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05.03.

2007

Rural Infrastructure:
Rural infrastructure consists of the following: i) Telecommunications:

ii) Power iii) Roads and transport; iv) Water and sanitation. Overview of rural infrastructure:

A. Telecommunications:
i) 85% of villages have at least one village public phone, but few households have private phones;

ii) Teledensity low in rural areas;

iii) Village telephone service is highly subsidised;


iv) Privatisation is largely confined to cities; v) Long distance rate subsidise short-distance service regressive scheme in rural areas;

B. Power i) Only about half of households are connected;

ii) Power outages are frequent; iii) Private provision of power is frequent; iv) Subsidies on power tariff are high;

v) Government funds are inadequate to achieve universal coverage.


C. Roads and transport: i) Around 40% of villages are unconnected to the rural network;

ii) Although income and vehicle ownership has increased substantially, the road network has not expanded at the same pace; iii) The main focus of road construction has been employment generation, not quality; iv) State transport undertakings have run up huge losses; v) State Governments have a poor record on road maintenance; Water and Sanitation: i) Almost all habitations (villages + hamlets) are covered with drinking water sources, but operations and maintenance efforts are inadequate;

ii) Sanitation facilities are highly subsidised, but most of the rural population is unserved. Very low total outlays makes it difficult to expand the coverage; iii) The average amount paid by households for drinking water is too low to recover costs of operation and maintenance or stimulate private markets; iv) States are unable to maintain protected drinking water sources;

v) Private water providers face substantial entry and price barriers;


Table 1: Share of rural households lacking of basic infrastructure Sectors % of all rural households Type of infrastructure Direct exchange lines

Telecommunications 92

Power
Roads Water Sanitation

48
44 5 78

Electrical connection
Surfaced roads Water source within 1 Km* Latrine**

Many water sources only function a few hours a day, however because of poor maintenance; ** Surveys indicate that many latrines are not used for the purpose they were designed.

Gaps in infrastructure investment:

i)

Policy makers have recognised the gaps in rural infrastructure and struggled to find ways close to them;

ii) But efforts have been severely restricted by a shortage of funds; iii) Even during the current period of economic reforms, started in 1991, the dismal state of infrastructure has hardly shown any significant improvement, thus depriving the rural communities of opportunities that a well developed infrastructure could offer; iv) Mid-Term Appraisal of the 10th Five Year Plan (June 2005) noted that infrastructure inadequacies in both rural and urban areas are a major constraining Indias growth; v) A Committee on Infrastructure under the chairmanship of the Prime Minister was established to define an agenda for action in this area; vi) The Committee has identified an ambitious programme for infrastructure development, which will cover the entire 11th Five-Year Plan period; Budgetary allocation for infrastructure development: i) Centrally, budget allocation for infrastructure has increased from 3.2 to 4.6% of the Gross Domestic Product (GDP) over past ten years;

ii) But central allocation of rural infrastructure has fluctuated with no clear upward or

downward trend;

iii) State revenues have not increased at a rate that could finance operation and maintenance costs;
iv) Under the 11th Five Year Plan total infrastructure investment has been projected to increase from 4.6 to 7 to 8% of the GDP (including four sectors mentioned here and additional sectors for rail, air and water transport, irrigation and storage in rural and urban areas; v) The total investment of 1583.13 billion for new asset creation is actually a small percentage of the total amount needed The need for new approach:

i)

How can policymakers mobilise more resources to expand the coverage of rural infrastructure?

ii) The answer lies in finding new of financing methods, attracting new players to provide services, and adopting new policies to support privatisation and decentralisation of infrastructure: A. New financing methods: New financing methods are required to: i) To increase access;

ii) New ways of managing finances are needed, with different models of risk-sharing arrangements between financiers and providers of infrastructural facilities; iii) These models are based on cost recovery through charging of user fees; New Players: i) To improve the quality and coverage of infrastructure services, the public sector should either make way for private and informal providers or enter into partnership with new private sector;

ii) Private-public partnerships have been strongly recommended in the 11th FiveYear Plan; iii) Private players in some cases should be provided with incentives to undertake investment in rural infrastructure by removing entry barriers and by allowing them to recover cost through user fees; iv) However, privatisation is in an experimental stage in rural infrastructure; v) The role initially played by the private sector should be limited and gradual; vi) In remote areas, wherever the demand is for small volume of services, alternate or informal providers may be encouraged to take over these services; vii) There is also a need to decentralise fund management to local institutions, which would create an environment that is favourable to small service providers;

