Telecommunications

December 18, 2006
How the west was won

NEW DELHI -- Everyone will recall that till 2003, mobile telephony was before a number of courts, that the sector had Rs. 7,000 crores of cumulative losses and no incremental investments were being made. By 2003, 8 years after the introduction of mobile telephony in India, the sector had reached 13 million mobile telephone subscribers.

TRAI took some bold steps in 2003 and the gamble paid off. Initially, all the stakeholders severely criticized TRAI, but from 2004 onwards the sector was making profits, Huge investments started rolling in again, mobile telephony left the court rooms, and 20 million mobile telephones were added each year in 2003-04 and 04-05, and about 35 millions thereafter. At January 2006 growth rates, we will add 60 million telephones this year. For 2010, the NTP 99 teledensity target was fixed at 15 percent. This target will be exceeded in 2006 itself and will be more than doubled by 2010.

How did this happen? Tariffs had been going down from March 1999 to March 2003, and yet the growth was mostly the ‘Hindu’ rate of growth, which exploded only in 2003-04. What were the reasons? An analysis would help other sectors of the economy also.

TRAI mainly took seven steps in 2003-04 and one step in 2005-06, which made all the difference. One, the Calling Party Pays Regime was introduced in 2003, severely bringing down the total tariffs at both ends, while encouraging consumers at the call termination end to receive calls. Earlier, the network did a lot of infructuous work when people did not receive calls out of fear of being charged.

Two, call termination charges were reduced, both for the mobile and the fixed operators, to the rock bottom. The argument being that termination was a monopoly; hence, it did not deserve any marketing elements etc. to be added in the cost-plus calculation. TRAI’s action increased competition at call origination, a point where tariffs are decided, and led to a fall in tariffs. This action subsequently led to the European Union issuing an order to its regulators to reduce termination charges.

Three, TRAI with the approval of the Government moved to technology agnostic access regulation and WLL was regularized leading to additional competition.

Four, BSNL and MTNL were encouraged to become aggressive competitors, which they did. This can be gauged from the fact that before the reforms process, during the public monopoly regime, they used to add 0.35 million lines each year. With similar control systems they now add more than 5 million lines each year.

Five, Access Deficit Charge was lowered from 30 percent to 10 percent of the sectoral revenues and later to 4 percent. This severely reduced tariffs. A high cross-subsidy regime would have led to huge irregularities and subsidy misallocation as has happened to many other sectors of the Indian economy. Whether this was unfair to the incumbents – I will deal with, in the issue next month.

Six, we allowed operators to bring down the introductory prices of handsets by bundling of handset prices and tariffs. We argued that we were tariff regulators and not handset price regulators. Introduction of this scheme led to huge increase in the number of subscribers for one operator, though the scheme also led to considerable losses to the operator due to thefts.

Seven, and the most important change, was when TRAI moved away from cost-plus tariff regulation, which is currently creating havoc in some other sectors of the Indian economy on account of padding of costs by operators, to competition regulation. I will deal with this concept and rationale in articles in this magazine later.

And finally, the eighth step in 2005-06. To increase the number of subscribers, one operator launched a two year free call termination scheme. There were huge demands to ban this scheme, and TRAI issued a consultation paper. Later some operators came out with three year and later lifetime schemes. On scrutiny we found that such schemes had successfully been run in other parts of the world and we did not intervene. Further, we found that the schemes were viable for the operators because they had started making profits in call-termination, consequent to the rates becoming profitable, courtesy a huge subscriber base and expansion of minutes. We did not change the call termination rates, which in any case were extremely low vis-à-vis the rates in other countries despite huge protests from our costing experts. Incidentally, our extremely brilliant costing experts have been the main strength of TRAI. One of the main reasons for the increase in subscriber addition numbers from 2 million a month in 2003 and 2004, to 3 million in 2005, and later to 5 million in 2006 was the introduction of these schemes.

All these steps led to tariffs that were very close to the fixed line tariffs. Later, both tariffs reduced to levels far below the lowest levels in the world. And these tariffs have excited the very large numbers of lower middle class and working class individuals like electricians, masons, repairmen, vegetable vendors, kabariwalas, etc. They found that this simple low price instrument can increase their productivity, which has led to the expansion in subscriber levels. India is a very price sensitive market with huge numbers. If the marketers take these numbers on board, they can make huge profits, even on razor thin margins.