Scrap the subsidy

The government’s decision to overhaul the system for subsidising rural telephones is welcome. But instead of trying to create a new system, the subsidy should be scrapped altogether. What the government should not do is base its actions on the specific recommendations of the Telecom Regulatory Authority of India (TRAI), though the regulator has done a service by pointing out what should be obvious: that the current method of funding through the Universal Service Obligation (USO) tax on telephone services, isn’t working. At Rs 11,000 a line, the phones are too expensive, and it is not clear why such a subsidy is to be made available only to fixed lines and not to mobile ones, which cost less. Also, in the four years that it has been around, the USO Fund has collected Rs 8,000 crore, but has disbursed less than a fourth of that sum. In the event, TRAI has calculated that it would cost upwards of Rs 30,000 crore to reach the decade-end rural tele-density target of 4 per cent, if the current USO model is followed. If, instead, the USO were to be used to subsidise the building of transmission towers, the same Rs 30,000 crore could be used to get to a rural tele-density of 15 per cent.

But the basic question needs to be asked: why should urban telecom users subsidise rural telecom at all? After all, you don’t get urban users of electricity to pay a cess, which is what the USO is, to fund the provision of electricity to rural areas (though the government in its wisdom has always followed a pricing policy of cross-subsidisation). Nor do you put a cess on those who buy television sets in urban areas, so that sets in rural areas can cost less. Why should telecom be any different—especially when it is patently wrong to equate urban with rich and rural with poor.

An alternative scheme must start by recognising that the telecom industry already pays about 25 per cent of its revenue to the government by way of various levies, and a fifth of this is towards the USO fund. Yet, by the end of the decade, the NCAER estimates, nearly 11 per cent of demand for cars/jeeps, nearly half the demand for motorcycles and around 43 per cent of the demand for regular-sized colour television sets will come from rural India. When producers of other items are able to find paying customers in rural areas, why do telecom firms need a government subsidy in order to find customers? What the telecom companies can legitimately ask is that the high tax burden on the industry be reduced; what it should not ask for is any kind of subsidy.

One of the reasons for the slow move into rural areas is that telecom firms have found urban (especially metro) markets more lucrative, whereas the initial investment in serving rural consumers would be substantial and not recouped overnight. This, however, may be set to change for two reasons. In large metros, like Delhi and Mumbai, telecom firms no longer have enough spectrum to expand their services dramatically—so, they have to move to smaller towns and/or rural areas. Second, the metros are more or less saturated, as 50-60 per cent of the addressable population already has mobile phones. The crux of the matter is that there is a business case for using mobile phones in rural areas—case studies have shown fishermen get better prices when they get information on fish prices along the coast and this is also the rationale behind ITC’s e-choupal initiative. What telecom firms need to do is to align themselves with such initiatives, and not wait for government subsidies.