Digital India: Budget Fails To Address The ‘Sinful Blade Tax’

Being the world’s largest democracy with less than one-fifth of the world average per capita income (nominal), India is not new to ‘political’ slogans, so to speak, more in line with things related to poverty elimination, and therefore, related to affordability. The latest of this sloganeering or initiative, as one may see it, has been on the Digital India campaign of the government of India. Objective of ‘Digital India’ is to make much of India’s 1.25 billion people connected to the Internet, ensuring accessibility and affordability. Demonetisation has resulted in the goal-post being shifted to digital India lately – for convenience.

Presently India has around 400 million internet users, depending on whom one believes and what the definition of an Internet user is (usage frequency and minimum age). Most of these 400 million users access internet as infrequently as once a month; around a little more than a 100 million of these 400 million use internet on a daily basis, as per industry estimates. Access of Internet can be done from various devious ecosystems (computer, TV, mobile and through broadband connection, WiFi access, smartphones, etc.), and affordability depends on price-points at which Internet connections are made available – coupled with convenience, that is the data cost on regular usage basis when one wants it and over the device one prefers to access it, other than the device (handset/computer) costs.

One cannot find faults with the government of India for its ‘Digital India’ campaign, as one could not find fault with ‘Garibi Hatao’ of 1971 of India Gandhi – slogan or genuine whatsoever it be. India has leapfrogged in many ways in the last two decades – it has not been surprising in India to find mobile connected homes but without electricity connection.

ICTs at the bottom of the pyramid, economic multiplier effects

It has been more than a decade now when researchers have found evidence of ‘multiplier’ effect from mobile access, as it has been found from any other soft and hard infrastructure. Back in 2005, it was estimated that every 10% increase in mobile penetration leads to a growth of nearly 0.6% in GDP in low-income sample countries, whereas a World Bank study (2009) highlighted higher impact for Internet, for every 10% increase in Internet access results in more than 1.3% GDP growth in developing nations. Since then, various studies have confirmed this trend; lately various countries have treated telecom sector extremely critically as its absence can make the nation backward in the competitive global landscape where information and knowledge are of paramount interests.

Like rest of the world, India witnessed huge growth in the penetration of mobile phones, as accessibility improved and costs plummeted improving affordability. Many believe, legitimately, that India now stands in one such inflection point when it comes to growth in Internet user base. Expectedly, mobile phones and smartphones have the lion’s share, as less than 3% of all phones in India are wired phones, and when it comes to broadband, around 89% are through wireless broadband.

Present government, with its ‘Make in India’ focus have made certain progress in creating an environment where more and more mobile phones, including smart phones are now locally made in India.

The definition of a smartphone, at this point may be necessary, as many may think that by virtue of the word ‘smart’ here, smartphones are, by default 3G or 4G enabled. A workable definition of smartphone is: ‘a mobile phone that performs many of the functions of a computer, typically having a touchscreen interface, Internet access, and an operating system capable of running downloaded apps.’


 Source: GSMA/UBS/TRAI/Idea Cellular

The difference is evident from above figure, indicating that more than 50% of smartphones in India in use, by the middle of 2016, were not 3G or 4G enabled whereas nearly 75% of all mobile devices were feature phones, not suitable for internet access in a practical sense. To understand what affordability of a device to an average Indian means, in spite of 4G enabled smartphones being available at less than $50 a piece lately, a feature phone user needs to pay more than a dollar in monthly outgo for three years to update to a smartphone. And, data/video experiences in low-cost smaller screen smartphones have not been good.

The good thing about the economic multiplier effect from inclusive internet access over smartphones is – it trickles down easily to these specific sections of the underprivileged categories, the poorest of the poor, so to speak – who, otherwise are, hard to reach. Those who cannot afford a high cost smart phone, or are excluded from the Internet access due to affordability side – meaning costs, otherwise, could have been taken this path where access to relevant online content that could have made meaningful impact in the lives of those living at the bottom of the pyramid. The huge boom in data traffic since Reliance Jio started freebies, by some estimates as much as more than ten times in the last six months, point out to the anecdotal evidence that the barrier is more at the regular costs of the data and not, to that extent, at the device cost.

In a workable sense, to improve internet users and regular usage, one needs affordable smartphones and cheaper data plans with decent speed, and appropriate, relevant content that can help the person earn significantly more as various farm-specific applications can help in eliminating the middle-men who do not want proportional value, or the waste in the farm-to-fork complex agri-supply chains.

India’s telecom: Survival of the ‘fittest among the fittest’

When it comes to data, India’s telecom sector may be at an inflection point now as Reliance Jio has made its formal entry, after years of speculation while the investment soared from $1422  – 30 billion (in 2015, 2016 and 2017 respectively; it is surprising to see Mr. Mukesh Ambani still retaining his job and assuring rest of the world that there is one business proposition) start-up. There has been a war of words between Reliance Jio with the regulator in its side and the incumbents on the other side.

All of above have forced number two and number three players, Vodafone India – a 100% subsidiary of Vodafone Plc and Idea Cellular – of India’s Aditya Birla Group, to explore a merger. Unlike populist opinions prevailing in much of Indian and global media which state how Jio may make survival of the strongest incumbents difficult, alternate opinions  – on how this war in India’s mobile turf, that have seen few survivors qualifying as ‘fittest of the fittest’ – coming out from multiple rounds of wars so far. It all started in 2002, when Reliance had its ‘monsoon hungama’ in its earlier avatar. Then, too, Reliance Infocomm did bet on a new technology and backbone fibre-network strength; but over the last fifteen years, the number two player is now, matter of fact, struggling for survival. Then again in 2008 – that saw a corruption-marred spectrum auction process with multiple local fringe elements entering the sector with cheap spectrum by duping global investors, but with no intention to serve the customers and making money from that process of telecom business and not merely by spectrum trading, or even by disruptive pricing as strongest partners like Tata-doCoMo launched – in the end again the incumbents came out victorious, by consolidating their revenue market shares.

