Connecting Bharat

Less than five months after the government amended the law to allow the Universal Service Obligation (USO) Fund to be used for subsidising even mobile phones and broadband services in the rural areas, the results are there for all to see. Mobile phone firms have come up with bids that ask for a subsidy that is a fraction of the benchmark price. In the case of Cluster 1, for instance, a benchmark price of Rs 394,967 had been set as the cost of building a mobile phone tower from which rural mobiles would be serviced; against that, the winning bid from GTL Infrastructure is for Rs 197,484. In the case of Cluster 10, to take another example, the benchmark price was Rs 423,860 while BSNL has won the bid by asking for a subsidy of just Rs 80,222. As for the other part of the subsidy (required for the electronics on the tower), most bidders have said they don't want it""that is, with the cost of the physical towers having been met, they are confident that they have a business model that can provide phones to rural India at costs low enough to bring in sufficient demand. Admittedly, this does not mean that the rural telephony model is robust enough to do away with subsidies altogether, but the heartening point is that the level of subsidy required has come down dramatically. It is reasonable, therefore, to expect a surge in rural telephony, with the attendant gains in connectivity and productivity that can be expected to follow when this happens.

Contrast this with the earlier situation in which the USO Fund was available only for fixed-line phones. This was exorbitantly costly""the Telecom Regulatory Authority of India (Trai) had estimated in 2005 that this model would need nothing less than Rs 30,457 crore by 2010 to set up all of 28 million rural phones, thereby reaching the rural tele-density target of a modest 4 per cent. Those numbers were forbidding, and that is when Trai came up with the model of subsidising the tower, which would service more users at a fraction of the cost. The other negative aspect of the earlier model was that, since fixed lines require physical digging and laying individual lines, progress was slow. Of the Rs 14,000-odd crore that will be collected by month-end through the five-year-old USO levy on phone services, just Rs 4,500 crore is expected to be spent! Since setting up mobile phones is faster, such backlogs can now be tackled.

The lesson this holds with regard to government subsidies in general should be obvious, namely that it is unwise to get married to particular technologies or policy prescriptions""if a new or different technology or method provides the same result, it should be adopted. To extend the logic to the education sector, for instance, if privately-run schools can ensure the same or a high quality of education as compared to government-run schools, channelling subsidies to private schools is clearly a good idea. The other lesson is that it pays to try and work through the market. Instead of fixing a subsidy based on normative cost, potential service providers should be asked to do a reverse-bid on what they require to provide the same service""this is the only way to bring into play those efficiencies that are normally associated with free markets.