The Tragedy of The Unused Commons

Hope for the good sense and guts to grasp the nettle and take decisions that are bold as well as wise.

“The tragedy of the commons” as you may recall, refers in economics to the overexploitation of shared resources because of unregulated access. The tragedy results from shared resources being depleted or degraded because users pursue their own interests, contrary to the common good. This leads to unsustainable depletion or degradation. The atmosphere and oceans are examples of such shared resources.

There are also reverse situations, in which resources that are available for the benefit of society are unused, to the detriment of the common good. In such cases, there are opportunity costs from disuse that result in detriments, because the benefits of use are foregone. India’s abundant sunlight is a good example. Given its abundance, a reasonable expectation might be that extensive innovation and market organisation would be focused on harvesting this potential energy. Alas, India is a laggard in innovation relating to solar power.

Another resource that is neither depleted nor degraded by usage but underused is radio frequency spectrum. The opportunity cost for unused spectrum is therefore even greater than for a degradable mineral resource such as coal, resulting in an extreme tragedy of unused commons.

Some Issues Need Resolution

The situation today is that swathes of spectrum are unused because of our inability, perhaps unwillingness, to develop the appropriate regulations and organisation to benefit from them. This is true of all unused and underused radio frequency spectrum, although some of it is the most useful means for broadband connectivity for the majority of our rural and semi-urban population. It would also give more urban users less expensive access. For both sets, judicious use would enhance productivity and improve living conditions.

The entire thrust of the Digital India initiative requires these enabling policies and procedures, that is, the administrative rules and regulations that would enable the use of presently unused and therefore wasted spectrum. There are, of course, many other steps required than merely putting in place the regulations. The market structures and organisation have to be created under government leadership with other stakeholders in industry and civil society that would permit sustainable use of “the commons” — namely, the spectrum, if it were a shared resource instead of being apportioned in silos.

At present, private operators in this sector, except one, have too much debt, very low profitability, and insufficient network coverage. Services can be good in some locations, but countrywide, are spotty and not universally accessible. Yet, operators apparently want auctions, not now but at some time in the future (perhaps next year), for the essential resource that is the prerequisite for building the coverage that they don’t have although they are sorely needed, as they have been for years. While clearly impractical because of how auctions soak up capital, limiting subsequent investment in networks because of the deprivation of capital, operators reportedly want auctions in order to reduce competitive threats. 

Another baffling aspect of our reality is that the administration and regulator took no effective action to prevent the destruction of existing market structures in the telecom sector when there was a disruptive new entrant. Although, with overwhelming resources from unrelated activities, unsustainable strategies and tactics could be construed as jeopardising India’s current and future productivity. Meanwhile, the administration and the regulator dithered, debating theoretical concepts of what constitutes anticompetitive or predatory activity, and the judiciary remained on the sidelines.

Yet another aspect of puzzling inactivity is that there have been no steps to test certain promising technologies for permitting their use through appropriate policies in India, such as TV White Space or the development of MIMO — Multiple-Input-Multiple-Output — using arrays of antennas, yielding (a) greater throughput (b) over longer distances (c) to more users, thereby improving spectrum capacity for broadband. While initial tests for TV White Space, conducted after a delay of several years, have been promising (disclosure: the author was associated with some), proposals for larger follow-up trials have stalled. Without these, policymakers can’t even consider policies that would enable the development and use of TV White Space devices for extending optical fibre from gram panchayats to hundreds of thousands of village users.

In the press, confusing articles short on facts make policy formulation even more difficult and risky in this already technically and financially complex space. One instance is an article about Maharashtra’s Village Social Transformation initiative avoiding TV White Space because this technology has problems with security clearance, in addition to Foreign Contribution Regulation Act clearance for Microsoft’s sponsorship of the pilot. There's no mention of the real problem in India: getting permission to use TV White Space for purposes other than for Doordarshan’s broadcasts. The security risk in these frequencies is the same as in other frequencies, and transmission in any band can be monitored.

