the disturbingly low extant figure of 2% to about 4% by end-2007 won’t be met. Unless there’s significant change in the operating environment. If the results of the recent bids for rural mobile networks are any indication, this change may be round the corner.
At one level, the disparity in rural-urban teledensity is not surprising. A purely market -driven system of allocation will tend to concentrate on main cities and on the largest and wealthiest customers. That’s why the government designed a Universal Service Obligation (USO) fund as a tax on service providers to facilitate redistribution of resources to ‘unprofitable’ rural areas. Complementing this is the access deficit charge (ADC) regime put in place by the Telecom Regulatory Authority of India to help service providers bridge the gap between cost of supply and provision of access, especially in rural areas. The ADC regime has essentially benefited the incumbent Bharat Sanchar Nigam Ltd (BSNL), while the USO regime has failed to impact rural telecom services, given its restrictive mandate until now.
Much of the collections under the USO regime remains unused. At last count, out of Rs8,000 crore, about Rs2,000 crore was spent from this non-lapsable fund. This amount has predominantly gone to the state-owned BSNL for provision of fixed-line phones. The regime was restrictive—it subsidized only basic telephony services through the either fixed or fixed wireless route. Hence, rural telecom largely remained an effective monopoly of BSNL. With private operators concentrating on urban subscriber numbers, rural areas received little attention, perpetuating this monopoly.
Quite clearly, competition, especially in mobile services, has been the primary reason for the rapid expansion of urban telecom services. And clearly, in order to replicate urban success in rural areas, a competitive rural telecom market is necessary. Since the costs of expansion and maintenance of rural networks are high compared with dense urban areas, it was decided to extend USO funding for mobile services and rural infrastructure in 2006. This was expected to provide incentives for private operators to break into the rural market.
The results of the bids for subsidy for rolling out mobile networks in 2.5 lakh villages announced this week were, however, a revelation. Some operators want to pay the government to offer services in villages rather than take USO funding and, in some cases, the bid for subsidy is ‘zero’. This implies that the pace of utilization of the fund won’t increase and, more crucially, that rural telephony is not unprofitable after all. However, one must allow for what game theorists term as the ‘winner’s curse’ (simply put, bidding on incomplete information). In which case the bidder will bleed over time and another round of subsidy injections will be needed. If, however, the bids are an accurate reflection of the economics of rural telephony, then the present imbalance is as much a reflection of the inability of the regulatory regime to break the BSNL monopoly, as of the private players‘ obsession with the (now-saturating) urban markets. Either way, there may be cause for the waiting rural subscriber to cheer.
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