The Hindu Business Line : Consumer price index for telecom services

A telecom price index is a measure of the changes in access and usage prices and, hence, affordability of telecom services. To date, such an index has not been constructed in India, and it is needed now more than ever.

THE growth of India's teledensity (number of telephones per 100 people) is an indicator that consumers now have greater access to telecommunications (or telecom) services, based on telephone lines and networks.

According to the latest report of the Telecom Regulatory Authority of India (TRAI), India's teledensity was 12 in January 2006. As Compared with the teledensity of 1991-92 (0.69), this accounts for an increase of about 1,739 per cent in 15 years, or an average growth of 116 per cent per annum!

This remarkable increase is largely due to the burgeoning subscriber base for cellular phones rather than fixed phones. For instance, of the 130 million subscribers in January, mobile subscribers constitute 62 per cent. And 94 per cent of the 5 million new subscriptions that month were mobile subscribers.

Privatisation, competition and technology have placed telecom services within the reach of the common man. And this reach is only bound to increase as communication and networking assume greater significance in the global economy.

In this regard, affordability and easy access to telecom services will be decisive for growth in the sector, as well as for growth and competitiveness of telecom-dependent economic activities.

Let's take access. A consumer price index for telecom services (CPITS) is a measure of direction of changes in access and usage prices and, hence, affordability of telecom services. To date, this index has not been constructed in India, and it is needed now more than ever.

Why is CPITS crucial

For instance, a recent sample survey conducted by this writer reveals that rural (or urban) households' monthly expenditure on telecom services is about 3.89 (4.05) per cent in Karnataka and 4.47 (or 7.48) per cent in Goa.

Subscribers' response to a hypothetical reduction in a local or STD call charges by about 25 per cent implied an increase in 50 per cent of the total number of calls for more than 50 per cent of subscribers in Karnataka.

For subscribers in Goa, a reduction in ISD call charges rather than local or STD charges is a major factor in increasing the total number of calls. This offers evidence of price responsiveness influencing usage demand in telecom services. Thus, a CPITS would be a useful as a guide for reallocation of resources between telecom and non-telecom uses by consumers. At the same time, the index can be used to promote consumer demand for telecom services by both public and private providers.

For policy-makers, a national level CPITS has two important uses. First, it is a useful indicator of telecom services' contribution to GDP. Estimates for 2001-02 show that the share of telecom services in GDP from total communication services is equal to 97.94 per cent, and the share of public and private telecom services in the GDP from telecom services equals to 87.82 per cent and 22.18 per cent respectively. As the demand for telecom services is price-responsive, a CPITS will be useful in projecting changes in contributions made by telecom services to the national income.

Second, a CPITS will help project service tax revenues from telecom services. Way back in 1994-95, telecom services were the first of three services to be brought under service taxation in India. Of the total services tax revenue in 2004-05 (Rs 14,196.19 crore), the contribution of telecom services is the highest (27.71 per cent).

Complexity of construction

The construction of a CPITS is a complex process due to heterogeneity in the provisioning and pricing of telecom services in India. For instance, both basic and value-added services are a composite of unique services and are provided through fixed and cellular mobile phones by public and private companies.

Subscribers include residential or non-commercial households, commercial enterprises and institutions, non-commercial institutions, and the government sector. Access and usage costs are distinguished by exchange capacities in rural and urban areas.

The standard tariff packages approved by TRAI may be different from the alternative packages offered by service providers. In reality, it may not be possible or practicable to incorporate all these heterogeneous elements in a single index.

Thus, a measure of specificity and simplification is essential. Specificity calls for choosing an index for particular consumers, and simplification calls for choosing the most relevant services in its construction. Japan, for instance, broadly incorporates telecom services in its Corporate Service Price Index. Canada focuses on wired long-distance calls in its Telecommunications Service Price Index.

Need for early action

The progress of developments of Service Price Index was highlighted in the Economic Survey 2003-04. Nevertheless, a CPITS for public use is yet to be created.

A CPITS for household consumers may be attempted with the inclusion of non-refundable fixed charges, monthly rental, service taxes, and metered call charges beyond free calls. This index needs to be constructed by rural and urban areas, as these areas have distinct pricing of telecom services. In fact, rural and urban indices will distinguish Indian CPITS from the rest of the world indices.

Construction of this index is a technical job with huge price data requirements. In this regard, professional co-operation and inputs from the Central Statistical Organisation and Office of the Economics Adviser in the Industry Ministry would be of great importance for TRAI.

(The author is Professor of Economics, Institute for Social and Economic Change, Bangalore. His e-mail id is: mrn@isec.ac.in)

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