Column: Ringing in the next revolution

Tweaking policy on many issues?from spectrum allocation to auction?could usher in the data-led revolution

As the dust settled on the fatigue inducing election for the 16th?Lok Sabha and psephologists arrived at a reflective analysis of voting behaviour, the initial diagnosis was that the UPA paid a heavy price for overlooking the aspirations of India?s youth, whose affinity to telecommunications and the internet was cleverly exploited by the BJP campaign.?Twitter and Facebook captured the imagination of the party and young voters alike?Narendra Modi?s official Facebook page has about 15 million ?likes?. It also records the fastest-growing number of ?likes? for anyone in the world, while 4.1 million people follow him on Twitter.?Now, the new government must show urgency to reform the very sector that arguably played a significant and influential role in the electoral outcome.

The Indian telecom sector has been in stasis since 2008 while, in the decade before that, it was the darling of most stakeholders. India?s subscriber base grew at breakneck speed, adding 20 million per month at its peak during 2007-08. The institutional and regulatory apparatus was held as an example for other infrastructure sectors to emulate and broadband, although paltry in reach and density, was viewed as a solution to dismal public service delivery, especially in the service-deficit rural areas.

All this changed beginning 2008.?The causes relate to the well-documented 2G scam and need not detain us here. Suffice it to say that the opprobrium that followed left a scar on the sector and showed up in slowing revenues, delayed decisions, excessive litigation and wearing investor confidence. Institutional credibility too took a beating. Growth dropped to near-zero in FY10, FDI took a hit and the 1800 and 800 MHz band auctions were delayed by two years to 2014.

The inevitable stagnation has meant little progress in connecting rural India, where teledensity is just 43% and an appallingly low rate of broadband (defined loosely as a download speed of 512 kbps or greater) penetration?at 5%?exists. Other emerging market economies, in the meantime, have soared. Russia, Brazil, China and South Africa have broadband penetration rates of 67%, 46%, 30% and 27% respectively.

It is one thing to use telecom infrastructure for one-way communication in an election campaign and quite another to put the critical?infrastructure to work for economic development and competitiveness.?The potential, however, is immense, even at current levels. Telecom contributes $52 billion (roughly 3% of GDP) and provides productive employment to 2.8 million Indians, besides generating growth and productivity impacts.?

The second telecom revolution (aka data revolution) waiting to happen will depend upon our ability to promote high-speed data services and connect the rural economy, both of which hold immense transformative potential. Rural coverage (or lack thereof) and high-speed data services have been the victims of policy, market and institutional failures.

Spectrum management, the lifeblood of mobile, needs immediate attention. That new internet users in India will log on mostly via their mobile phones is certain. Mobile internet will also be cheaper and more convenient than any other option. For this to happen, the supply of spectrum needs to be increased for?commercial use. The current shortage of spectrum raises operator costs, hurts expansion, raises user prices, reduces quality, prevents the deployment of more powerful technologies, and, most importantly, reduces investor confidence in a capital-intensive business. Therefore, it is imperative to increase the supply of spectrum available for mobile, by refarming from non-commercial players including defence. Models exist in which the defence spectrum can be released commercially, consolidated to ensure continuity of bands for efficient use, while addressing India?s security needs. The M&A regime needs a fillip to encourage consolidation since there are pointlessly up to 12 operators in a single service area. This remains excessive by any benchmark and fragments scarce spectrum preventing much needed economies from being realised in spectrum-scarce urban areas. The policy should also support secondary markets for spectrum, not as a substitute for supply, but to ensure that scarce spectrum is used efficiently. For assignment, while auction has become the de facto standard, the objective of revenue maximisation must be weighed against long-term sectoral benefits, placing a premium on auction design. First price auctions?can become instruments of exclusion and often conflict with the inclusion agenda that many developing countries, like India, have increasingly favoured.

The 2G scam exposed the fragility of the institutional apparatus in the telecom sector. While it has come a long way since 1998 and is structurally superior to many other infrastructure sectors in India, weaknesses remain. As we have seen,?merely delegating regulatory powers, including enforcement, is not enough to minimise regulatory risk. Attributes of good governance include sufficient political and financial autonomy, efficient rules of accountability and review and effective enforcement. Depoliticising the regulatory process will remain an important long-term goal not only in telecom, but also for all regulatory agencies in India.

Technological developments have rendered service-based divisions of telecom redundant. A complete integration allowing all telecom services under the ?one licence, one nation? paradigm should be implemented in letter and spirit. The primary objective of unifying licences is to provide for technology neutrality, to be service agnostic and to simplify the licensing process in general.

A particularly vexing issue is how to deal with public sector operators in telecom.?Ownership and operation by the public sector should be in extreme cases of market failure such as for infrastructure that is financially unviable and has high social value. Very few portions of telecom today, if any, meet these conditions. The ?lock in?, however, makes the transition challenging at best and intensely political at worst. Although privatisation must remain the ultimate goal, some immediate measures such as focus on its core strength in infrastructure ought to be exploited to unlock BSNL?s massive potential. British Telecom?s model of leveraging its extensive infrastructure in the face of intense private sector competition is instructive in this respect.

The telecom sector requires intervention on several other fronts, including completion of the vital national optical fibre network, i.e., back-haul infrastructure, that has seen inordinate delays, achieving universal access, lowering of carbon emissions and a robust framework for internet governance.?The Nariman Committee?s (2000) recommendations?for regulatory convergence is also an idea whose time has come. Perhaps it was too?ambitious?then. The immediate task however is to restore confidence?in the sectors? regulatory apparatus to demonstrate seriousness of intent in telecom revival.?The guiding principles of good regulatory institutions include independence, transparency, accountability, expertise, credibility and legitimacy. Although independent regulation in India is relatively new, there is a wealth of evidence from the telecom sector itself that can help design and implement a performance enhancing regulatory mechanism that places a higher weight on economic outcomes.?

Rajat Kathuria, Mansi Kedia & Sugandha Srivastav

Kathuria is the director and chief executive, ICRIER, Kedia is a research associate and Srivastav is a junior consultant. Views are personal

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First published on: 04-06-2014 at 04:57 IST