The Indian Economy Blog

February 1, 2006

The Sham Called ADC

Filed under: Business,Regulatory reforms,Science and Technology — Gaurav Sabnis @ 9:30 pm

Ajay Shah, who has a fine blog here, writes about how telecom in India is unnecessarily being penalised by a predatory, opportunistic and almost immoral regulation and taxation mechanism.

He writes about ADC -

The access deficit charge (ADC) and the universal services obligation (USO) are based on the wrong-headed notion that the State will tax urban consumers to subsidise rural telephony. If the State wants to run a social program, it should do so, but this should be paid for by the general exchequer. It is bad tax policy to impose a tax upon one industry to finance a certain social program. If the State believes that rural telephony is important, it should be willing to pay for it out of general tax revenues.

Great point. Expecting just urban phone users to pay for what the government decides is a “social good” is just bizarre. If it is a “social good” and all that, why not fund it out of the general exchequer.

Another thing about ADC is, it is passed on to the state-owned BSNL, purportedly for use in rural telephony. But BSNL is also an active participant in the ultra-competitive urban markets. So how can we be sure how much of the money collected through the ADC is actually being spent on rural telephony?

Why doesn’t the government separate BSNL into two companies – Urban and Rural? If it is serious about rural connectivity, it should. What is happening right now is, the ADC goes into the pockets of the BSNL. And BSNL is seen offering great services in the urban areas, spurred by competition. But what is BSNL doing in the villages? Precious little. The rural telecom sector has hardly been touched by this revolution that our cities have witnessed.

The main reason for it is that as of now, with the urban market still having great potential, it is just not worth it to go after the much smaller rural markets. But as the competition intensifies and the markets move towards maturity, telecom companies will look for alternate avenues. This shift towards untapped markets is being seen already. Telcos who used to concentrate only on the big cities and businessmen a few years back, are concentrating on smaller cities and consumer segments with a much lower income level.

Notice all the advertisements about “lifetime prepaid”, “chhota recharge” and “aadmi phone leta hai baat karne ke liye”. Contrast them with the ads of around two years back, slick, crisp and clearly targetting the urban rich.

Once the cities and towns reach saturation, where will they head to next? To the villages for sure. The journey which moved from Bombay to Baroda to Bhagalpur will move next to Bhugaon.

Some people however are not in the favour of waiting for this natural market-pace to reach the villages. They believe that all regions should have some basic services regardless of whether they are financially viable or not.

Even if we grant this premise, what is the logic behind having the funds raised for this purpose routed to a company which is in charge of both rural and urban telephony? Given a choice between an arm of its business which gives it profitability, and another arm which costs a lot, isn’t it obvious where it will focus? That is what BSNL does. Pays lip service to rural telephony while investing and harvesting from the urban markets.

So as Ajay Shah says, the best way to spur telecom even further is to scrap ADC. And the best way to spur rural telephony is to float a separate company for it.

16 Comments »

  1. As I emphasised in the original article, the story of India’s
    rural telephony is that when we brought in competition and opened
    up to greater innovation (read: mobile phones), telephony for
    the poor
    took off.

    All the big telecom vendors are saturated on customers like you or I,
    and the frontiers of growing revenues is now poor people. That is what
    explains plans like Rs.1000-for-lifetime-free-call-received. It’s
    the sort of thing you’d do for a driver or a maid :-) Similarly, the
    sharp growth rates are now found in the low income areas of the countries.

    As I say in the article, 50 years of socialism gave us telephony which
    was the preserve of the rich. A few years of new policies have
    taken phones where nobody had ever expected them. Hence, I think the
    best thing we can do for telephony-for-the-poor is to stop doing anything about it, by scrapping the USO and the ADC altogether. :-)

    Comment by Ajay Shah — February 2, 2006 @ 10:35 am

  2. An OT question. Are you folks at the Indian Economy Blog planning to set up an NGO or a voluntary organisation of sorts? The “.org” extension suggests so.

    Comment by Shivam Vij — February 2, 2006 @ 2:22 pm

  3. Re NGO or voluntary organization: Atanu (via Deesha), Yazad (Praja) and Reuben (via the BoP Consortium) are doing something of that sort… from what little I know. However, this are their individual initiatives and have nothing to do with IEB.

    As far as IEB goes, no plans for an NGO or voluntary organization — so far.

    Comment by Prashant Kothari — February 2, 2006 @ 2:55 pm

  4. I have to disagree with the conclusion of this (and presumably Ajay’s) post.

    That GOI has been taxing petrol for decades in order to build roads but uses the money for other things (many subsidies of other kinds) and never build roads is well know. Taxing urban telephony doesn’t seem too different.

    But my disagreement with the post is this: I don’t think the argument that people living in rural areas should have wait until the markets force come to them is justified, especially with regards to telephony, which to me, is a basic necessary. While I am a strong proponent that (a bit) regulated lassie-faire market forces should be norm, not an exception, when it comes basis services, beyond education and health care, such as roads, telephony, drinking water, and sewers, I think government (mostly state and local) has strong role to play. While it’s not a human rights issue (apparently everything is these days), it is the right of citizens (all of them) to expect these services in any normal country.