Another article suggests the government is considering allocating a high-speed wireless frequency band of unused spectrum (V band or 60 GHz, which is like short-range wireless optic fibre) on a first come, first served basis “which is a gross violation of the Supreme Court order”. Somewhere down the page is a surmise that since the Broadband India Forum is advocating de-licencing of this band and foreign companies support it, this “means that it should be allocated without auction on first come, first served basis”. The Broadband India Forum in its white paper clearly recommends aligning with an international standard, the Harmonised European Standard.1

 According to this, low power equipment within specified emission limits in this band doesn’t need a licence, like Wi-Fi, which is de-licenced spectrum that is open access and not allocated for exclusive use. Other de-licenced spectrum would not need to be allocated either, although in India, bands such as 60 GHz could be restricted to authorised operators.

It needs government intervention to cut the Gordian knot and initiate discussions on pooling spectrum for networks and working out practicable, sustainable options. Here’s hoping good sense and guts will help to make a start.

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Shyam (no-space) Ponappa at gmail dot com

1: "V band - 60 GHz: The Key to Affordable Broadband in India"

White Paper by Broadband India Forum, November 9, 2016

http://www.broadbandindiaforum.com/img/White%20Paper%20on%20V-BAND%20Revised%20Final.pdf

Nobel Laureate Richard Thaler's Views On Auctions

The government has already set up a Nudge unit; now, it should apply the Nobel laureate's insights on auctions relating to essential infrastructure.

You may be surprised to learn that the central government has been applying ideas from this year’s Nobel Prize winner for economics, Richard Thaler, even before the award. According to press reports, a “Nudge” unit was set up last year (2016) by the Niti Aayog in association with the Bill & Melinda Gates Foundation. Its purpose is to apply behavioural insights in policymaking for initiatives such as Swachh Bharat, Jan-Dhan Yojana, and Digital India. There are issues about ethics and motivation in the use of “nudges”, of course, with the best nudges likened to effective GPS devices that make it easier for people to get where they want to go with enabling information, and without covert manipulation.

Recognise, however, that manipulation can cut both ways. It can be beneficial for those being influenced, as when we eat healthier, observe regulations, or manage waste better. It can also be detrimental, as when manipulators entice, persuade, or coerce us to act against our interests, whether it is the private sector, government or vote seekers. Examples are enticements or misleading consumer information, government pressure for compliance without appropriate regulatory bases, or populist measures for votes.

Incidentally, Mr Thaler also advises the $6-billion Undiscovered Managers Behavioral Value Fund, which reportedly does better than 97 per cent of its peers, with average annual returns of 16 percent.

Ironically, one of Mr Thaler’s powerful early insights has been ignored and is awaiting discovery and application especially in India. It is about the “winner’s curse” in auctions, the phenomenon that winners of highly contested auctions tend to overbid. This is because when there is strong contention for a desirable asset, the one who most overvalues the asset tends to bid the highest. Mr Thaler demonstrates that the curse occurs in two ways: Where the winning bid exceeds the value of the winnings, or where the gains are below expectations. Mr Thaler’s 1988 paper demonstrated these effects through examples including oil and gas leases, corporate takeovers, publishing rights for books, and bidding for baseball players.1 This is especially important for India because we need more effective resource management, whether of coal/fuel for power, or of spectrum for communications. We can ill-afford the high opportunity costs of bad policies. 

To be fair to policymakers in India, findings by Mr Thaler and others on auctions have been ignored by other governments greedy for immediate revenue. The UK, Europe and the USA went through disastrous 3G auctions that bankrupted their telecommunications industries. The exceptions were the Scandinavian countries and others such as Japan, South Korea, and China, where circumstances were managed so that there were either no auctions, or less contentious auctions.  Tomes have been written on the “success” of high bids that resulted in enormous government collections. The consequences for the operating companies, however, were devastating, because of the severe drain on their finances from the heavy up-front investments. This was aggravated by the collapse of the technology bubble in 2000.

All the following auctions had disastrous outcomes for services:2

1994: The first US auction netted huge bids. Soon after, a number of “successful” bidders declared bankruptcy.

In India, the 1994 auction was followed by chaos because of overbidding and default. The sector recovered only after the auction fees were set aside for revenue-sharing in 1999 through the New Telecom Policy (NTP 1999), and lower shares were set in 2003.

1995-1996: US “C”-Block auction — several “successful” bidders declared bankruptcy.

2000 UK and 2001 EU 3G auctions: Netted $35 billion in the UK. In Austria, Germany and Italy, bids netted over $100 billion, 10 times the expectation. Considered a huge success, but winners couldn’t repay their debts, and the markets took a decade to recover.

