Why is connectivity expensive in India?

Why exactly is connectivity so expensive in India? For instance, these days in Pune I pay Tata Indicom Rs 880 (US$20) a month for 64kbps (max) speed. Compare that to 5 years ago I used to get 256 kbps unlimited usage ADSL connectivity in Berkeley CA for only about $20 a month. One can naively ask why I don’t get 256 kpbs unlimited usage for say Rs 200 a month in Pune today?

OK, just to frame the question a little better, let me state that I recognize that prices depend on the underlying costs and on the degree of competition in the market. First, underlying costs. There are technical costs and there are statutory/regulatory/government imposed costs. Technical costs in India cannot be more than the technical costs in the rest of the world. Equipment costs approximately the same, modulo local taxes and import duties. Of course, average fixed costs vary depending on scale, and I do recognize that there are scale economies. So that is one factor that needs consideration: the scale of the operation. Perhaps the BB market is so small that some variant of average cost pricing makes the prices so high.

The non-technical costs need to be considered. First, there is licensing costs. That is a component of fixed cost. And then there are various taxes such as service taxes which add to the variable costs. If licensing costs are just what is required for funding the regulatory mechanism, then it cannot be all that high. But if licensing fees run in the several hundreds of thousands of dollars (or even millions of dollars), clearly then there is a different objective function that the government is attempting to maximize. Perhaps, and this is just a conjecture, the government is trying to maximize (short-term) revenues by imposing high licensing fees.

Just to continue along that revenue maximization line of argument, one way to extract rents is to limit competition within the market and make firms compete for the market by say auctioning the right to serve the market to the highest bidder,or just to have arbitrarily high licence fees and allow only those firms to compete within the market that successfully cross that barrier. This effectively raises the firms’ costs and therefore average cost pricing drives up the prices way above the world prices.

It appears that there is at least a limited degree of competition in the market. In Pune, I see Airtel, Reliance, Tata Indicom and BSNL in the internet access business. Their prices are remarkably similar. So unless there is collusion, their prices reflect underlying costs. It is certainly not marginal cost pricing (unless the variable taxes are extremely steep). It must be some form of average cost pricing and if so, the high average cost must reflect some high license fee because technical fixed costs (faced uniformly by all providers) cannot alone be high in India as compared to the rest of the world.

The question then so far is: what is the cost structure of the connectivity business? And how does it compare to the rest of the world.

The other matter I struggle with is: what is the objective function of the government? Short term revenue maximization? Like it attempted to do with the business of email service when it demanded outrageous license fees for the right to engage in that business, and later in the auctioning of the right to provide telephony in the various telecom circles?

If yes, then it is a very myopic policy. It hurts long-term growth of the internet in India and has serious second- and third-order impact on other sectors of the economy which could have efficiency and productivity gains from the use of the internet, such as education, commerce, and so on.

Author: Atanu Dey


20 thoughts on “Why is connectivity expensive in India?”

  1. Hi Dr Dey
    Sorry for not writing about the topic. But I had a suggestion. I just came across your blog but was unable to find any link on the website regarding your ideas on India development. If you could provide the link where your theories are expounded it would be aprreciated.


  2. The answer to expensive broadband in india is simple
    1. Not enough bandwidth from India to the rest of the world. Even giant BSNL does not have its own cable leaving India (it is still to operationalize a cable to Singapore). This causes everyone to manage the demand side of things – a very common phenomenon when supply is constrained

    2. Physical infrastructure such as cables are expensive in India because of all the rents(formal and informal) to be paid to install, maintain and protect such an asset. That is why there is never a choice of cable provider in India anywhere while there is a plethora of channels.

    Ultimately, it will take Wi-Max or other wireless broadband technology wherein only a limited number of towers are needed to get work round Point No. 2 while we just have to wait for big giants to install more cables connecting India to the rest of the world to overcome Point No. 1


  3. Apart from a number of Indian and Foreign owned satellites that provide international bandwidth of about 54 Mbps per transponder (they usually have a few transponders each, which are also used by broadcasters), India has international connectivity on the following undersea cables:

    1. SEA-ME-WE-3 (VSNL) – total capacity available to VSNL is a few Gbps. Much of this is already used up. This cable connects India to Western Europe, Middle East and East Asia (inc Japan). This used to be the old workhorse.

    2. FLAG – Intercontinental, but smaller footprint than SMW3. Owned by Reliance, but by a quirk of history, VSNL owns the access points out of India. Needs the two to tango, which they often don’t. Capacity available on this one.

    3. i2i – Whopping 8400 Gbps design capacity. Over 1400 Gbps immediately available. It connects to Singapore, which is a hub for many international cables. This one cable alone debunks any complaints of bandwidth ‘scarcity’. The catch, it is wholly owned by Bharti and SingTel, its partner.

