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May 14, 1999


Rafiq Dossani

India's Telecom Reform: Lessons From America

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India's telecommunications usage rates are below that of any other country with a comparable per capita income. The number of telephones per 100 persons is less than 2 in India compared with 10 for China. Bangladesh is greater at 2.5. Egypt's population, twice as wealthy as India, but less technically educated, has five times the per capita internet usage rates of India.

Hence, reforming the present system is necessary. To some extent, the country's telecom development has suffered due to policies driven by the need for revenue rather than growth. For example, in order to raise foreign exchange, the country's IDD monopoly, VSNL, did a foreign issue of shares (Global Depository Receipts, or GDRs) in 1996. To make the issue attractive to foreign investors, VSNL was granted a monopoly over international telephony till 2004 -- a mistake in retrospect. Similarly, in order to raise revenue, the government decided to create a duopoly structure for the domestic telecom industry and licensees were chosen on the basis of the highest bids, leading to overbidding and default. The government should have observed the international situation more carefully.

In the US, a similar bidding process for radio licenses led to similar overbidding and defaults, with the process being repeated more recently in telecom. A less revenue-constrained government might also have chosen licensees on the basis of providing the lowest cost-service rather than the highest revenue for the state, as Hong Kong did.

Thus, the earlier rounds of telecom reform have generally been a disappointing experience. However, the latest round is well-designed, driven as it is by an impartial telecom regulator, and should set the stage for the sector's accelerated development. While the future structure of the industry in terms of the number of players and the coverage and geographical focus of development depend on the ability of the public sector giants, DoT, MTNL and VSNL, to restructure themselves, there is likely to be more competition and better rates for most telecom services.

There is little doubt that urban India will benefit greatly from a higher density of telephone and other telecom linkages. More business will be done in urban India and more business means a higher growth rate for the country. But how important is higher telephone usage for rural India, where three-fourths of the population lives? This is an important question because it cannot be assumed merely on the basis of long queues in the urban areas that higher usage will result from the availability of more rural lines.

There is evidence from studies of the power sector that show that the rural poor do not benefit from higher power connection rates (even if the power is subsidized) unless they can afford the light bulbs, electric irons and mechanized farm equipment that can be used with the availability of power.

Even in the United States, attempts at rural electrification failed until 1950 because the rural population did not have the money to buy the durable goods that consume power.

The success of American rural electrification only occurred after access was subsidized.

The government also provided loans for appliances at subsidized interest rates. Ireland's rural areas, which had no power connections until 1947, were successfully electrified only after the government agreed to pay for connections on the basis that the value of electricity sold each year be a mere 5 per cent of the capital cost.

Similarly, studies conducted both in India and abroad have shown that the improvement of irrigation facilities, such as through pumping groundwater resources or building large water tanks, helps the poor much less than the wealthy since the poor cannot afford the water-pumps and piping systems that will allow them to use the water. Another example: India's experience with fertilizer subsidies has shown that the main beneficiaries of subsidized fertilizer are wealthy farmers as they are the ones that can afford the complementary inputs of water and hybrid seeds that are needed.

Unlike fertilizer, power and water, though, using a telephone does not require complementary inputs. Nor is power supply necessary. It is possible for a farmer to make a call once he has a line and a telephone, even while sitting in darkness. Urban dwellers in many Indian cities, large and small, have been doing this for decades. As any small urban trader will testify, a telephone line is often more valuable than having power. While a power black-out is a nuisance (and one that a gen-set can overcome), downed telephone lines threaten his livelihood.

But it may be different for the farmer. Whom will the farmer call when his family lives around him and his ability to sell his foodgrains depends entirely on the whims of the local moneylender? Without power supplies, he cannot operate a grinding machine or a milking machine to raise his productivity. So, he can use his telephone neither for pleasure nor for commerce.

Clearly, there are missing links other than power: the transport network, for one. What the farmer needs is access to bigger markets, which is possible only with a better road system. But India's road network averages less than 4 km per 1,000 persons, or about a fifth of comparable country standards.

This allows us to evaluate the decisions made in the latest telecom reforms that continue the subsidies for rural users. We have argued that subsidies are necessary for rural development. However, given the absence of complementary infrastructure of greater importance, it is likely that the subsidies alone will not do much for spreading rural telephony.

Rafiq Dossani is an associate professor at Stanford University.

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