The Hindu Business Line : Mobile and fixed phone substitutability

All over the world, the growth of mobile phones has impacted the subscriber base of fixed phones. India is no exception. That an increasing number of fixed phone lines are being surrendered each year is relevant to framing current telecom subsidisation policies.

The mobile fixation.

M. R. Narayana

India’s phenomenal growth in the mobile subscriber base and penetration rate (or teledensity, as measured by number of phones per 100 inhabitants) has attracted global attention. The subscriber base of mobile phones reached 165.09 million in 2006-07. From April to December 2007, new mobile subscribers increased by 67.54 million, about 11 times more than the total mobile subscribers India had in 2001-02 (6.54 million).

The mobile phone penetration rate reached 14.71 in 2006-07, and contributed to 80 per cent of India’s overall teledensity (18.35). The National Telecom Policy 1999 had set the target of achieving a penetration rate of 7 by 2007 and 15 by 2010. These targets have already been achieved due to introduction and expansion of mobile telephony.

Unctad’s latest Information Economy Report 2007-2008 is useful to place India’s accomplishments in mobile phones among 195 countries, classified by developed and developing economy status. India‘s mobile subscribers constitute about 6 per cent of the global users, 11 per cent of developing countries, and 16 per cent of developing Asia’s mobile subscribers.

During 2002-2006, India’s compound annual growth rate (CAGR) of mobile subscribers (90.20 per cent) and penetration rate (87.40 per cent) were the highest compared to these regions. Nevertheless, India’s mobile penetration rate remained lower and ranked 121st in the world.

Mobile phones have introduced competition in providing access and services at globally competitive prices and state-of-art technology. This competition is now relevant not only among the private providers of mobile services, but also among the private and public providers of both fixed and mobile services.

Positive impact

From the viewpoint of consumers, competition has been advantageous in getting on-demand and higher telecom services at lower prices than ever before. Lower prices are particularly evident in international and domestic long-distance call rates. In fact, telecom services are the best examples to appreciate the positive welfare impact of privatisation, globalisation, deregulation and competition for the common man as well for business activities.

The Telephone Regulatory Authority of India’s quarterly evaluation of public and private providers’ quality of services is transparent and scientific, and an objective guide for informed choice of competitive providers by all consumers.

Internet penetration is and will be of critical importance for wider and quick reach of this information. At present, however, India’s Internet penetration rate is merely 5.4 and ranks 136th among 195 countries. This implies a gap in integrating information and communication services for consumption purposes, and is a constraint in increasing broadband subscriptions and penetration.

Unsurprisingly, mobile phones have also posed intense competition to the retaining of existing subscribers and attracting new subscribers by fixed phone line providers.

Whether competition from mobile phones has resulted in higher or slower growth of the subscriber base for fixed phone is an empirical question, and depends on the substitutability between mobile and fixed phones. This evidence does matter for India because it is relevant for resolving current issues in telecom subsidisation policies.

Evidence for substitutability

All over the world, the growth of mobile phones has impacted the subscriber base of fixed phones. India is no exception. From 2002-03 to 2006-07, the CAGR of fixed phones was negative, and equal to -0.52 per cent as compared to 88.91 per cent of mobile phones.

Fixed phones per mobile phone declined from 3.2 in 2002-03 to 0.25 in 2006-07. About 1.56 million fixed phones were surrendered last year as compared to 0.25 million in 2002-03. Does this have implications for substitutability of mobile phones for fixed phones?

Substitutability and complementarity between mobile and fixed phones is a frontier research in telecommunications economics. In general, the global evidence is in favour of substitutability rather than complementarity. The early evidence now available for India also supports the substitutability theory, based on the estimated positive elasticity of access and usage price of fixed phones in the mobile demand model.

For instance, other things being the same, an increase in access price or usage price of fixed phones by 5 per cent would increase subscriptions for mobiles phones by about 0.303 per cent or 10.61 per cent respectively.

Thus, changes in usage prices of fixed phones have a bigger impact on substitutability and, hence, greater positive impact on mobile subscriptions.

Most importantly, this evidence is found to be relevant for current subscribers of fixed phones in rural areas and those belonging to certain social categories.

Implications for subsidisation policies

India’s National Telecom Policy 1999 emphasised the Government’s commitment to provide basic telecom services to all people at affordable and reasonable prices. This commitment is called the Universal Service Obligation (USO). Under the USO, the service providers are subsidised for their network expansion costs in rural and remote areas through the Universal Service Fund Levy on the licences issued to all providers.

In addition, the Telecom Regulatory Authority of India introduced the Access Deficit Charge (ADC) in 2003, financed by Interconnection Usage Charge, to subsidise the fixed providers for continuing with their below-cost rentals and tariff in providing universal access and services at affordable cost.

In principle, ADC is a transitory support arrangement for fixed service providers and is proposed to be merged with the USO. The cumulative collection of the levy and ADC was Rs 32,873 crore from 2002-03 to 2007-08. About 61 per cent is contributed by the levy, though its disbursement is merely 27 per cent.

The evidence of substitutability matters for these subsidisation policies. First, the USO may need to be redefined by inclusion of substitutable mobile phones.

Second, if the ADC is abolished and the benefits are passed on to subscribers by way of reduced access and usage prices, it would contribute to the expansion of both access and usage of telecom services in the rural areas as well.

Third, given that usage price is highly significant and has the biggest impact on demand for mobile phones, the present design of subsidisation may need a re-examination of its basis from fixed to mobile phones, and from access price to usage price.

(The author is a Visiting Professor, Faculty of Economics, University of Tokyo.)

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