Indian Economy May Lose INR 1.2 Tln In The Recent Spectrum Auctions

The liberalization of the Indian economy, the Information Technology market, e-Commerce business and increased focus of the Government’s pivoting on IT-intensive services make the quantitative impact of the internet economy and the subsequent networking effect on the GDP, employment, trade and ancillary sectors quite apparent. India’s robust internet economy reached $60 billion in 2013 and contributed 3.2% to GDP. The number of internet users reached 300 million in December 2014 from 200 Million in 2013, surpassing the US and reaching the 2nd position globally after China. However, even with 300 million people the internet penetration rate is very low at merely 19% and connecting the remaining 950 million population to internet is a Herculean task.  India’s absolute connectivity lags a lot behind Russia, Brazil and China as can be seen in the illustration below.

 

Source: IAMAI-BCG Report India@Digital.Bharat 

There is no doubt that the Digital India plans are very distinguished, however there are many real and perceived impediments to internet penetration targets set by the government, which is jeopardizing the whole situation. Important factor to consider here is that mobile internet constitutes around 71%of the total online population and that maximum rural population access the Internet from their mobile handsets. And that being the case, “wireless access” plays the centrality of connectivity. Rural India internet penetration is at 7% and since most of the target group is in rural India, for them to go online, they need affordable services at reasonable costs. The average monthly mobile bill for users has increased by 13% to Rs.439 whereas in rural India only a few can access the internet in more than Rs 100 a month. As per the studies conducted by Darrell M West, Brookings University, in India accessing one megabyte per second costs $61 and broadband access charges that are more than four times that of China, Brazil and Argentina, and 25% higher than Vietnam and Malaysia, which makes it very expensive for an average person. Even according to the ITU, the cost of an entry-level broadband plan in India is equivalent to 5.5% of an Indian’s per capita income which is huge in comparison to a similar plan that accounts for 0.5-0.8 % of per capita income in countries such as Singapore, the US and the UK and even Sri Lanka (2.9%) and Malaysia (3.2%). This high wireless bandwidth cost is directly proportional to the exuberant spectrum reserve price per unit and its low or controlled availability is adding to the supply crunch. The telcos need sufficient funds to feasibly invest in the infrastructure which is the need of the hour. Credit rating agency Fitch also stated the fact that “Heavily priced spectrum will exert pressure on telcos’ balance sheets and cash flow, and limit their ability to invest in capex over the medium term”– In other words, expansion will be curbed by spectrum charges.

This increased demand for, and limited supply of spectrum as controlled by the government to keep spectrum prices high under the guise of maximising public good is a narrow and short-term policy under the assumption that it would be maximising societal welfare. Such short-term goals of maximising revenue from a public good for governments seeking means to reduce their budget deficits are actually harmful to society.

Such policies have the following impact:

*The net license fees of the government will be lower even though the price per MHz is kept high and if they restrict the amount of bandwidth released,

*It will further hamper the M2M market/IoT, OFN roll-out and the required technological development thereby reducing the sector’s massive ability to contribute to GDP growth and employment.

*This also affects the Net Neutrality leading to blocking and throttling of data services by the TSPs and ISPs as a consequence and which is quite evident.

*Lastly, increase in spectrum pricing is directly proportional to consumer tariff where the ISPs have no other choice but to raise the data prices.

India’s spectrum pricing on an average is 25 times costlier than other countries viz., the US, France, Singapore, Germany, Spain and Sweden, and in quality it is well below the global average and even APAC average.
This steep rise in spectrum price not only leads to mobile tariff rise but also has a much deeper impact than rising fuel prices on the common man. The reserve price or the minimum price in India is higher than the global scale, the argument behind is that the demand for spectrum is considerably higher in India and availability is low. This results in fewer bidding. For instance, the auctions for spectrum in November 2012 did not find any bidder forthe 800 MHz band and as a result, the Government decided to reduce the reserve price for 800MHz by 50% and 1800 MHz by 30% in Jan 2013.
In particular, spectrum pricing policy, given that the government’s agenda is to increase mobile and internet density in its Digital India plan, should ensure that rural areas have access to internet services at an affordable price. One wrong measure would lead to high tariffs, resulting in slower growth eventually impacting the economy, which has been the case so far.

