Bridging the Widening Connectivity Divide in India

Transcription

1 Research Brief Bridging the Widening Connectivity Divide in India Abstract: Bridging the connectivity divide in a country such as India can be difficult, but it can be achieved through a focused national policy. By Evelyn Goh, Kobita Desai and Ron Cowles Recommendations With the biggest need to process and disseminate information, the Indian government can lead the way to bridging the connectivity divide. The government must develop a well-focused national vision to accomplish this important goal, and it can also set up an independent high-powered body to oversee the country's communications infrastructure development. Government assistance should not only come in the form of targeted financial assistance but also in the form of education and incentives. The private sector can become a significant contributor; it has the flexibility and dexterity of leveraging on opportunities and quickly setting up businesses, thus providing employment opportunities. The government must cut red tape and bureaucracy to facilitate bridging the connectivity divide. Publication Date: 14 January 2003

2 2 Bridging the Widening Connectivity Divide in India Introduction The Digital Divide Is Widening The divide in access to sophisticated services, such as Internet access, is widening between developed and developing nations. Such is the case in India. This digital divide only adds to the already big gap in critical areas such as literacy, health, job availability and training, and education. Accordingly, it is in a government's best interest to put in place the necessary mechanisms to close this gap or face the reality of being left further behind. Access to the Internet and to the promise of technology is vital to the continued success of the region. But who should take the baton in leading the effort to bridge the digital divide and above all who should pay for it? The answers do not lie in one place, but belong with government, industry and even private individuals. One way to bridge the digital divide is to provide targeted subsidies to fund network expansion. Another is through government mandates. And yet another way is to fund advanced network expansion through some form of tax paid by able consumers. All of these options have shortcomings, particularly as competition enters the marketplace. Digital Divide The traditional view of digital divide encompassing teledensity has been superceded by a much broader connotation in today's environment. Teledensity is just the enabler, albeit a crucial one. Digital divide is the gap between those who have access to and those who don't have access to modern information technology. It is beyond access, its about information and knowledge. And that really translates to access to the Internet, the greatest leveler of inequalities. However, for India, it is more of a connectivity divide where the state of networks and the access to technology is of great concern. This Research Brief discusses how India can improve telecom penetration. India is emerging as a global software and applications powerhouse. It is the place where companies look to outsource their software developments. But despite these high-tech activities, a large part of India's population is still deprived of basic communications, let alone access to broadband facilities and advanced services. Even though telecommunications access in India has become more widespread in recent years, access to telecommunications facilities by people living in rural areas is still poor. Teledensity in the urban cities such as Mumbai and New Delhi are at the level of developed countries while rural states such as Orissa have teledensity below that of developing nations. Currently, fixed telephone penetration in India is 4.1 lines per 100 people, which is among the lowest in the world. Inadequate telephone connectivity to India's rural areas, where more than 70 percent of India's population lives, is a key challenge for the country. Although there have been certain initiatives by the government,

3 3 nongovernment agencies (NGOs), and aid agencies to narrow the teledensity gap between the rural and urban population, efforts are futile with India's established poor infrastructure. The digital divide in India is aggravated by a number of factors such as few personal computers (PCs) and low Internet penetration, high telecommunications connection fees, geographic dispersion and low literacy rates. Gartner Dataquest Perspective Tackling the Connectivity Divide in India Understanding why the divide matters and why India must bridge it is a necessary first step in solving the problem. Illiteracy and poverty continue to shackle India's effort to achieve economic prosperity. Narrowing the connectivity divide is crucial to India's future economic growth. It could also mean increases in employment opportunities with the world hungry for a well trained IT workforce. Gartner Dataquest maintains that there are at least three key issues that India must tackle, some of which are conflicting. They are as follows: Improving and expanding the telecommunications infrastructure, placing more stress on demand access and connectivity, particularly in the rural areas. Build and train IT specialists and consumer IT awareness and knowledge. India has a huge pool of IT graduates but this represents only a small part of the population. Education needs to be streamlined to meet the potential demand for trained IT personnel. More importantly, the Indian government should advance a program designed to enlighten consumers to the potential of the Internet and to educate them on how to maximize its use. Develop and improve local Internet content and applications Basic Inhibitors to Bridging India's Connectivity Divide The majority of the rural population is living in poverty and affordability is a serious issue in these regions. This problem, however, is difficult to overcome and is out of control of the carriers. Besides, it is difficult to persuade operators to set up communications infrastructure in poor areas. There is inadequate financial subsidy from the government of India and the financial market. In China, the government provides tremendous support for the local enterprises to build and improve communications infrastructure. India, on the other hand, lacks government support and funding. There is a shift in trend toward mobile services. As mobile services become more pervasive and prices tumble, mobility services are preferred over fixed services. There is little incentive to opt for fixed line just for voice.