C. New Policies:

i)

The Government has adopted an economic reform agenda that includes privatisation and commercialisation of the infrastructure as a whole;

ii) Liberalisation and competition has been happening at the top only; iii) The liberalisation and competition has not reached the lower level than State levels to villages; iv) State Governments need to promote small, localised providers of the services; v) Local Governments will have to play more proactive role in promoting, monitoring and regulation of these new service providers;

Rural Infrastructure, Economic Growth and Poverty Alleviation:


A. Effect on economic growth: i) Some empirical studies suggest that there has been a strong relationship between infrastructure and economic growth;

ii) According to World Bank, a 1 per cent increase in stock of infrastructure is associated with a 1 per cent increase in GDP across all countries;
iii) A study of Mexico shows that 10 % increase in market access leads to 6% increase in labour productivity;

iv) A cross country study on the telecommunication had shown that economic product increases with the increase in density of telecommunication network; v) According to this study, not only higher infrastructure spending results in higher economic growth, but also leads to more intensive use of infrastructure facilities with a possible consequence of a rapid deterioration of facilities; Effects of different infrastructure on economic growth: i) When population growth results in higher demand of food and traditional fuels, electricity-aided irrigation (for example, with electric pumps) overall cost of irrigation is reduced and more intensive cultivation of land, which in turn helps to meet the increased demand;

ii)

Electrification also helps to overcome the shortages of other conventional fuels, such as kerosene, besides providing better lighting;

iii) Investment on rural roads often result in lower cost of goods and services consumed; iv) A World Banks Operations Evaluation Department of a project for rural road rehabilitation in Ghana found that rural sellers profited from higher prices, as they were able to sell their goods directly rather than through middlemen; v) Shopkeepers noted that bringing goods to the village was not only expensive, but also pushed up their overall sales.

Effect of infrastructure on poverty:

i)

The importance of infrastructure has a positive effect on poverty reduction as has been best seen by the evidence available from surveys;

ii) For example, half of the Ecuadorian families have seen improvements in the provision of basic infrastructure as a possible solution to poverty; iii) Similarly, poor rural community residents in Nigeria regarded lack of adequate infrastructure services as the cause of their poverty; iv) In India a study has shown that: (a) One million rupees spent on roads would lift 123.80 people out of poverty;

(b) Identical expenditure on education would lift 41 people out of poverty;


v) Similarly, some other infrastructure have different type of impact on poverty. Table 2 gives the impact of different infrastructure on different infrastructure:

Table 2: Correlations of rural poverty with infrastructure deficiency indexes, by sectors Deprivation index Roads Telecom Power Water Overall 0.615 0.655 0.925 0.034 0.832 Correlation Rank correlation 0.635 0.724 0.940 -0.079 0.779

Need for supportive environment:


There has been a need for supportive environment for rural economic growth. For example: i) Obstacles to rural electrification may include high connection costs and little or no access to credit, including unfavourable loan terms that dissuade the poor from borrowing;

ii) Limited availability of skill in rural areas that may prevent villagers from maximising the benefits that would accrue from electrification, thus underlying the need for imparting training in requisite skills;

iii) A supportive environment for rural growth should be built on the assets and

capacities of the rural poor; iv) For cottage and small scale industries there is a need to develop micro-enterprise advisory services and pro-poor credit opportunities to promote off-farm employment and diversified production; Selection of rural infrastructure projects: i) If the rural infrastructure projects are to have the greatest possible impact in reducing poverty, projects should not be selected on the basis of efficiency;

ii) Because most efficient projects may not maximise social welfare; iii) Traditional method for project selection for the road sector have relied on costbenefit analysis; iv) Benefits are typically considered to be: (a) savings on travel; (b) financial savings on vehicle operating costs;

increases in agricultural production brought about be road investment projects


v) Thus method of project selection therefore tends to bias investments towards: (a) towards rich; (b) high traffic areas and tends to neglect rural areas

vi) Thus the selection of infrastructural projects should have been combining equity and efficiency considerations; Telecommunication: I) Demand for telecommunication services has been surging across rural India, as middle and upper class has been:

