The Hindu : Business : New policy benefits only incidental

Online edition of India's National Newspaper
Monday, Jan 17, 2005

Business

Business

New policy benefits only incidental

Consumers benefit from the policy changes in telecom and civil aviation. But the benefits are incidental at present, says C. R. L. Narasimhan.

IF, FROM early February, many categories of telephone users will be paying substantially less for long distance calls made or received by them, whether within India or outside, they will have to thank the regulator, the Telecom Regulatory Authority of India. Earlier this month, the TRAI, while conducting a six monthly review of access deficit charges — the charges that mobile operators pay to the fixed line operators for calls originating from or terminating on the latter's land line — brought them down substantially, in some cases by as much as 60 per cent.

Many individual operators have said they will pass on the full benefit to their subscribers. Although individual tariff plans incorporating the new reduced ADC burden have not been announced by all operators, it is expected that a call between Chennai and Delhi now costing an average Rs. 2.40 a minute will henceforth cost Rs. 1.90. A per minute call to the U.S. will be cheaper by Rs. 2 from the existing Rs. 16.

the main issue: how good are the assumptions behind the recent lowering of ADC? The TRAI cites the more than doubling of cellular connections, from 21 even assumption of price elasticity is borne out (and BSNL gets its estimated compensation) there will still be major doubts on the sustainability of the ADC regime in the latest tinkering notwithstanding, the ADC as a mechanism remains flawed and will therefore not be in a position to prevent rampant abuse.

Perhaps the is "arbitrage" will continue and along with it a flourishing grey market for calls. The disguising of international calls as local ones to pay a lower ADC is one of ain abuses (allegedly perpetrated by Reliance Infocomm) and will not go away unless the entire method of levying charges is altered to one of revenue sharing.

Indeed this course of action had been contemplated by the TRAI itself. However, the ADC continues to be on a per call basis.

Grey market will remain

The grey market for international calls will not go away. Even as the ADC for international calls has been lowered — leading to lower tariff in that segment — that for domestic calls too has been brought down. The TRAI itself has admitted as much pointing out that the scope for arbitrage can be substantially checked only through better surveillance and imposition of penalties on those violating the rules. Clearly the regulator faces some tough choices.

Given that regulation in the telecom sector is still evolving, any move to remove one set of anomalies will give rise to another. As far as ADC is concerned, the TRAI has announced that there will be another review.

What do all these mean to consumers (the telecom subscribers)? A tariff reduction is welcome but it is equally important to realise that in the instant case customer benefit is incidental to the task of rationalising the regulatory structure. As a general rule, in telecom areas the rationale for the charges is not easily understood. That rural telephony has to be subsidised is understood but there is considerable opacity in the way a particular estimate of ADC is arrived at. Moreover, the present case shows that the old divisions — fixed versus cellular and public sector versus private — remain. Not surprisingly, the likely impact of the ADC changes is seen in the context of who wins and who loses. The time has not yet arrived for regulation to focus either on the industry or its customers in a broad sense.

The policy on civil aviation cannot be compared with the one on telecom. If telecom regulation and the framing of rules have been slow in evolving, it is only because the sector itself has been witnessing changes at a breathtaking pace. Soon after announcing the ADC reduction, the TRAI has unveiled broad policy initiatives including a discussion paper on ushering in a unified licence regime. If and when that comes about — a smooth passage is by no means assured — the regulator will be presiding over a level playing field. Most important, from the consumers' point of view, there will be a great deal of transparency in choosing a particular service operator. It should be easier to judge the competitiveness of each operator including in relation to interconnectivity and related issues.

In contrast, the civil aviation policy has been moving in fits and starts. Even while it has tried to meet the principal objective of any sectoral policy — benefiting consumers through competition — practically all policy changes have been characterised by a great deal of opacity. For instance, in the domestic sector, the policy has encouraged a duopoly — IA and Jet Airways — in the place of the earlier government monopoly. The Singapore Airlines — Tatas joint venture would have really encouraged competition but opaque foreign direct investment rules have kept out foreign airlines from participating in such ventures.

Poor transparency

The latest package aimed at more "open skies'' is also one in the same genre of less than transparent policies. Jet and Sahara get permission to fly to foreign destinations. The Gulf sector will however be reserved for the government owned airlines .The newer domestic airlines, notably Deccan will have to wait for some more time. Only airlines with a five-year track record in India can get to fly overseas.

The new policy also talks of developing synergies between Air India and Indian Airlines and letting the latter to concentrate on domestic operations.

In the wake of the policy announcement there has been the customary hype. Will the entry of private airlines in the international sector really bring about the perceived benefits? At one level, greater competition is a good thing for consumers. By creating more capacity and by demonstrating superior customer service, private airline can make a point or two.

Raw deal for AI, IA

Yet the new policy has its share of deficiencies. The public sector airlines get a raw deal, the exclusivity of Gulf traffic notwithstanding. In justification for the opening up of foreign skies to the two private airlines, the Government says that capacity constraints with the public sector airlines have prevented them from flying to many destinations. Bilateral agreements entered into with many countries — some 100 of them — have been underutilised. Private airlines ought therefore to be given a chance to exploit the business arrangements between countries.

The argument is flawed for many reasons. It is not as though all routes now made available for the private airlines will be utilised. Some routes will be clearly uneconomical to fly. Besides, the public sector's capacity constraints have been caused entirely because of the Government's failure over the past ten years to approve their aircraft acquisition plans. In this and many other critical aspects the Government has ignored the Naresh Chandra Committee's recommendations which called for a strengthening of the public sector airlines before throwing open the sector to competition.

Getting back to the core issue of consumer benefits, as with telecom the benefits from the open skies policy, if any, will be incidental. For sustained benefits one has to wait for the removal of policy aberrations.

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