3G Operation Successful But The Patient is in a Bad Shape

Posted on May 21, 2010 in Sci-Tech

Amiya Sinha:

The entire debate on spectrum allocation is as if only the government and the telecom companies (telcos) mattered, without reference to the people, the primary stakeholders.

Two arguments favor making spectrum pricey through auctions. One, spectrum is a scarce resource whose value escapes the government when companies make capital gains selling their allocated spectrum (which is what selling stake in these companies achieves). Two, this is needed to fairly allocate spectrum among multiple claimants. Neither argument is persuasive. Spectrum auction is far from the only way for the government to capture its value. A tax on capital gains or windfall profits would do just as well, when a company unlocks the value of its spectrum via sale of stake or spectrum when that is permitted.

In fact, the state appropriates a share of the value created by spectrum when it takes a share of the revenue of telcos. HUL or Tata Motors only pays corporate tax and does not share its revenue with the government, but Bharti and Vodafone do. But this is not all. The spread of telecom boosts economic growth. By the network effect: the greater the number of people connected to the network, the greater the value of being connected for each person. With ubiquitous phones, decisions get taken faster.

Productivity increases – a CEO calls up his driver before he leaves his room so that by the time he reaches the building entrance, his car is waiting for him; a multi-location video conference clinches a crucial decision that would otherwise have called for many high-value man-day’s of travel.

The entire IT-BPO success story is thanks to India’s telecom revolution. Phones have multiplied the incomes of self employed tradesmen (carpenters, etc). Rural producers realize better prices because their phone tells them the mandi price. Such enhanced incomes, cumulatively, drive up the demand for goods and services. If there had been no telecom revolution, would Bangalore have seen a real estate boom?

The government captures a share of this additional output through direct and indirect taxes. But creating larger output, which is the tax base, is not telecom’s only contribution to tax revenue. Telecom has also enabled a tax information network, which has raised the share of tax collections in GDP – direct taxes grew at more than 30% a year even as the nominal economic growth was around 15%.

If we assume that without the telecom revolution, India’s GDP growth would have been one percentage point lower and that the tax/GDP ratio would have been one percentage point lower, the increase in tax revenue just in 2009-10 attributable to telecom is Rs 90,000 crore, assuming the lower growth since 2003-04, when the telecom revolution gained scale.

India most certainly would not have had its telecom revolution had spectrum been as expensive in 2003 as the 3G spectrum is now, that is, close to Rs 68,000 crore.

Some argue that call rates would not go up because of higher spectrum charges because competition would force players to hold tariffs. This might be true for a specific phase of the industry’s growth but is not sustainable, and will show up in slower expansion and lower quality of services. India cannot continue to have a world class telecom industry, even if its capital costs (spectrum fees capitalized becomes just that) are many times higher than they need to be, that is just plain silly.

Upfront spectrum fees transfer investible resources from the non-government sector to the government. They jack up the cost of telecom services or slow down their expansion and quality improvement and, vitally, impede roll out of real broadband –1 gigabits of data per second (what Google is planning for US homes and is also envisaged in the US national broadband plan).

Instead, if the government keeps the spectrum cheap, and focuses on the larger tax base created by faster growth of telecom, its revenues would be bigger over time and the Indian people would be better off. But, in the absence of auctions, how do we allocate the spectrum to companies? The answer has two parts. In telecom, the degree of competition is determined by the total availability of spectrum and the minimum spectrum required by each player. Suppose four players are possible.

Who these players are matters a lot to telcos, but next to nothing to consumers, so long as all of them are competent. Take lots, have a beauty parade, make the telco CEOs do the Iron man – whatever the method of selection, it should not impact the cost or quality of telecom services.

However, the bigger problem in this model is the obsolete idea of dedicated spectrum for a telco. India needs to invest in technology that will create a real-time spectrum exchange, so that the entire spectrum is available to all the telcos to service their customers, with the exchange matching the demand for and the supply of spectrum at every point of time, the usage charge accruing to the government right then and there. Just because this departs from the legacy model of the west, it does not mean that we should not put people first.

Costly spectrum only serves to transfer investible resources to the government and slow down telecom spread. The Indian telecom industry needs huge investments in broadband to secure what will soon be a competitive norm: 1 Gb per second. Cheap spectrum and fast telecom spread boost GDP growth and yield more revenue than when the spectrum is costly.

The writer is a correspondent of Youth Ki Awaaz pursuing Economics (1st Yr.) from Ramjas College, University of Delhi. Football is his religion.  Writing has always been one of his areas of interest.