2010: India’s 3G and broadband wireless auction with over Rs 1 lakh crore bid was considered a great success. Having paid too much for spectrum, operators struggled thereafter and new systems are slow to roll-out.

Meanwhile, auction experts wrote disparagingly of “failures” (low fees) in countries such as the Netherlands, Switzerland, Sweden, and ignored countries such as South Korea, Japan and Finland where there were no auctions (until 2009). However, these “failures” had the best broadband services, according to a 2010 study by the Saïd Business School at Oxford.

After India’s 2015 auction, researchers at ICRIER observed that the anticipated growth dividend from telecom didn’t materialise. Their rhetorical question and answer: “Does this mean the much-needed mobile broadband ecosystem will be further pushed into the future? If so, this would be another case of lost opportunity in telecom.”3 And that’s what it has been so far.

Broadband is an essential aspect of infrastructure. For India to break out of its low-growth trajectory, our policies have to recognise the impediments caused by spectrum fragmentation and high-cost auctions, and create practicable alternatives such as shared networks including spectrum that is paid for only when it is used. Also, more open-access and light-licensed bands in line with global developments will help India reap the benefits of ecosystems of devices as they evolve, e.g., in 60 GHz and TV White Space bands (for which India is ideally positioned). Instead, these technologies are blocked as is the spectrum, which remains unused, creating more barriers for ourselves by having to devise high-cost workarounds. Our ministries – for communications, electronics and information technology, information and broadcasting, defence, and finance – need to address technology applications and policies collectively to induct and align our systems and practices with global developments now and for the future.

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Shyam (no space) Ponappa at gmail dot com

1. Richard Thaler, “Anomalies: The Winner’s Curse,” Journal of Economic Perspectives 2, no. 1 (Winter 1988): 191-202

2. There was one successful auction in India in 2001 for a fourth mobile operator in each circle (state), when markets were depressed and competition was subdued. Other auctions in India and abroad hailed as successes because of high-auction bids resulted in constrained networks and services

3. Mansi Kedia, Pamil Urdhwareshe, and Rajat Kathuria (ICRIER), “Deconstructing the 2015 auctions”, Financial Express (April 8, 2015)

NPAs & Structural Issues

To fix one you need to fix the others.

Shyam Ponappa 

  | October 5, 2017

An aspect of financial services often overlooked is that they serve as second-order infrastructure, essential for commerce, industry, and daily living. A disruption in the financial sector slows everything by cutting productivity. Other reasons for decline, such as structural issues in power supply, telecom/broadband, and in farming, are accepted as part of the landscape. That is why devising corrective measures is not so simple. Setting aside political considerations, misattribution does not help in problem-solving. Resolution needs root causes to be identified and addressed. 

Consider the example of the guillotine approach to non-performing assets (NPAs). Imagine if an inspection of water and sanitation in your locality were to result in the shutting off of the water supply because conditions are deemed unsanitary. There would be a scramble for sourcing water, while economic activity and productivity would tank. What if it were a metropolis, or the whole country?

This is what happened with the abrupt change in booking NPAs. From around 2.5 per cent between 2006 until 2011, they began to rise in 2012 (see Chart 1). 

Chart 1: NPAs as a Percentage of Gross Advances

Source: RBI - dbie.rbi.org.in

Public sector banks in particular responded to the government’s accommodative efforts after the 2008 crisis. As growth fell, NPAs rose, especially for long-gestation, regulation-dependent infrastructure loans. In 2015, the Reserve Bank of India (RBI) adopted a hard line as the economy was gaining momentum after slumping in 2014 to 6 per cent. Earlier, the RBI was faulted for allowing the ever-greening of loans. An abrupt change without a gradual coming to terms to manage cash flows resulted in a crisis.

Leaving aside malpractice/fraud, NPAs resulted from factors such as aggressive, unsustainable lending, regulatory delays, the domestic and global slowdown, and commodity price shocks, as when export duties were imposed in Australia and Indonesia on coal. Cash flows drive demand, and a weak economy can make or break a business. 