    I don’t propose that the government should have monopoly to provide these services (a visit to your nearest urban government hospital should put a rest to that notion), but GOI (and state and local governments) should encourage (through tax incentives and policy) private enterprises to provide basic services (irrespective of market profitability) to all the people of the country, not just urban. But then India is not a normal country.

    Comment by Chandra — February 2, 2006 @ 9:09 pm

  5. BTW, Shivam: what exactly is an OT question?

    Comment by Prashant Kothari — February 2, 2006 @ 9:54 pm

  6. Prashant,

    OT = OffTopic

    Comment by Vulturo — February 3, 2006 @ 10:06 am

  7. Chandra, I note your disagreement. However, I make another point on which I would like to hear your opinion. That assuming the government should indeed be responsible for providing rural telephony, regardless of the market viability, does it make sense to have a company like BSNL do it? A company which also runs urban networkks?

    Comment by Gaurav Sabnis — February 3, 2006 @ 10:53 am

  8. Vulturo = thanks for the clarification

    Going back to Shivam’s original question about IEB “setting up a voluntary organization”

    IEB is

    a) voluntary and
    b) an organization of sorts, albeit virtual

    Arun Maira had a couple of op-eds in the ET a month ago (not online unfortunately) about the need for WMD in India (WMD = Ways of Mass Dialogue) and about the need to improve the “software of democracy” in India ie, fora for dialog and discussion…

    Given the low Internet penetration rates, blogs aren’t going to have aything but a niche audience in India (for the near future). So, there’s no way IEB (or any other blog) can match the other channels of communication (TV or print). Perish that thought.

    But hey — it’s an effort at dialogue and discussion, howsoever small. At least, that’s what we at IEB would like to think.

    What say you?

    Comment by Prashant Kothari — February 3, 2006 @ 12:22 pm

  9. Comment edited due to lack of relevance to topic at hand. The query about whether IEB plans to set up an NGO or not has been answered politely and comprehensively. Since it is admittedly off-topic, it is requested that further discussions be carried out elsewhere, preferably over emails.

    Comment by Shivam Vij — February 3, 2006 @ 8:53 pm

  10. Gaurav, I guess my quibble was with regards to your take on taxes (or charging fees) and waiting for free markets to work for basic services. Your point about BSNL is a good one. But I would go beyond that.

    Without getting worked up about BSNL, I think GOI can use the fees to provide incentives for rural only telephone companies and open the entire non-urban areas for unrestricted number of licenses (this may help keep the prices down for rural consumers). Not all companies want to be mega ones. I would think there will be lot of entrepreneurs, throughout the country, who would jump at the opportunity, especially, if the government can lower their borrowing costs (using the fees) to enable decent returns as long as they are purely rural telephone (or communications) companies. Then, may be BSNL itself may join in rural telephony by splitting itself!

    Comment by Chandra — February 3, 2006 @ 9:38 pm

  11. I would like to add a very interesting titbit here. For the last year the ADC paid to BSNL was Rs 5000 crore.

    Incidently, if you see the financial results of BSNl their profits for the last year was also Rs 5000 crore.

    That means that they are non profitable, if it were not for the ADC

    Comment by Rishi — February 4, 2006 @ 1:31 am

  12. Is there any account that how much BSNL spends on rural telphone infrastructure? Or of all the ADC how much they have apent and where?

    Comment by Anshul — February 5, 2006 @ 9:51 am

  13. India is missing a great opportuity of skipping a wave of technology, an old one at that – landline, instead take the rural folks to mobile only. For a start, you need only one good transmitter every 100SqKm covering a few villages, as against running miles of cable & servicing them unviably, for a long time, given the low teledensity. A Network of Mobile transmitters every 100SqKm, connected by Optical fibre, will give enough future proofed capacity as also ability to install new connections at the instant of making request! BSNL-ADC-USO-GOVT is an ideal in-efficient mix, for delivery landline, from which it will be difficult to extricate villagers, even if technology takes 4 leaps ahead! Is it because the city folks (who decide policies) dont want the villagers get the better technology that the landline is being forcefully pushed?! That for a start will be better utilisation of ADC/USO, however unfairly it is burdened on urban telephone user!!

    Comment by Chandrasekar K — February 14, 2006 @ 1:27 am

  14. The USO, inported into India from the US, is an idiotic idea even prima facie. A few years ago I estimated the welfare losses associated with it. My PhD thesis was on the welfare effects of the USO on the Indian economy. Of course, wisdom will slowly dawn on the idiot policy makers of India in about 40 years or so. Until then, the Nehruvian socialistic policies would have improverished the nation even more.

    Comment by Atanu Dey — February 17, 2006 @ 8:16 am

  15. Why does everybody start blaming on Nehruvian policies. His policies were not wrong. How else will you control a nation as big as India of 330 million(1950 figures) without centralized control.
    We now have middle management/upper management. 50 years ago, all we had were the rich and the poor.

    Comment by Raj kashikar — June 1, 2006 @ 4:21 am

  16. guaranteed online persoal loans…

    ply attentions afterglow …

    Trackback by guaranteed online persoal loans — September 23, 2008 @ 11:39 pm

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