1. The telecom sector is a major developmental priority of India, as is evident from the National Telecom Policy of 1994 and the Government of Indias (GOIs) recent policy statements emphasizing the need for growth in this sector. The focus on telecom reflects the significant contribution that this sector can make to economic growth in the country. Not only is there substantial evidence that telecom significantly enhances economic opportunities in both rural and urban areas, the ongoing transformation in this sector at the international level shows the vitality of telecom itself: the rapid changes in global telecom technology, sharp decline in its costs, and the emergence of a variety of new telecom products have stimulated dynamic activity and investment in a range of economic sectors, and herald the potential for immense commercial and social interaction.
2. This backdrop, together with Indias low teledensity, reflects the huge gap between current and potential opportunities linked to telecom in India. Thus the major emphasis on enhancing telecom growth in India. The imperative to increase teledensity in India is evident not only from the statements of policy-makers, but is also reflected in the pace of demand for telephone lines in India. In the first half of the 1990s, the number of telephone lines installed have more than doubled, and they are expected to double again in the next five years (Table 3). Thus, in effect, India would possess an almost completely new telecom network within a decade; even then, Indias teledensity will remain very low and policies will therefore have to be adopted to further invigorate the sector. In addition, it is essential that the ongoing transformation and operation of telecom in India be carried out efficiently and that it embodies the dynamic stimulus that characterizes this sector world-wide.
II.1 Objectives of Telecom Pricing Methodologies
3. Telecom prices are a crucial component of any policy initiative to foster growth, enhance efficiency and impart dynamism to the sector. Prices affect economic decisions of investors, producers, buyers and sellers in any market, and reflect important information about the prevailing and expected market situation. Moreover, if there is a competitive pressure on prices, producers are likely to be more alert about improving their performance and taking account of dynamic developments. All these aspects provide a basis for linking prices with the achievement of various socio-economic objectives.
(A) The National Telecom Policy of 1994 contains a number of telecom objectives. These include:
4. In recent years, a number of countries have emphasized cost-based prices incorporating a reasonable commercial return for achieving these objectives. There is also a major move towards providing flexibility to operators regarding their pricing decisions. This facilitates the extension of their product coverage, introduction of new products in the market, and to re-orient the tariffs more in line with costs (i.e. to achieve cost-based prices incorporating a reasonable commercial return). Together with such flexibility, however, there is a need to ensure the stability and predictability of the price system in order to reduce uncertainty and promote business confidence. For that purpose, it is useful to clarify the criteria for determining and changing prices that are subject to regulation.
5. The interests of consumers are promoted by improving efficiency through cost-reduction and quality-improvement, and introduction of a wide range of products at competitive prices.
6. The objective of providing access to telecom services to all at affordable and reasonable prices is similar to the objective of universal provision of (or access to) telecom service. This objective would require subsidization of the service to certain parts of the country, or to certain users.
7. With regard to adequate returns from investment, it is worth bearing in mind that the impact of price cannot be ascertained separately from the volume of demand for various services, or from the policies that might make it difficult (or easy) to supply the service. Thus, for example, a high price might not be good enough to attract investment if that same high price also chokes up demand for the service in question.
(B) Other objectives which can be derived from above and have an implication for telecom tariff policy include:
(i) Stimulating the use of telephone services. Demand is stimulated by lower prices. In telecom, there are two basic types of demand, one for access and the other for use. Normally these two elements are priced separately, and the impact of price on these two types of demand should also be considered separately (see below).
(ii) Smoothing peaks in usage. A relatively higher price at the time of peak usage would reduce any congestion in the network due to peak demand, and would divert it to other time periods when demand (and price) is relatively lower.
(iii) Preventing abuse of monopoly (or market) power by the telecom operator. These objectives require addressing relatively high and low prices. A high price incorporates a large (or monopoly) profit margin, and a low (including below-cost) price becomes a concern because a telecom operator might be using it as an unfair means to limit competition from other operators in the market. To deal with the high price, a price ceiling could be fixed (or competitive prices be encouraged). A price floor could be considered to deal with unfair competition.
(iv) Promoting a forward-looking perspective. There is some evidence to suggest that with increasing competition, there is a greater stimulus for a firm to focus on making improvements in its operations. A forward-looking perspective can also be simulated in a pricing methodology based on long-run incremental costs (see section III below).
(v) Promoting efficiency. With the telecom sector opening up in a large number of countries, and the resulting competition from new entrants, there is now a major focus on improving the efficiency of operation. For this purpose, cost-based prices are being increasingly emphasized.
Various aspects of efficiency have been considered in this context. They include,
A notable aspect of dynamic efficiency relates to bypass. This arises when the customer chooses an alternative supplier of the service (i.e. bypasses the initial supplier). This occurs in a competitive situation when the price charged by any supplier is higher than the cost of providing the service plus a reasonable commercial return.
II.2 Summary of the Link Between Telecom Objectives and Prices
8. The discussion above suggests that telecom prices should encourage efficiency, provide financial viability for the operator, and promote investment and new services in the sector. At the same time, the price mechanism should curb the possibility of anti-
competitive behaviour in the market. For managing peak time demand, price should be higher in the peak period compared to the off-peak period. Further, subsidized prices might be needed to fulfil social objectives such as providing universal access to telecom.
9. The various policy objectives are not unique to India. Around the world, there is an increasing focus on cost-based pricing with a forward-looking perspective to achieve these objective. At the same time, flexibility of prices is also emphasized. Furthermore, if the market does not have competitive pressure then some simulation of such a pressure has to be added to the price mechanism by introducing a pre-announced downward adjustment over time. This price mechanism can be supplemented with price floors and ceilings for the relevant services (see below).
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