Vantage point

Wednesday, February 01, 2006

The Sham Called ADC

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.

Cross posted at