 

In this age of high-speed wireless networks, it is essential to have appropriate spectrum pricing in order to maximize socioeconomic benefits of the World Wide Web. Let us look at some of the pricing across the world

Global Spectrum Pricing Snapshot

The average revenue per user (ARPU) variance suggest that India’s 2G spectrum in the 1800 MHz band (2012) was 44 times[1] costlier than the price in Singapore in 2011. Similarly, price for the 800 MHz spectrum during the same period was 5.3 times higher than Germany, nearly 15 times more than Sweden, and almost 13 times higher than France. For 900 MHz it was 27 times higher than the price discovered in Spain, while for 4G airwaves in the 700 MHz band was 32 times costlier than US levels. Similarly, for 3G airwaves in the 2100 MHz band was 24 times more expensive than in Singapore.

Table: High price of spectrum compared to international benchmarks

Source: Economic Times

ARPU in a particular Country varies as per the population, and in which case India has the lowest ARPU ($3) in comparison to other countries as seen in the table above which pushes steeply the variance or the differential effect it has on the real price per unit per inhabitant. Price per unit per inhabitant = Sale Price of Spectrum /Population

The real price is determined by keying in the average revenue contributed by the subscribers in the country and deriving at the differential factor known as the ARPU multiplier. ARPU Multiplier = Country X ARPU/ Country Y ARPU Thus, Real Price per unit per inhabitant = Price per Unit per Inhabitant X ARPU Multiplier. Or in other words, ARPU variance needs to be factored in to bring parity. This indicates that India has the highest spectrum price per inhabitant by several times making it one of the expensive natural resources globally.

The following section talks about the issue of spectrum management and the demand supply fallacy and how it needs urgent attention.

Macro-Economic Impact if the Spectrum price is reduced

As per ICRIER-IAMAI study, for every 10% increase in the internet subscriber leads to 2.36 % points increase in GDP growth for developed nations and 1.08% points increase in case India. So in the scenario 2 (as shown in the table below), the reserve price of the spectrum bands is proposed to be reduced by 25% which in turn activates the multiplier effect at 1.82 at which the internet penetration and GDP growth takes place. Multiplier rate is determined as; what % change in prices/cost or reduction in cost of spectrum is expected to increase the internet user penetration to a certain %. Thus with reduction in 25% of overall bands of spectrum, the number of internet user will reach nearly 550 Million or 42% penetration, keeping the other variables constant, which leads to an increase in market size to $150 Billion by 2020 and creation of 17 Million direct Jobs and many more ancillary jobs

In the 1st (best) case scenario the proposition is to cut the spectrum prices by half, the multiplier effect is much stronger at 3.64times taking the user penetration rate to more than a trillion mark or 84% internet penetration. Market size gets massive at $288 billion and GDP contribution rises to 9.3% with creation of 32 Million jobs.

Possible Scenarios

* Direct Jobs ** IMF

*** Internet Penetration has been taken as the basis for the calculation from the IAMAI BCG Report.

Calculation of 2nd Case Scenario

Multiplier Effect: Change in Output/Change in cost

Change in Output (Internet User growth) = 550/300

= 1.3 times

Change in Cost (Reduction in cost) = 2500/3500

=.714 times

(How much change, by reduction in cost of spectrum, can increase the internet user penetration)

Hence, 1.3/0.714= 1.82 or the Multiplier Rate at which the number of internet user penetration will reach nearly 550 Million users, keeping the other variables constant

The average revenue loss to the government by foregoing the scenarios could lead to an estimated loss to GDP of almost $100 billion over the period till 2020[1], which is an annual loss of $20 billion roughly or Rs 1.2 trillion (lakh crore). However the impact of larger contribution to GDP will be not be realised immediately hence the need to finance the fiscal deficit could be more than justified over the period by the GDP contribution, employment generation (1.8x-3.5x) and simultaneous networking effects of the increased internet penetration.