    4.SAFE-SAT-3 – VSNL’s alternate route to Europe via Africa, and East Asia (via Malaysia). Lots of capacity Available.

    5. Tata Indicom – VSNL, connects to Singapore (like i2i), and has 5400 Gbps capacity. Launched, but awaiting security clearances from Govt of India

    6. Coming Soon – SEA-ME-WE-4; VSNL & Bharti – next generation in the SEA-ME-WE family.

    As you can see, all three of India’s telecom giants (Tata, Reliance and Bharti) own independent access to international capacity. There is a humongous amount of capacity available, waiting to be used, under the sea.

    This kind of capacity is not matched by the quality of the “last-mile”, the stretch from the exchange to homes and offices. In many cities, the legacy BSNL/MTNL lines are poor quality and incapable of supporting more than a few Mbps speeds. Older Cable TV networks similarly suffer from quality problems.

    New lines laid by Bharti, Tata, BSNL and others do allow higher speed access, but service offerings are tailored for the mass market which suffers from legacy issues.

    In my mind, there are two reasons why higher speed broadband services are not offered in India:

    a) Operators have found a ‘comfort spot’ on pricing international bandwidth; with no one ready to fight each other in this space.

    b) Last-mile bottleneck creates reluctance on the part of operators to offer higher-speed services

    c) India’s internet penetration is miserably low. Looking at market growth rates, operators may be taking a very conservative world view. Hence high prices for low bandwidth. For this change, PC penetration must take off sharply.

    Contrast India and China, Mobiles and Internet. India has taken off on a similar path as China in terms of mobile telephony, hence the mobile boom. India’s internet penetration is nowhere near China’s, hence the broadband bore.


  4. Atanu, you raise the million dollar issue. !! Internet connectivity or the lack thereof is the biggest bottleneck on India’s info superhighway. Since 2000, broadband has become popular in the US, in all homes. This has seen a major jump in the way people use the internet…to read news, to get updates, to shop and in many other aspects of life.

    I for one, cannot imagine my day without internet and just take so many things for granted. Havent been to my bank in a year and more. Dont need to.

    Apple computers are one example of how broadband internet has grown. In their latest G5 desktops, there shall be no telephone modem. If you need it, its a costly accessory at 69$

    Same way, if internet becomes all pervasive in India, the real internet boom will start, and Indians will become the consumers and providers both.

    Another commenter spoke about WiFi and Wi-Max. Maybe thats the way to go for India. Google is getting the whole of SanFran free-wi-fied with aims to get the whole nation up to the same level. Its a big idea…but the bigger the idea, the more it can be pulled off.

    The Indian government should invite them in, and give them a free rein. !!

    Or maybe some of the big cellular companies can do something similar. The consumer is ready to pay, at least thats my feeling. Sadly there is nothing reasonable out there.


  5. Atanu, you’re right. Broadband is expensive. But its a lot better than it used to be. I remember, around 1998-2000, when modem was the only way to connect, my phone bills used to be 5-8K every month. Even worse, do you remember the days of TCP/IP connections for 15,000 rupees? (phone charges additional of course!).

    One reason why broadband is cheap in the west is because a lot of capacity was added during the internet boom years. And as most of the companies went bust later, others could buy them for cheap and sell the bandwidth at a discounted price. Reliance buying Flag is one of those cases I think.

    On another note, I read somewhere that South Korea is the world leader in broadband. The average connectivity there is 20 MBits/sec.

    I can only dream…!


  6. Yeah…instead of laying copper wires and cables, its better to go for wirless internet(atleast in clogged cities).I think Mobile Internet with UMTS is also a good idea given that Mobiles are booming in India,though i am not sure about the quality aspects of it.


  7. I think trends in India definitely indicate a steady decline in broadband prices.

    Btw….you can’t get highspeed internet any where in the States now for $20. Comcast, one of the leaders, sells its highspeed cable line for between $35-50 pm, and the prices are similar with most competitors.


  8. I agree with Sunil – I pay $42/month for Comcast cable. Also there is no choice. My apartment building only has Comcast so I cannot switch to another ISP if the service is bad…so I don’t think India is facing any unusual problem there.


  9. I am not sure if this has already been said, but I dont think there are enough broadband users (demand) in the country. Granted, the high cost may be a barrier, but then its a chicken and egg problem. I think what India is facing is the early market phase, where adoption is on the upswing but the early adopters pay a price for being so few in numbers. I believe that India with its very high tele-density cities and ability to leapfrog the old telecom infrastructure elsewhere in the world will eventually witness cheaper broadband access than most any part in the world. Just look at what happened to the cost of the cell phone calls!


  10. However, one more thing to worry about here is the “quality” of the connection. Are we really getting world class quality broadband connections? If yes, then we are fine. If no, then we have to bring the quality bar up as well. I use Airtel in Delhi and their service is quite good and I have hardly ever faced a problem. However, one could do with higher speeds.. Ah.. Oliver asked for more!