Apart from crippling banking and financial services, the consequences of the NPA shock were enormous, especially for sectors such as iron and steel, construction, power, telecom, transport, and agriculture, with knock-on effects on MSMEs across sectors. Could a phased, more gradual, differentiated approach have yielded better results? Probably, just as when water supply fails, interim arrangements involving pipes, equipment and tankers have to be made to tide over the crisis.  For stressed loans, the requirements were for a differentiated approach to the category of wrongdoing, including overreach, and support for stressed sectors undergoing a downturn.   The need was and is to prevent disruption in cash flows from a systemic perspective, conserving employment and assets in untainted enterprises with the potential for recovery.  This also retains momentum and market sentiment to the extent possible.

Ways Out?

1. NPAs in the mid-90s were outrageously high. Yet, what followed especially after 2003 was high growth until the global financial crisis of 2008. The NPAs were reduced and ceased to be a problem (see Chart 1). One explanation is that banks did significant NPA provisioning from profits in bond trading, as interest rates on 10-year government bonds fell 8.1 per cent from 1997 to 2003. A booming economy from 2003 did the rest, although there were no changes in the underlying causes that led to the NPAs. Hence, bond trading could be a way out provided interest rates fall, and so could economic growth. 

2. Regarding interest rates, the dilemma is of high rates for domestic savings because people save with banks in India, and for foreign investors in bonds, against low rates for consumer demand and for capital investment. Given our acute need for growth and misaligned real interest rates, this needs rectification (see Chart 2). 

Chart 2: Real Interest Rates-India, China, Indonesia, Thailand , South Korea – August 2017

Source: https://www.bloomberg.com/news/articles/2017-08-02/india-s-real-interest-rates-compared-with-other-asia-economies

3. There’s a need to insulate banking from political influence, while ensuring rigorous procedures for evaluation and monitoring. Any system can be gamed, however, and to work well, players need competence, integrity, and the freedom to exercise both. Banks are not well suited for funding long-gestation infrastructure because their deposits are more short-term. This is an institutional and market deficiency that needs to be bridged through developing bond markets, and channeling long-duration funding from pensions and insurance.

4. There are compounding effects from imposing the Aadhaar/UID without the requisite connectivity, processes and safeguards, likewise the hasty imposition of the goods and service tax (GST). There is little doubt of benefits when properly applied, but that needs time and support for thorough implementation; meanwhile, the immediate need is for relief. Rescue measures are needed to lighten the burden of the GST and its reporting requirements on MSMEs (up to a higher ceiling?) over a long period. Interim solutions could be flat rates for a larger set, augmented by support for implementation.

5. Meanwhile, structural issues resulting in NPAs need to be fixed. Three obvious areas:

a) Farming, with its large population, small holdings, outmoded practices, low productivity, and the issues around pricing. Pricing is an essential aspect, as are direct benefits, for example, subsidies through cash transfers depending on income. But simply increasing farm prices addresses only one aspect of a multifaceted problem. What’s needed is to change the way production and marketing are organised. Practicable strategies are needed for produce, perhaps like the approach in dairy farming for milk production and marketing. Systems need be designed (worked out) and implemented properly, with design elements to promote and safeguard honest, competent, disciplined behaviour.

b) Telecom and broadband services need policies based on a complete change of mindset and market structure, such as shared networks and equipment including spectrum, protection from anti-competitive action, and revenue sharing instead of auctions.

c) Electricity supply: Power generation and distribution are both stressed by low economic activity, while many states continue with lax practices of under-recoveries for electioneering.This cannot be resolved as long as profligacy and indiscipline continue.

Fixing NPAs alone won’t do. Changes are required in key sectors for genuine resolution.1

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Shyam (no-space) Ponappa at gmail dot com 

1. “Indian Banks – Perception and Reality”, Ashima Goyal: www.epw.in
http://www.epw.in/system/files/pdf/2017_52/12/SA_LII_12_25032017_M_and_B_Ashima_Goyal.pdf

Revamp Telecom Sector & Revive The Economy

Share infrastructure and spectrum, and adopt revenue-sharing for growth.

Shyam Ponappa   |   September 7, 2017

There’s little doubt our economy is facing a slough of problems, including misdirection and loss of momentum. Apart from the present government’s doings or omissions, other legacies have also contributed to this, such as the complacency of previous governments, the scams, the obduracy of the then Opposition, resulting in the attrition of parliamentary processes, and so on. This, followed by the persistently divisive approach of the incumbent government has effectively scuppered any possibility of convergent societal efforts. There’s no point attributing blame for the purposes of redeeming the situation. Instead, we must try to pick up the pieces.