(a) Compared with an average teledensity of 8.59 overall and 25.90 in Indian cities;
ii) Until recently rural telecommunications had been a public monopoly. Because lack of funds had impeded necessary investments to achieve higher coverage; iii) The Planning Commissions estimate of the investment required for full coverage (a rural density of 4.2) would be Rs 926.90 billion at 2002-03 prices iv) Average annual budget of the Department of Telecommunications in the 1990s had been only Rs 24.30 billion at 2000-01 prices; v) Thus public sector provision of telecommunications in rural areas has been grossly inadequate and underlines the need for private sector participation; vi) The strategy suggestion for developing rural telecommunications is intended to provide incentives for privatisation and to expand the rural consumer base for telecommunication services; vii) Specific recommendations include:

(a) Decentralisation of services;

(b) Use of new technologies, such as wireless and cellular technologies, which has been better suited than traditional landlines to meet to demands dispersed, often impoverished population;
(c) Strengthening the demand for telecommunication services through microfinance and other subsidies for consumers; (d) Supporting public-private partnerships, where last-mile provision has been done by private agents, to reduce cost of provision for the public sector; (e) Providing subsidies for private providers based on social and economic desirability of their proposed services. Access to services: i) As of December 2004, 85% of the Indias 6 million villages had at least one village public telephone and direct exchange lines numbered 13.04 million (half of which had been estimated to unremunerative);

ii) Still rural teledensity has been 1.67 which has been lower as compared to urban;
iii) The rural-urban disparity shows that much still needs to be done to improve the reach of rural telecommunication system, especially in some states; iv) Privatisation has been introduced in 1994 to accelerate the spread of

Telecommunication network

v) Targets for village public telephones and direct exchange lines had not been fully met by private licences in the 9th Five-Year Plan;
vi) The 6 licences were to provide 2.02 million direct exchange lines as part of their agreements over a three-year period, of which 10% were to be in rural areas; vii) As on March 2002, the private operators had rolled out only 0.234 million direct exchange lines mainly in urban areas; viii) The pace of rural connectivity is likely to gain momentum with the implementation of the Universal Service Obligation (USO) Fund and broadband networking in the rural and remote areas;

Usage:
i) The rural telecommunication sector in India had been heavily subsidised; ii) The average subsidy for a village telephone has been more than Rs 31,000. iii) In 1999-2000 revenues had been estimated to be Rs 6.13 million (if monthly rentals had been assumed to be Rs 75.00) as against an expenditure of about Rs 30.00 billion; iv) Tariffs, connection costs and rentals on telephones have been kept artificially low in rural areas, for example:

(a) Connection costs range from Rs 1000 to 3000;

(b) Monthly rentals range between Rs 50 to 190;


(c) Tariffs may vary from Rs 0.50 to 1.00 for short distance calls; (d) Long distance rates has subsidised short distance rate; Table : Cost of providing village public telephones Expense or revenue from a single phone Average cost of providing a VPT Total recurring expenditure per VPT per annum Cost (Rs) 8,000-10,000 32,000

Annual recurring expenditure @ 24% per annum


Maintenance cost @ 8% per anum Average revenue earned per annum

24,000
8,000 960

Subsidy per annum


Total VPTs serviced by DTS (by 2002) Total annual subsidy for DTS (by 2002)

31,140
550876 17.15 billion

Field studies regarding use of rural telephones have found out that:

i)