4 4 Bridging the Widening Connectivity Divide in India Universal Service: A Gartner Dataquest Definition The goal of a sound universal service policy is to allow all citizens that want a telephone to obtain quality telephone service at affordable rates. Therefore, Gartner Dataquest defines universal service as basic telephone service at a specified level of quality and at reasonable prices, considering the socioeconomic levels to be served throughout a country's total geography. The universal service definition must remain flexible and should include Internet access and touch-tone services. Going forward, the definition of universal service must be allowed to evolve beyond basic voice-grade services to include enhanced services. It should be used to bridge the digital divide. What Issues Are Associated With Connectivity Divide? Telephony Issues Following are some of the telephony issues that must be considered to develop a sound advanced universal service policy in India: The current low teledensity The development of policy designed to bringing advanced services to the masses cannot overlook the fact that a big percentage of the population does not even have access to basic telephone service. Table 1 shows that India is far from the teledensity levels of Europe and the United States. It will take several years (up to 10 years or more) before the region catches up to the developed world. Therefore, any policy to bridge the digital divide must attend to the pent-up demand for basic telephony as well. Teledensity is not expected to increase rapidly in India because of issues such as the high birth rate, limited investment funds and the lack of concession agreements (government mandates to add lines in undeveloped and underserved areas). Market dynamics will determine the build out of networks, and these will be limited to urban areas and business connections because of the absence of incentives or mandates from government leaders and regulators. As per Gartner Dataquest's forecast, line additions will probably not grow by more than 24 percent per year in the next five years. Table 1 India, China, U.K. and U.S. Teledensity, 2002 Country Teledensity India 4.1 China 17.0 United Kingdom 59.6 United States 74.1 Source: Gartner Dataquest (December 2002 The economic conditions of the particular market area Economic problems will put bumps on the road to universal service. In the past, India has proved to be vulnerable to economic disasters. Moreover, disputes with its neighbors distract attention and resources away from India's need to close the digital divide.

5 Funding a universal service policy If financial support is part of India's universal service policy, then policy makers must determine the level of funding for universal service. It is an economic decision that at present does not address 100 percent of the need in any region of the country. Funding programs must be designed to address the particular issues of a region, to correct those issues, and to be competitively neutral with regard to suppliers and technologies. Opening markets to competition While competition is ultimately a good thing, many of the principles of a full, competitive market run contrary to a sound universal service policy or any policy designed to bring advanced networks to the general population. The reasons include the following: New entrants, domestic and multinational, generally seek out those markets that produce the highest margins. In India, business customers in urban areas generate more than 60 percent of telecommunications revenue, and these are the markets that attract competitors. But universal service policies and initiatives to bring communication networks to all citizens are designed to target unserved areas, underserved areas and lower-margin consumers (generally residential). New competitors ignore these marginal markets and areas. Therefore, universal service policies run counter to the economic policies of a competitive marketplace. Incumbent carriers are saddled with carrier-of-last-resort responsibilities. On the other hand, new entrants can pick and choose the markets they want to serve. As carriers of last resort, incumbent carriers are required not only to pick up the slack in serving the underserved areas of the country which in many cases consists of areas of indigenous people without purchasing power but also to maintain the necessary capacity to handle overflow traffic from competitors. The incumbent also must carry all traffic in case of a default by a competitive carrier. Because the incumbent carrier is affected the most by any universal service policy, these added responsibilities put additional pressure on meeting the goals of any universal service policy. Incumbents will face shrinking revenue because of competitive losses. Coupled with this, these carriers invest in network upgrades as a competitive response. But these network upgrades will take place in areas where competition is occurring not in underserved areas. Shrinking revenue and scarce capital resources limit carriers' abilities to meet universal service objectives without outside funding. Carriers incur stranded investments. In a competitive environment, new facilities-based competitors will lure established customers away from incumbent providers and could eventually render certain parts of the incumbent's embedded networks useless, and the investment becomes stranded, many times before it is fully depreciated. This uneconomic condition puts additional financial strain on universal service objectives. 5

6 6 Bridging the Widening Connectivity Divide in India All carriers with legacy networks face the cost of migrating these networks to introduce new technology platforms to launch new services. This issue involves both the incumbents and new entrants and works contrary to universal service objectives. There may be limited margins to attract new competitors. Often incumbents aim to provide advanced services at prices that are difficult to compete with. Of course, any predatory pricing issue must be addressed. However, even without monopolistic pricing, competitive pricing schemes could cut against advanced universal service policies. If no competitive choice exists, there is limited incentive to upgrade networks in competitive areas and no incentive to offer advanced services. Rate rebalancing Rate rebalancing (eliminating subsidies from rates) is necessary for a healthy opening of the markets. Overpricing certain usage-based and value-added services in favor of holding the price of basic services at a low level has been successful in promoting universal service objectives in a monopoly environment. However, competition requires these pricing strategies to go away. Indeed, many areas of India have undergone some form of rate rebalancing, resulting in increases in local service rates. While this has been a plus for local competition, it has been a detriment for Internet access rates, which cannot tolerate steep increases in the cost of local service. To assuage the impact of rate rebalancing, regulators must put in place special treatment of certain issues, such as flat rates for Internet service. Other Limitations In addition to the telephony issues, a number of hardware, software and e-commerce issues inhibit the availability of advanced services to consumers in India. These include but are not limited to the following: Lack of broadband connectivity This is a "chicken or egg situation." Because there is a lack of advanced network infrastructure in most areas of India, there is a lack of e-commerce, particularly for residence consumers. Lack of consumer credit There is a limited opportunity for B2C transactions because of high interest rates on credit cards (3 percent per month), a lack of available consumer credit and difficulty in the fulfillment of orders. Lack of Indian-languages Web sites There are a limited number of Web sites that cater to the various segments of the Indian population, which limits e-commerce opportunities, particularly for middle-income and lower-income consumers. The diversity of India's language and culture is a big challenge. While it opens up a wide range of possible solutions, it can be an impediment to sustainable businesses. Standardized solutions should be developed, which could provide economies of scale for content and broadband application providers.