Some things need doing, and urgently, but we (and especially our governments) seem to be avoiding them. Basic infrastructure is our most urgent need, apart from unifying leadership and social institutions. Certain systemic bases simply must be built and made available to organise and channel energies into constructive, productive activities and well-being, although it will be time-consuming and far from easy on our continental scale.  

In infrastructure, broadband can yield the quickest and highest rewards (e.g., http://organizing-india.blogspot.in/2010/10/broadband-for-education-training.html) by adopting policies that enable responsible access to existing resources, instead of continuing with self-imposed administrative restrictions. Everything else — energy, water and sewerage, and transportation — is more complex, and needs far more capital investment and organisation. What’s more, with good communications support, other infrastructure becomes easier to build and manage. On the face of it, the government seems to be addressing this. For example, an Inter-Ministerial Group (IMG) was formed three months ago to recommend solutions for the debt-laden telecom sector. Interim reports did not augur well, though, suggesting there was no need for major policy changes because of signs of recovery. Unfortunately, the IMG’s final recommendations are on the same lines: Deferring spectrum and licence fee payments from 10 years to 16 years, and reducing interest charges by about 2 per cent. However, there is no reduction in licence fees or spectrum charges nor easing of spectrum limits on consolidation; interconnection charges will be decided by the Telecom Regulatory Authority of India, and spectrum auctions will be after April 2018. But for an overleveraged, hypercompetitive sector, deferring the massive capital requirements for auctions by some months and other proposed measures doesn’t really change the game.  

Will this enable the telecom sector to recover? Many operators and observers think not, including yours truly. The reasons below leave one wondering whether the IMG made their recommendations with full knowledge, or were not fully cognizant of the realities.  

Why major changes are necessary  

There are compelling reasons for radical policy interventions. A report by Strategy& (formerly Booz and Company, now part of PwC) suggests that telecom operators in developing countries have negative margins on data services (see chart).

Source: https://www.strategyand.pwc.com/reports/connecting-the-world-media-report

This is significant for India (a) because we need considerable growth in networks and delivery, (b) that is affordable, (c) yet sustainable, i.e., generates positive cash flows.  

The reality is that the already troubled sector’s revenues fell steeply after Reliance Jio’s entry in 2016, and so did government revenues from licence and spectrum charges. Yet, having upended the sector’s finances, Jio paid only Rs 47.81 crore as licence fees and spectrum charges for the six months ending June 2017, or less than 1 per cent of total operator payments, since it had minimal revenues. By contrast, Bharti Airtel paid Rs 2,902.75 crore, Vodafone Rs 2,005.25 crore, and Idea Cellular Rs 1,677.67 crore. The sector is being severely weakened by this strategy as revenues and government collections collapse, resulting in deficient infrastructure.

While high government revenues alone are the wrong criterion for telecom policies, this shows how the sector’s finances were gutted, and the likely reality going forward. A recent report by Standard & Poor’s (S&P) expects revenues to fall up to 10 per cent for the year, with the sector settling down over 12-24 months. But that is merely one surmise; the certainty is of continuing damage to the market’s ability to sustain itself, as well as the reality of reduced operating revenues and government collections.  

These disruptive practices are hollowing out industry capacity, whereas the country’s need is for more capacity to be built for broader and better access, given under 300 million data subscribers. Adequate network access needs to be built up in underserved areas, and appropriate content and linkages have to be built for the full range of user needs covering education, health, and entertainment through government and commercial services.  

Only the government can develop appropriate policies and regulations, including levying no more than reasonable charges (high government charges have constrained India’s communications development). After the sector stalled in 1997-98, there was a partial remedy by the National Democratic Alliance through NTP-99, substituting a revenue-sharing arrangement for fees owed through auctions. The government’s share was initially too high, but as it was gradually reduced and as competition increased, mobile telephony grew explosively, as did government revenues (see: http://organizing-india.blogspot.in/2017/04/facts-not-beliefs-should-drive-policies.html).  

