All eyes will be on India's finance minister Pranab Mukherjee this week as he unveils the Congress Party-led government's first budget of its second term in power. There is little hope for a "big bang" reform of the likes seen in the 1990s. Too bad, because as India's mobile-phone companies show, the private sector can work wonders, if Delhi would only unshackle it.
India's mobile market is a marvel compared to anywhere, and seems downright miraculous in a country where hundreds of millions of poor people still lack electricity. Indians pay among the lowest mobile calling rates in the world—less than one U.S. cent per minute. A handset goes for as little as $50. Competition is so fierce among the 13 providers that they're forced to invent new services, too. Farmers can now receive commodities-price data over their mobiles, and mobile-phone banking is shaping up to be the next big thing. No wonder each month up to 10 million additional customers start using mobile phones. Bharti Airtel's $10.7 bid for the Africa business of Kuwait's Zain suggests Indian companies may now be in a position to export these innovations profitably, too.
Policy makers jealously eyeing India's mobile successes—including perhaps some in Beijing—can note that the smartest thing New Delhi has done is to get out of the way. India in 1994 issued its first licenses for mobile services to two private-sector companies in four geographic areas. In the mid-90s Delhi expanded service to 18 additional areas, and in 2001 and 2002 it issued licenses for two more operators in each market. From there the number of licenses has only continued to expand.
At the same time, the government has cut its licensing fees for service providers. In 1999, Delhi switched from a fixed fee to a percentage-of-revenue model. That freed providers to charge lower calling rates by removing what amounted to a fixed per-user tax. Since then the tax rate has continued to fall, from as high as 12% in 1999 to as low as 6% today. Delhi also cut and then scrapped entirely the "Access Deficit Charge" mobile providers paid to support state-owned telecoms in providing fixed-line services.
Other regulatory improvements have also played a role. Delhi has steadily raised its cap on foreign investment in mobile service providers, to 74% from 26%, though the Indian partner must still have managerial control. Five of the top 10 providers by subscriber numbers enjoy some degree of foreign investment. Foreign investment has offered Indian companies a ready source of capital to fuel expansion and innovation. Notably, price controls have not factored into this success story although India has a form of them: Thanks to fierce competition, the market rate for a mobile call has been consistently less than Delhi's "recommendation" of a fair rate for at least the past decade.
This isn't to suggest that India's mobile-services regulation is flawless. Delhi still doesn't offer nation-wide licenses; providers must obtain approval for each geographic area they want to enter. Auctions for licenses to provide next-generation mobile data services have been marred by delays and allegations of corruption. Nor does Delhi deserve credit for having this liberal model in mind all along. Liberalization has been a messy process, often fueled by the total collapse of earlier regulatory models (as when a botched license auction in the 1990s threatened to bankrupt key providers) or roundabout litigation (with the expansion of licenses in the middle of last decade).
Still, whether deliberately or by accident, India has stumbled its way into a pro-competition model that works. Nor is mobile telephony the only example; automobiles are another. First in 1983 and then in a bigger way a decade later, Delhi opened up its auto sector to foreign competition and investment. It also cut tariffs on imported autos and parts, though they're still high. Despite the strictures that remain on the industry, this opening has been enough to spur investment and production. And competition and innovation. Note that the Tata Nano, billed as the world's cheapest car with an expected price of only $2,500, was developed in India to suit that market.
We recount all this at length to make a simple point: Economic freedom works. Policy makers who want their countries' companies to become world leaders can take a lesson from India's mobile-phone market. Competition at home, not protection, is the surest path to success.END
* username: rupertbu
