Now the Telecom Regulatory Authority of India (TRAI) has picked up this device and brought out a consultation paper on telecom pricing. It is very different from the Sebi papers. It has a very broad focus; in fact, its scope encompasses almost the entire terms of reference of TRAI. It begins with 43 questions. It does not proceed to answer them, but tries to define a language in which their answers can be worked out, namely the language of micro-economics. Lest people get put off by technical stuff, it sends all charts into annexes. Then it summarises certain facts about the Indian tariff structure. Finally, it takes up what is perhaps the most urgent question before TRAI, namely interconnection charges.
TRAI no doubt wants to give the impression that it is unbiased and has an open mind. So the report tries to avoid giving answers and reaching conclusions. This is probably unavoidable for a judicial body; but it makes the report rather boring. It is, I am sure, essential education for the department of telecom, which is innocent of accountancy, let alone economics; it is probably also useful to the new operators in basic and mobile services. But for me, the report began to get interesting only when it began to describe the Indian scene.
The first thing that strikes one is the lack of obvious rationality in the tariff charged by the department of telecommunications and MTNL. The tariff is a two-part one, consisting of a fixed rent and a per-call charge. The rent is far lower than would be required to cover the cost of instrument and connection; generally, the rents should be twice or three times what they are if they are to cover costs. And the call tariff escalates: the first 100-250 calls are free, and as the number of calls rises, the average call charge also rises. Why are rents so low? Why are more frequent users of telephones charged more? No one knows, but I suspect some social considerations must be responsible. For instance, maybe the telecom department wants to make telephones affordable to more people, and to fleece businessmen, companies etc which one presumes would make more calls. But if the telecom department faces permanent excess demand, charging low rents does nothing to reach telephones down to poorer people: those who applied first, rich or poor, get telephones first. And the losses the telecom department makes on providing new connections give it a strong incentive to delay providing lines and to perpetuate the line shortage. Higher call charges for more frequent users induce users to install more telephones than they need: they use up telephone lines, and defeat the departments objective of exploiting the rich.
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Another strange feature is DoTs long-distance charges: charges beyond 1,000 km are 90 times local charges. Actually, in the age of satellite telephony, every place is almost equally far roughly twice the distance from the earth to the satellite. Even where places are connected by terrestrial lines, once the lines are laid, costs increase little with distance. In the OECD countries, charges increase with distance till about 100 km and then are constant. The maximum multiple in those countries was 20 in 1996; since then it has come down to eight. In India, of course, long-distance calls are regarded as cash cows. But their high cost no doubt reduces the demand; it is possible that charges more closely tailored to the actual costs would raise trunk traffic enormously. This issue will become important when mobile operators begin offering trunk services at cost and undercutting DoT; DoT is well aware of the threat and has countered it by threatening to raise interconnection charges on outstation calls of cellular operators. The solution clearly lies in the TRAIs laying down long-distance charges on the basis of costs.
The cost of operator-assisted trunk calls should be higher than of self-dialed trunk calls. Actually, it is the same for distances exceeding 1,200 km, and operator-assisted calls cost less between 1,000 and 1,200 km! Between 0 and 800 km the cost of operator assistance is Rs 4-7.5; but between 800 and 1,000 km it suddenly jumps to Rs 25. It is difficult to avoid the impression that the DoT does not know much arithmetic.
The smaller the exchange, the lower the rent. This is probably an indirect way of subsidising rural subscribers. Rural telephones are a shibboleth in India; the DoTs argument is that it is doing a national service by serving rural subscribers at a loss, and the same disability should be imposed on private operators. Actually, the rural subscribers are not landless labourers, widows, the blind and the deaf; they are gentry with pucca houses, tractors and motor cycles. They do not need to be subsidised. But they do not have many local friends to ring up in a 100-line exchange; in a village, it is often equally easy to walk down to the neighbour for a talk. What would really help them is lower trunk charges, since they have so few people on their exchange to talk to.
Interconnection charges are a vexed issue, and the paper is very tentative on them. It is more sure of what it is against than of what it favours. It is against using the present call charges as interconnection charges because they have no economic basis, against capacity-based charges because they limit the access of private operators, against the sum of costs of network elements because it is too complicated, and against the efficient component pricing rule which would reflect revenue lost by the interconnector by providing the interconnection. It is not against total-element long-run incremental costs, which are in effect forward-looking full costs, nor against a two- part tariff, nor against price caps, floor and ceiling prices.
To my mind, the first thing TRAI needs to do is to clean up DoTs charge structure: double or triple the rent, abolish free calls, reduce call charges, bring down trunk charges substantially, impose a standard charge for operator assistance, and possibly introduce a quantity discount on charge calls, which would reduce the demand for lines and benefit users of public call offices. This much can be done straightaway in a rough-and-ready manner.
Once it is done, the DoT and MTNL will squeal a lot. At the same time, the greater rationality of their pricing will begin to show results slow down growth of demand for connections, increase revenue per connection, raise the return on investment. At that point TRAI must tell them that if they want further changes in tariffs, they must produce good figures. That is when their accounting standards will begin to improve; in five years they may come to be quite well run.