For a similar explosive surge in broadband economic revival, we need policy decisions urgently that:  

a) Adopt infrastructure sharing fully to reduce costs. Do this through two or three consortiums to have competition, with government entities anchoring each. For instance, 70 per cent of Sweden is covered by a shared network between Telenor and Hi3G, which is shared outside the major cities. For shared networks, equipment is readily available to support multiple operators; we need the enabling policies.  

b) Approach spectrum as a shared public resource. For assigned spectrum, allow licensed operators and manufacturers/developers secondary access (primary holder retains priority), at reasonable revenue-sharing charges, without up-front fees. Start with unused or under-used frequencies such as TV White Space. 

c) Allocate spectrum for Wi-Fi conforming to global standards to benefit from ecosystems, e.g., 5 GHz and 60 GHz.  

This will enable maximum utilisation of spectrum and networks for the common good, instead of artificially restricting access as is the practice today. We will all benefit greatly from better networks and services, and government revenues will exceed any conceivable auction fees.

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Shyam (no-space) Ponappa at gmail dot com

A New Telecom Policy That Works

A sound NTP-2018 requires sustainable, integrated policies that address our realities.

  Shyam Ponappa   |  August 3, 2017

The government finally announced in July that a new telecom policy (NTP-2018) in consultation with stakeholders would be in place by March 2018.  There’s been some jockeying for one-up statements thereafter, suggesting the risk of being sidetracked. The need for competent, supportive policies in the public interest must be focussed and driven, and not be allowed to fall prey to being hijacked by bluster, nor be diverted towards maximising government revenues, crony interests, or electioneering tub-thumping.

A quick review of the sector and potential demand indicates what’s needed to fulfil our requirements. Telecom operators are saddled with Rs 4.6 lakh crore of high-interest debt. This has resulted from aggressive bids spurred on by spectrum auctions, aggravated by shrinking revenues and price wars. Meanwhile, urgent concurrent needs for network investment for greater reach and delivery, and for realising more of the potential for extensive and intensive usage, languish — for want of capital, enabling policies, and orderly markets. This has resulted in a crisis in what could have become the most successful communications market in the world. Instead, India’s communications sector is partly on the brink of collapse because of retrogressive policies and practices, unsustainable financial models, the fallout of scandal, and disruptive competition.

The best way forward is for all government agencies, not just the Department of Telecommunications, to define objectives jointly, and devise policies through consultations to enable an effective and robust sector. Here are suggestions for what to aim for and what to avoid in developing NTP-2018.

Objectives for NTP-2018

1. Networks: maximise capacity utilisation/throughput

Maximise the utilisation of networks by increasing throughput. This requires exploring alternative forms of organisation and management to exploit invested capital for public interest objectives, e.g., through consortiums, perhaps with government participation to ensure national security and the common good.  Orderly markets are essential in communications (as in all infrastructure), and competition, while essential, is not constructive beyond a point, unlike in fast-moving consumer goods or non-capital intensive sectors.

2. Spectrum allocation and management: Maximise throughput

Maximise wireless throughput to facilitate connectivity, by: a) Making more spectrum available, (b) In large, contiguous bands, (c) At less cost. Explore pooled usage and secondary sharing of spectrum by operators/consortiums as appropriate (consult with operators and experts).

3. Financial approach: Use revenue sharing

Use revenue sharing to compensate for spectrum and network rights, usage, and all government charges, as was done with licence fees in NTP-99.

Pitfalls to avoid

1. Palliative “default solutions”

It is easier to tinker with policies as they are than to undertake major systemic change. An easy way out would be to fall back on the received wisdom of competition and free markets, hoping to muddle through. For instance, the government set up an inter-ministerial group (IMG) to reduce financial stress in telecom. This group has apparently recommended extending payment schedules from 10 to 16 years, and cutting interest rates from 12 to 8 per cent.1 These sops could become the basis of NTP-2018, leaving the market to shake out, hoping consolidation will remedy inadequate coverage and delivery.2 This will merely reschedule operators’ payments over a longer period. The structural problems will remain, with insufficient network coverage, barriers to technology, less likely benefits from innovation such as “wireless fibre” and small cells with lower radiation, with hyper-competitiveness still a drag.

