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September 8, 2000
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Putting India on hold

When we look back, 2000 will be known as the year of holding India to ransom. It started with the hijacking, it continued with the abduction of film star Rajkumar. In the first instance, the central government rolled over in abject surrender, in the second instance the state of Karnataka has been prevented from capitulation only by a Supreme Court public interest litigation.

These were both high-profile examples of terrorism. Each proved that India is run by a soft and dithering administration. We have also seen two other instances of economic terrorism where the nation has been held to ransom and another failed attempt at economic terrorism that may yet revive.

The only time the state resisted ransom demands was when the power-workers of Uttar Pradesh struck to protect their fiefdom from trifurcation. On that occasion, the man who stood up was the late Rangarajan Kumaramangalam. The next time the Uttar Pradesh power workers strut their tough stuff, one can at best, hope that the example he set is not forgotten.

The ransom demands in the telecom sector coupled with the responses are rapidly turning this key industry into a theatre of the absurd. You have 450,000 telecom employees holding a billion consumers to ransom and blocking the formation of a corporation with an estimated book value of over Rs 2500 billion or $54 billion. They are negating a liberalisation that is desperately needed by everyone. Most painfully, negotiations are being conducted by a telecom minister who appears to be proud of his lack of tech-savvy and offers sop after sop without sorting out the problem.

The multiplier effect of a vibrant telecom sector can hardly be overstated. The growth of Indian ICE (infotech, communication and entertainment) sector has come despite the constraints of the worst telecom system in any big country. It can't continue without lasting telecom reforms. Indian call charges are the most exorbitant in the world. Consumers pay double-digit and in certain cases, triple-digit multiples of global rates as various charges. This gouging is accompanied by appalling service and downtime standards, and a lack of bandwidth that has forced every dial-up surfer to turn into a nocturnal creature.

E-commerce and high bandwidth-dependent services have far higher overheads in India than in the First World. Thus far, lower wages have compensated. But you cannot maintain a position as a global player on that one USP (unique selling propostion) alone. The flight of human capital to more congenial environments will accelerate and Indian ICE wages must climb, merely to retain people.

The exorbitant telecom charges are combined to apathy and ground-level corruption that effectively restricts downstream growth. A little thought experiment would indicate just how much the equation is skewed against Indian infotech. Let us, for argument's sake, assume that two middle class 20 year-olds decided to drop out of college and found IT startups in their respective parent's garages.

One lived in California and the other in Bangalore. Their IT equipment would cost the same. But the Bangalorean would spend Rs 3000 upfront and another Rs 500 under the table and wait several weeks for each phone connection - the equivalent of $75 for each connection. These come free within 24 hours to the American. The Indian would then pay Rs 17,280 per month to stay connected at Rs 24 per hour and also pay another Rs 300 to his ISP for the dialup. Monthly overheads in the form of telecom charges alone would thus cost him $ 380 and his average connection speeds could be as low as 2-4 kbps. The Californian would pay $20 for the ISP link and another $15 in call charges for connectivity at 33.6 kbps.

If you factor in the skewed data transfer speeds, the Californian is getting better than 75 times the same value for money. This is one major reason why India doesn't have a native Larry Ellison, Bill Gates or Steve Jobs. Few Indian college dropouts can handle this sort of overhead structure and thus there are few Indian kids handling start-ups. Phone penetration is abysmally low for the similar reasons. If, starting from zero, the cable industry could sell over 35 million connections in just seven years, one wonders why the telephone industry has merely 25 million connections.

But one doesn't expect the linesman who sees his sinecure with all the sifarish disappearing, to care about such things. Nor does one understand why Paswan is indulging in incremental sops. It started with the free connections offer. Now in addition, Paswan has announced ad hoc increases of Rs 1,000 per month.

Another little thought experiment suggests a better way. Let us assume immediate total capitulation rather than incremental negotiation. Assure every striking employee of his job and pension. Tell them to go home and collect their pay orders online on the free connections they have already been assured.

Assume an average remuneration of Rs 10,000 a month (which is a generous premium on the actual figure of around Rs 7000), this would cost around Rs 54 billion annually or about $1.1 billion. To generate that in perpetuity would require putting around $12 billion into an escrow account at an interest rate of 10 per cent. Add another $1 billion or so to fund both the retirements of the senior officials who would have to negotiate the agreement and another $1 billion, of course to fund Paswan's next election campaign and that of the rest of the Cabinet, which would have to agree to this. Put aside another $1billion to convince the rest of our parliamentarians that backing the government on this issue would be for the public good.

Then sell off the whole jing-bang Department of Telecom Services (DTS). Usually public telecom auctions, in Turkey and Brazil for instance, have come at multiples of five-seven times book value. Let us be conservative and assume that the government realises only book value. After putting $14 billion and change into escrow and pay-offs you are still left with $40 billion to help retire public debt. And every Indian telephone user gets a break.

I presume this would be too cynical for our upright, honest politicians and officials. However, if the Department of Telecom Services is not corporatised and flogged in a hurry, it will see a rapid erosion of valuation. By its dedicated policy of gouging and poor service over decades, the Department of Telecom (DoT) has painted itself into a corner.

As telecom services are opened up, newcomers are discovering that there is room for huge discounts to undercut DoT and increase traffic volumes. Telecom is a price-elastic industry where the Pareto Principle also applies in spades. Around 10 per cent of telecom users generate 90 per cent of telecom revenues. So by assiduous cultivation of these high-end consumers, private operators can rapidly acquire majority revenue share. Hughes Telecom and Bharti have both discovered to their delight that it doesn't require too much.

A few discounts, a guarantee of quick connections and basic maintenance, a consolidated billing process and you've skimmed off the creamy layer. A few years later, sarkari phones will still have the maximum connections, but I doubt that they will have more than 40 per cent of revenues. By the time, Paswan and his colleagues are scratching around looking for election funding, DTS, MTNL and VSNL will be worth a lot less. A capitulation and sell-off would thus be a win-win situation.

Devangshu Datta


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