7 There is a lack of communities of interest both in country and out of country which limits e-commerce opportunities. Can India Truly Afford Universal Service? One would argue that each country should provide for basic telephone services first for the masses. This argument could be extended to bridging the digital divide first for the "haves" that is, the businesses, the educated populace, universities, government and others that could make use of the Internet and advanced services so that a particular area can become an investment haven for foreign companies. However, Gartner Dataquest would argue that, properly done, India could accomplish both: increase penetration and bridge the digital divide for all its citizens. It will be a slow process, but a country cannot do one and ignore the other. Paying for Universal Service, Today A number of programs have been initiated to bridge the digital divide. However, there have been some major bottlenecks inhibiting the success of such development programs: Bureaucratic red tape and rigid control Slow decision-making process Inadequate investment by private companies Lack of funds from the government While success of such programs depend to a large extent on access to funds, simply pouring money for rural and underserved development is not the way to re-establish social equilibrium. Success lies in using knowledge and IT resources to build and nurture sustainable businesses for the rural and underserved areas of India; ensuring India's rural populace the dignity of labor and self respect as they contribute to the economic progress of India. What Should be Done To bridge the connectivity divide, government support is required at every stage.governmentscontinuetoplayabigroleintakingthetelephoneto the masses. Not only to facilitate through appropriate policies and investment in infrastructure but also through education. However, Gartner Dataquest advises against relying on old methods, which have not worked well and are unlikely to do so in the future. Blanket network rollout obligations, even with penalty clauses attached, have yielded little success primarily because resources remain scare and funds limited. Furthermore, competition puts pressure on pricing, eroding bottom lines of established players and new players. Few companies have the resilience to support a business case that yields little or no return. Thus, prioritization becomes very relevant. 7

8 8 Bridging the Widening Connectivity Divide in India Although services such as software, banking and insurance, are increasingly becoming important contributors to the Indian economy, agriculture remains the mainstay of rural India, providing employment opportunities for more than 60 percent of the working population. And rural India remains deprived of basic infrastructure. However, with limited resources on hand, it becomes necessary to prioritize investments in areas to bridge the connectivity divide. The government should thus consider the option of prioritizing locations that offer immediate and tangible returns to people residing in those locations, both in terms of better education and thereafter employment opportunities. The focus would be toward setting up "communication community centers" servicing a group of small villages. Besides telephony services, Internet access can be provided at nominal rates to encourage usage across communities for wholesale traders, healthcare, education and simple services. These centers could also run special programs for schools imparting basic IT education at subsidized rates. This can be supplemented by availability of useful local content. While Gartner Dataquest recommends the expansion of networks to rural India, we recommend inexpensive public switched telephone network (PSTN) connections be provided, rather than free connections, so that deployment is based on real demand. This will be an incentive toward achieving long-term profitability. ThereisscopetoleverageIndia'sprowessintheITservicessector,which has been limited by the lack of a poor communication network in most cities other than the key IT hubs such as Bangalore and Hyderabad. This bottleneck can be removed by setting up a world-class super corridor linking all major IT development centers in India with the rest of the world through an efficient, high-speed and reliable communication network. A dedicated network of this nature will alleviate the concern of poor communication infrastructure in cities, which have the manpower and facility to host software development centers. Besides, it will also open up employment opportunities across other cities other than the IT hubs of India. Private telecom companies can be invited to participate in this development and receive incentives in terms of tax rebates, a lower import tax on equipment and possibly better revenue-haring agreements with the government. The regulator can be given more independence by setting up a highpowered body with adequate representation from the industry, civil servants and the government. Furthermore, the role of the regulator can be strengthened by giving it the authority to administer policies, taxes and USO fund disbursement. It would also be responsible for monitoring and ensuring that a level playing field is maintained, penalizing those who violate.

9 However, a crucial mission remains. one of taking the connectivity revolution to rural and underserved areas of India. This cannot be left to the government to solve, and private sector participation is needed to bridge the gap. There have been investments but these are predominantly concentrated in the profitable urban centers because there is little incentive to invest in nonprofitable areas. Going forward, the corporate sector may also discover that bridging this connectivity divide could translate into new market opportunities. With the biggest need to process and disseminate information, the Indian government can lead the way to bridging the connectivity divide. 9 Key Issue What are the keys for market success in the rapidly evolving market?

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