2.  Rely on consultations and avoid preconceived ideas

Statements such as that NTP-2018 will be app-directed and not connectivity-directed appear inappropriate or misinformed. This is because connectivity remains our most critical need for more effective delivery of services. Connectivity is deficient not only in rural and semi-urban areas, but even in dense urban areas. In fact, ignoring connectivity is typical of India’s approach to and failure in building networks and infrastructure (incomplete systems because of gaps, or with stranded assets, or that fail in end-to-end delivery). Simply put, our requirement is for more user-access and backhaul/networks to enable higher, more widely available access and throughput. This is India’s communications infrastructure need, whether it is broadband or Narrow Band Internet of Things (NB-IoT). Everything else follows.  Otherwise, it’s like trying to deliver more water without a network of pipelines, or more electricity without adequate distribution networks.

3. Anti-competitive disruption

While disruption is a reality in our communications sector, its jurisdiction has become contentious between the Competition Commission of India (CCI) and the Telecom Regulatory Authority of India (TRAI). The CCI reportedly asserted that the Competition Act of 2002 defines “predatory price”, “dominant position”, and “relevant markets”, which fall in its domain, and that it has applied this framework over the last eight years across sectors including telecom.3

Turf issues are not unique to India, and have been resolved in many countries.  Secretary General Pradeep Mehta of Consumer Unity & Trust Society (CUTS) points out that in 2011, a committee recommended amending the Competition Act to include mandatory consultation between the CCI and sector regulators where necessary.

A puzzling question if the telecom sector was in fact being monitored: Why was such disruption permitted? From press reports, it’s unclear whether there are no appropriate regulations, or whether the CCI’s and/or TRAI’s assessments of dominance and predatory pricing rely on precedents from developed economies without appropriate changes for our circumstances. To illustrate, consider the notion that market share is a key criterion for dominance, or Significant Market Power (European Commission).  However, in a developing economy, a large conglomerate investing in a new sector could have SMP even with zero market share, simply because of its size and resources, and economic power (attributes in Section 19(4) of The Competition Act). The European Commission also mentions privileged access to financial resources, economies of scale and scope, and barriers to entry. 

A sound NTP-2018 requires sustainable and integrated end-to-end policies for our realities, not academic or silo-based orthodoxies.

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Shyam (no space) Ponappa at gmail dot com

1: “Govt panel for sops to ease financial stress in telecom sector”, BS, July 25, 2017:

http://www.business-standard.com/article/economy-policy/img-readies-sops-to-ease-telecom-stress-117072401632_1.html

2: “Short-term turbulence”, BS, July 29, 2017:

http://www.business-standard.com/article/economy-policy/short-term-turbulence-in-telecom-sector-117072900022_1.html

3. "CCI tells Trai to consult it on predatory pricing, market dominance issues", BS, July 28, 2017: 

http://www.business-standard.com/article/companies/pricing-market-dominance-its-remit-cci-tells-trai-117072800069_1.html

Broadband Reforms for Local Manufacturing + Coverage

Published as "Broadband reforms for local manufacturing".

Broadband in India needs reforms for local manufacturing and for infrastructure expansion and utilisation.

Shyam Ponappa 

  |   June 1, 2017

India’s markets are at the heart of what attracts investment and economic activity, with mobile phones and broadband services comprising a significant share. In exploring their magnitude and supply chains, an obvious need emerges for policies and incentives for local manufacturing of components and handsets to boost domestic supply and create employment. Another avenue for deriving local benefits is extending the coverage of digital platforms, expanding the market through policies and incentives facilitating broadband infrastructure. Policy support can help both to extend networks using fixed and wireless technologies, as well as to increase capacity utilisation.

Reforms affecting both supply and demand are needed to fully and equitably provide ubiquitous coverage and exploit digital platforms for public welfare. Such reforms would mitigate the lower revenue potential of rural populations. Enabling steps could include allowing active sharing of spectrum and networks, providing more unlicensed spectrum, financial incentives such as tax credits and spectrum charge rebates for rural infrastructure, and standardised right-of-way charges.  

India’s Mobile Handset Market

“A billion smartphones will be sold in India in [the] next five years.”