Above battle-readiness of the top three incumbents have made many veterans explore the alternate opinion – on the survival of one the disruptor this time – Reliance Jio itself.

Mobile services are not ‘sins’: Budget missed opportunity of ending ‘blade’ tax

However, on another less focused area, both the incumbents and Reliance Jio agree on one thing, and that is the ‘Sin Tax’ on telecom services in India – nearly at 30% – which covers both voice and data.

Unfortunately, telecom is one critical infrastructure sector in India, deprived of having its legitimate status as an infrastructure sector – to lower its capital-intensive costs of capital, the sector being capital-intensive. On the contrary, the sector is taxed heavily.

Something similar to ‘razor and blade’ strategy of taxing, the reverse of which was followed by Apple in 2001-2 while pricing songs low (with no margin for itself) and making money from the device (original case here, paid content), is being followed by the government of India. This affects the health of the companies providing the services, including that of the state-owned BSNL and MTNL which have been reeling under heavy cumulative losses over the last decade. Much of India’s mobile connectivity and data connectivity, the ‘Digital India’ achieved so far, has been achieved by private players, as state players not only failed to do its due part; rather it destroyed huge tax-payers money other than making sub-optimal usage of the scarce spectrum. State players in telecom in India has time and again needed huge bailout to survive, unlike the experience of China.

Indian Government’s repeated exploitation of the telecom sector has seen government’s revenue from the sector – either through spectrum sales or spectrum rationing or wrongful allotment and thereby creating an artificial scarcity, or by taxing services at a higher level than desired, in the last few years, being at a very high but unsustainable level. Going forward, unfortunately, this goose that has been laying multiple golden eggs for the government to meet government’s insatiable demands, directly and indirectly, is suffering from that over-taxing greedy mentality of the government. Revenue income budgeted for 2017-18, therefore, did not include any fresh spectrum auction.

Market forces have thankfully been working in making smartphones cheaper. Majority of new smartphones in Indian market over the next few years would be 3G/4G enabled, access costs – be it voice or data is now one of the lowest in India. The content part, due to India’s linguistic diversity and more than 90% of population not having English as the first language is also being taken care of, with regional news or entertain packages. Indus OS, the second most used mobile operating system in India, is another example of that market forces innovating in the right direction, to address the linguistic diversity part with ‘App Bazaar’ in local languages.

One can read the government’s and that of regulator’s attempt of lowering already lowered voice or data rates of India, as Reliance Jio intensifies the competitive intensity. If one compares ‘Digital India’ with Deendayal Upadhayaya Gram Jyoti Yojana, one could see reach of mobile connectivity has been comparatively better, but without any of the infrastructure status benefits that power sector, generation to transmission to distribution gets.

Government’s apparent step-motherly attitude, if true, can be explained by the fact that in power sector, government companies have significant presence (and a vast majority of them in distribution – the SEBs in poor financial health, for which UDAY has been launched), in case of telecom – it is negligible. Government has been a big investor in power or in other infrastructure sectors; in telecom – it’s been mostly the private ones.

If there is one sector in India where private sectors have done wonders, in spite of repeated government failures with policy uncertainties and blatant cronyism – it is the telecom sector, offering lowest price points to customers. Consumer’s facing speed-related constraints or on call drops have been there in all markets. Due to the nature of the sector (mobile battery and internet connection are now viewed by netizens to be as important as water, and other basic necessities – if not more), consumers would always ask for better and better speed with 100% coverage gaps.

Consumers in the US pay an average of $50 a month or more to get services that have significant deficits, both in speed and call drops to inter-carrier connectivity of VoLTE calls, in India – consumers pay less than 5% of that, as Bharti Airtel’s latest quarterly results show (Airtel Africa’s ARPU being 50% higher than that of Airtel’s Indian ARPU). Point is – in capital intensive sectors – be it electricity or automobiles, India has not been able to provide similar efficiency as costs in India have been more or less similar to the US or other parts – be it in per unit cost of power or when it comes to similar models of cars, that too without the reliability or regulatory safety features.

TRAI, to Department of Telecom and government have often expressed its desire on the quality of service in telecom. Unfortunately, it is Economics 101 that tells us one cannot keep quality of service independent of the price of the service.

One needs to be mindful about the difficult tight-rope walk that the government has been undergoing to meet its fiscal deficit targets, where telecom sector has been one of the easy ‘tax-seeking’ targets for the government.

However, the solution is neither in taxing an infrastructure industry as the ‘devil industry’ nor in continuing policy-uncertainties and cronyism by favouring new entrant/s once in every few years to lower the costs the consumers pay. An unhealthy telecom industry is not good for the nation, nor its users. Market forces have so far been successful, it is time government also walks its talk by lowering the tax part levied on the ‘blades’ part of the digital eco-system.

The Union Budget for the financial year 2017-18, presented on 1st February 2017 by India’s Finance Minister, again failed to provide what was necessary and essential, for a digital India roadmap – that of giving India’s telcos their due infrastructure status with financial benefits – as has been enjoyed by India’s power sector for long. More importantly, it failed to address the ‘sinful blade tax’, that’s being continued. In the end, it is the consumers, poor and rich who pay that near 30% taxed levied on telecom players. Arun Jaitley, to deliver the campaign of Prime Minister Modi, could have been a little more generous here – assuming ‘digital India’ is not being used as merely another cheap political slogan of this government.

Prof. Ranjit Goswami is the vice-chancellor of RK University, India. An abridged, edited and older version of this article was published in The Conversation.


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