Basic objective of telephone ownership has been to receive incoming calls;

ii) For outgoing class the villagers prefer using the public call office (PCO) located in a nearby town;
iii) The underlying reason for their preference has been poor quality of service and the high sunk cost of a village phone;

iv) Most of the rural people had not been willing to lock up their meagre funds into deposits and rentals;
v) In developing countries villagers pay 1 to 1.5 per cent of their gross community income for telecommunication services; vi) If this assumption holds good for India then the richest 11 per cent of all rural households and having an income of above $ 1.00 a day can afford to own a telephone at a monthly rental of Rs 70.00; vii) Because studies have shown that only 11% of household own telephones and pay a monthly rental about Rs 150.00;

viii) Around 10% of the households that do not own telephone typically makes only 4-5 calls per month, incurring an average expenditure of Rs 200 only;
ix) Thus only those households with per capita incomes over a dollar a day (income around Rs 1350 per month had been regularly accessing telephone;

x) Field studies have indicated that rural areas demand small quantities of telephone services; xi) Thus the option would be to promote access to small units of consumption than to increase the number of direct exchange lines; xii) Thus it may be more effective and economical to provide mobile phones and public call office (PCO) services to people through private vendors; xiii) Even with subsidies, ownership of private telephones remains unaffordable to most rural people only three sates like Kerala Punjab and Maharastra can have such telephone connection; xiv) Field studies have shown that use of telephone has not very common in many states. Only in three states (Punjab, Kerala and Assam) more than 10% of the population use telephone; xv) These states also have a fairly large out-migrant population requiring constant contact with their kin; xvi) Hardly any initiative has been taken in any state, either by the private sector or by the community, except for Maharastra, Punjab , Assam and Uttar Pradesh; xvi) Lack of popularity of telecommunication services in rural areas has been due to (a) both demand and supply-side factors; (b) Inadequate income

insufficient services.

xvii) Per capita annual telecommunication expenditure in rural areas merely Rs 2.90;

has been

xviii) In some states such as Orissa and Tamilnadu the figure has been close to Rs 1.00 xix) West Bengal, Punjab, Maharastra and Madhya Pradesh also send less than per capita national average xx) Thus if the use of telecommunication services to be promoted than it needs two pronged strategy: (a) Augmentation of supply; (b) Increasing the affordability of services by providing capital subsidies to the service providers; 13.03.2007 Current Policies and Approaches: i) Like other countries, in India also the Government has been the main service provider of telecommunication services;

ii) Until 1996, the Government increases connectivity by setting up Village Public Telephones

iii) But the government made no separate budgetary allocation for setting up rural telecommunication exchanges; iv) In 1999 the Governments telecommunication policy included a universal service obligation, which had been aimed at expanding rural services by increasing the supply of village public telephones v) Until liberalisation of the sector, the main Government agency has been the Department of Telecommunication supplying these services to both rural and urban areas; vi) The two landmark in the telecommunication policy and regulation in India had been the:

(a) National Telecom Policy of 1994 (NTP 94);


(b) National Telecom Policy of 1999 (NTP 99); vii) The NTP 94 facilitated entry of private providers through auctions and licences; viii) But the poor design of these instruments resulted in delays and privatisation; ix) The NTP 99 had attempted to resolve these problems as follows: (a) It allowed operators to carry their own intracircle traffic without seeking an additional license; (b) Operators could interconnect to any other service provider, including any

other cellular service provider, which had not been allowed earlier;

Direct interconnectivity to Videsh Sanchar Nigam Ltd. (VSNL) had also been possible, after domestic long distance had been opened up;
(d) Operators had been eligible for licences for any number of areas; (e) The licence fee had been restructured as one-time entry fee and recurring revenue share; (f) Entry of the more number of service providers had been based on the recommendation of the Telecom Regulatory Authority of India (TRAI), and the situation had been reviewed every two years; (g) Licences had been available for 20 years and were extendable by 10 years; (h) Both voice and data traffic could be carried by a service provider; (i) Direct interconnectivity between the licensed service provider and any other type of service provider in its area of operation and sharing of infrastructure with any other type of service provider had been possible; (ii) There was to be free entry in basic services, FSP and cellular mobile services for each area of operation; Around 2000 a National Long-distance policy had been implemented. This had allowed the following licensing criteria:

-A one-time entry fee of Rs 1.00 billion;

-Bank guarantee of Rs 4.00 billion, which was to be refunded in phases of fulfilment of network obligation;
-Paid-up capital of Rs 2.50 billion of the applicant company, with a total net worth of promoters at Rs 25.00 billion; -An India registration with a maximum of foreign equity of 49%. x) The service providing wing of the Department of Telecommunications has since been corporatised, and the new entity is called Bharat Sanchar Nigam Limited (BSNL); xi) Initially eight basic service operators who made the bid for services had been awarded the licences to provide services in different circles; xii) This also had a commitment to roll out services in the rural areas and the 9th Five Year Plan (1998-2002) target for new rural telephone connections had been increased from 25,000 to 55,000

Limitations of the private sector


i) The private service providers had paid large amount of licence fees to operate in certain circles; ii) They had been eager to recover their costs;

iii) Their circles include urban markets, which are not still saturated;

iv) Using the already existing technological infrastructure, they have been able to expand their market merely by improving the quality of services and that too catering predominantly to the urban areas;
v) Further long-distance revenue-sharing agreement gives them higher profit margins, provided they restrict to urban consumers making long-distance phone calls; vi) Therefore there has been no incentive for them to provide services to rural areas; Table: Targets for VPTs in 9th Five Year Plan, (1998-2002) Target measure Number of villages Villages with VPTs as on 2000 VPTs on multiple access rural radio VPTs on overhead wire Public Sector Target (1999-2002) Public Sector Target (1999-2002) Number 607,491 374,566 211,313 163, 253 177,038 55,848

Table : Telecommunication expenditure, 1993-99 Year Rural population (Lakhs) Total Rural Expenditure (Rs Lakhs) 83858.53 113055.22 178599.56 212168.12 217032.28 267241.75 299620.13 Rural expenditure per capita (Rs) 14 19 29 33 33 40 44

1993 1994 1995 1996 1997 1998 1999

5979.24 6110.79 6245.23 6382.62 6523.04 6666.54 6813.21

Criticism to existing approach:

i)

The Planning Commission has come out with two estimates for attaining full coverage in the rural telecommunication based on:
(a) the original norms; (b) the revised norms;

Original norms:

i)

This norm assumes Rs 1,00,000 as the average cost of providing a village public telephone;

ii) Investment required would be Rs 23 billion (at 2000-01 prices); Revised norms:

i)

The revised norms require that teledensity be raised to 4.2 direct exchange lines per 100 residents at an average cost of Rs 35,000 per direct exchange line;

ii) The required investment under this norm had been Rs 926.90 billion

Difference between the norms:


i) The revised norms considers the household, rather than the village as the basis for arriving at full coverage;

ii) The revision of norms had been based on the emergence of new technologies;

iii) Given the average outlay in the range of Rs 30 billion only, Government investment alone will not be able achieve full coverage in the revised norm;
iv) The current investment policy has been based in population density and does not take into account either demand or need;

Subsidy:

i)

The system of subsidising short-distance rates through long-distance rates has been faulty because the rural poor primarily use long-distance services;

ii) The rural and urban rich are the main users of short-distance services; iii) Thus this system of subsidy results in a regressive transfer from the rural poor to rural and urban rich; Costs of private providers: i) Private providers tariffs cannot diverge greatly from those set by public service providers;

ii) There has been a hidden cost for people using the services of public call offices
iii) The cost of a call from public call office has been Rs 1.00. But users generally pays anywhere between Rs 4 to 12 as they have to travel to the PCO; iv) The people using PCOs have been often poorer than people with own direct exchange lines; Role of private service providers in rural communication: i) Available evidences indicates that the private sector can play an important part in the rural telecommunication sector if its role is appropriately defined;

ii) The Department of Telecommunication can set up the telecommunication

networks (wireless or wireline); iii) The actual provision of rural telephony through mobile wireless or cellular telephones can be done by private operators or community based organisations.