This estimate is from a report by IIM-Bangalore and CounterPoint Researchers.1 The report notes that India became the second-largest global smartphone market in terms of number of users in early 2016, and still has enormous growth potential even as demand for smartphones elsewhere is waning. In the next five years, almost a billion smartphones and half a billion feature phones will require components worth $80 billion (Rs 5.2 lakh crore). These will have to be imported if they are not produced locally. The report estimates that in 2016, about 50 local units assembled over 180 million mobile phones valued at $9 billion (about Rs 59,000 crore), about 70 per cent of the $13 billion sold. However, the local value addition was only $650 million (Rs 4,225 crore, or 7.2 per cent). This underscores an urgent need for policy changes, considering that emerging manufacturers in these sectors such as  Brazil and Vietnam have value added of nearly 20 per cent and over 30 per cent, respectively, while champions such as South Korea and Taiwan add above 50 per cent, and China has 70 per cent local value added. 

In early 2016, India’s domestic smartphones had a 40 per cent market share, but by the quarter ending March 2017, Chinese brands dominated, with a share of over 51 per cent, while local brands dropped to under 14 per cent.2

According to the IIM-B/CounterPoint Researchers report, Indian manufacturers import most of their components, and there are few incentives for R&D or to attract component suppliers to form local ecosystems. Further, the existing incentives will become ineffective once the goods and services tax (GST) is introduced, because they will all be subsumed under GST. Accordingly, the Broadband India Forum in association with EY have suggested (a) refunding the GST to manufacturers for handsets and (b) extending this policy to components could provide an appropriate manufacturing incentive.3 This needs to be done without delay.4

The report also proposes a phased approach to maximise local value added, aiming for 30 per cent by 2020, and more thereafter. Early phases suggested are moving from assembling chargers and other such accessories to high-value components such as printed circuit boards, cameras and display units. The researchers suggest that chargers, batteries and cameras can in fact be manufactured locally, contributing to components valued at an estimated $15 billion by 2020. If these proposals are adopted and executed, it will reduce imports and create jobs, deriving local benefits from India’s market opportunities. Moreover, it will help create an R&D capability in India for this sector, which can over time become a supplier to global markets.

The prerequisite for these improvements is policy reforms on matters such as duties on components (including the refund of GST) and incentives for suppliers to set up in India. The report also suggests that policies need to be framed for effectively funding institutions and corporations for research to build intellectual property and skilled professionals. 

Extending Digital Infrastructure & Utilisation

There is a parallel need for policies supporting the extension and coverage of digital platforms, of the sort achieved in migrating from up-front auction fees to revenue sharing with the New Telecom Policy in 1999 (NTP-99). These require convergent action within the government and its multifarious departments and agencies, or in some cases by coordination and resolution among stakeholders, i.e., in addition to the agencies of government, the judiciary, the operators and vendors of equipment, the press and media, and the public. 

There are some issues that relate to the Telecom Regulatory Authority of India’s (Trai) recommendations over the years that need decisions on implementation. An example is access to broadband services through cable networks. The government’s position on additional charges as a share of revenues conflicts with cable operators’ unwillingness to pay additional charges, and perhaps the cost of the devices for conversion. The effect of this deadlock is that the entire set of cable network users have to use another means for broadband connectivity. As this policy change will affect the competitive dynamics of wireless service providers, it is a candidate for coordinated, participative resolution. Some Trai recommendations may benefit from review, such as open access (like Wi-Fi) on 60 GHz.

Other examples are: 

• Enabling additional bands of unused spectrum such as 60 GHz and 70/80 GHz for wireless gigabit links, and 
• Enabling the sharing of entire networks, including the radio access network (and therefore spectrum) among operators.

The promise of digital platforms is immense, and both these streams of reforms need to be taken up and completed for India’s digital platforms and markets to deliver on their considerable potential.

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Shyam (no space) Ponappa at gmail dot com

1. “Mobile Phone Manufacturing: A Practical Phased Approach,” by Pathak, Chatterjee and Shah: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874689 

2. http://www.idc.com/getdoc.jsp?containerId=prAP42557317 

3. http://www.communicationstoday.co.in/index.php/daily-news/6710-broadband-india-forum-with-ey-releases-the-research-paper-on-incentivizing-domestic-handset-manfacturing-under-gst

Added after publication - June 6, 2017

4. For a detailed exposition of the GST question and why raising customs duties on imported equipment/components is not feasible because of the terms of the Information Technology Agreement 1997 under the WTO, see: https://www.linkedin.com/pulse/incentivising-manufacturing-mobile-phones-india-parag-kar