Hence, by foregoing the above scenarios, there would be a macro economic loss of 6 lakh crores ($100 Billion) to the GDP/Economy by low internet penetration.

Some of the Micro Economic and Social Impact of reduced prices and increased penetration in next five years can help India achieve an inclusive Internet transformation.

Micro Socio-Economic Impact on HealthCare and Agriculture

Despite being the 2nd largest current base of users in the world, the Internet currently contributes a modest 3% to India’s GDP. This could grow to 4.5% to 10% by 2020 if India achieves its potential for growth in the number of Internet users as proposed. Over this period, increasing the Internet’s contribution to GDP will reach $150-$200 billion plus.

The impact of will reduce the cost of Internet access across devices, content and applications; increase access to low-cost, high-speed connectivity in rural and semi-urban India beyond the top cities; promote widespread digital literacy through the introduction of devices and content tailored to the local context; devise Internet applications in new areas such as agriculture, health care, education, energy, utilities, and public information; and create a more favourable business environment for Internet entrepreneurs to support rapid innovation.

HealthCare

Telemedicine application: India has a huge rural-urban divide in terms of healthcare infrastructure. The low reach of internet in urban due to lack of digital infrastructure and affordable broadband has made this situation of healthcare graver.  Today 60% of hospitals in India are situated in urban areas whereas about 80% of its population lives in rural areas, which have minimal healthcare facility. Another recent study found that 89% of rural Indian patients have to travel about 8 kms to access basic medical treatment, and the rest have to travel even farther.

But technology and internet can bridge this gap. Balabhai Nanavati Hospital (BNH) in association with UST Global Kerala has launched a telemedicine application for mobile devices to eliminate distance barriers and to improve access to medical specialists in distant rural communities. The telemedicine application connects patients in remote clinics with the doctors in tertiary hospitals via a video conference, launched through BlackBerry Messenger. The app addresses two major challenges pertaining to rural healthcare: access to qualified doctors and affordable treatment without the need for patients to travel to cities.

Telemedicine and digitization of patient records would enable high quality health care services to reach millions and benefit tremendously socioeconomically.

Agriculture

The benefits of the accelerated Internet penetration will extend into sectors of the economy that have so far not been touched. For example, applications for agriculture, such as farm extension services and supply chain solutions for farm produce, could be beneficial for a large proportion of the rural economy. One such example is of e-chaupal which helped thousands of farmers in doing agriculture and with greater efficiency.

ITC e-chaupal: ITC has reduced its procurement costs for agricultural produce by 2 to 5 % through a Web-enabled system that links farmers to the company. It has set up a network of rural hubs, equipped with PCs, printers, connection lines, and power supply. Farmers access information on crop pricing, weather, and farm extension services, all delivered through this Internet-linked system. Farm produce is also auctioned through the e‑chaupal portal, achieving better price discovery, greater transparency, and higher returns to producers.

Conclusion

India achieves its lowest rank among the 12 pillars in technological readiness (121st) last year. Despite mobile telephony being almost ubiquitous, India is one of the world’s least digitally connected countries. Even though the penetration rate is 19%, only 15% of Indians access the Internet on a regular basis. Broadband Internet, if available at all, remains the privilege of a very few.

The National Telecom Policy (NTP), 2012, which thrusts on broadband-on-demand and empowering the common man through ICT, by setting such high spectrum price completely averts the vision laid down in it and will be highly unfavourable to Digital India initiative such as broadband penetration in 2.5 lakh villages, 100 smart cities, e-kranti etc which would require rational spectrum management.

Even though, the price per MHz is kept high, the net licence fees of the government will be low if they restrict the amount of bandwidth released. It will hamper the OFN roll-out and the required infrastructure development thereby reducing the sector’s massive ability to contribute to GDP growth and employment. This may also lead to blocking and throttling of data services by the TSPs and ISPs as a consequence and distort the market completely. Hence, the government should find rationality in spectrum auctions which will also prevent any discrimination in internet usage. However, India is too early to get into the Net Neutrality debate like the economies which unlike India have one of the highest internet and landline penetration, and does not need over regulation of any of the existing positions with more room for cooperation.

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