  11. i think connectivity is expensive in india because no one has yet done anything significant to cater to the demands of the mass market of niches… rich vernacular / localised content… niches are where the demand is in india… offer niche markets good, valuable/useful content, they will buy

    once demand manifests… hopefully business sense will take over: the backbone networks will come together, access will fall in place… and old enemities will be forgotten 😉


  12. [The following comment is from Vikram Asrani. He mailed it to me because the system was probably misbehaving. So I am posting this on his behalf. — Atanu]

    What is the cost structure of the connectivity business – I think there are several aspects to this. Let us split this up into its components – connectivity from the user to the service provider, operations at the service provider, connectivity from the service provider to the internet and the speed component. Let us examine each component separately.

    Connectivity from the consumer to the provider is piggybacked on phone or cable lines (when talking about DSL or cable modem). In the US at least, there is a redundant and robust networking infrastructure to provide telephone and cable lines to every end consumer. In India, while there is a telephone infrastructure, it isn’t comparably robust
    (with cables hanging all around, roads being dug so frequently, improper drainage, lines are easily susceptible to picking up noise and disruption). When a network service is piggybacked on the existing
    infrastructure, it adds some cost. I suspect that the incremental cost with a robust infrastructure is almost zero, while the incremental cost in India is non-zero.

    The second aspect of connectivity is operational costs at the service provider (essentially efficient routing and rate limiting). This is purely a function of technology and efficiency of operation. Its hard for me to compare these two between India and the US.

    The third aspect of connectivity cost is pipes and peering. The cost of available pipes is a function of whether there exists physical pipes, and is essentially about supply/demand. The more points of presence you have on the network (ie the more you peer with other service providers), the better your connectivity. I think someone has listed the pipes out of India though has not spoken about peering. My knowledge is limited to VSNL which has one fat pipe to New York (through Europe but with no peering in Europe). Its expensive to peer
    with providers in developed countries. Costs are a function of 95% percentile of peak traffic as opposed to average traffic. I’m not exactly sure of why it is hard to have good pipes connecting India to the ROW and to increase peering with US network providers. I suspect there are more aspects to it than simply supply/demand.

    The term speed, I think is misrepresented. There are two aspects to it. The download speed (ie the speed between the last hop and your machine) which is what is advertised by providers, and perceived speed which is also dependant on how good the service providers connectivity is to the ROW. This aspect of it is never discussed when advertising about network connectivity. The latter is what determines user experienced speeds while the former is what is discussed everywhere. I think one would require to do a detailed technical analysis to understand requirements to improve connectivity speed from India to
    the ROW.

    All that said, I don’t think network connectivity is expensive based on the example you gave. Your comparison is of the Bay Area vs Pune. I think the average cost of a 384 kbps connection in the Bay Area is
    around $50 a month (as also pointed out by a couple of others). I myself was paying Comcast around $45 pm on a discounted scheme. The $20 and $30 schemes are essentially all promotional schemes which last anywhere from 3 months to a year. The cost of network connectivity in Pune, for a 256 kbps line, BSNL’s current charges are Rs 250 a month (was Rs 500 a month upto last month). I think Iqara has similar
    charges (somewhere around Rs 300 a month). While the download speeds can be compared (256 to 384) perceived speed, uptime of the service, value added services as well as restrictions are different in both cases (like service providers in India impose download limits on a monthly basis), making the complete user experience in both cases very different. (and this is probably what matters more)

    If you do want to compare costs, the way I look at it is that I could buy around 4 decent meals for the price I used to pay for broadband in the Bay Area on a monthly basis. I can buy only 1 or 2 decent meals
    for the price of monthly broadband in Pune. This makes the broadband in Pune cheaper than the broadband in the Bay Area. 🙂


  13. We are all talking about bandwidth and costs. Broadband will only get information in/out of your computer. But where is the Indian content?

    We need to do a lot of home work on automating our systems, and making their content available online. Can we have a Mapquest, or other GIS applications unless we rationalize the systems of postal addresses and each city/town nay even a colony has its own system of numbering plots, buildings, houses and apartments.

    What about a rational and universally followed ID system, a better one than the US Social Security as an ID. A picture ID, like a Driving licence. These would tremendously facilitate transactions, business processes and hence increase our productivity.

    Unless we have Indian, and local content we probably will use all this bandwidth (when it is made available due to the advances in technology) merely to watch multi-media entertainment, often a recycling of older Bollywood stuff or TV serials.


  14. Telecom services need huge start-up cost and if market is coupled with arrogance, monopoly and non-cooperation then its logical that we all need to pay for their follies.
    I believe that our pipes including fiber have significant unutilized capacity. There are idle switches in different parts of the country which are gathering dust. Our telcos cannot come together to pool the money for upgradation of ILD lines but they are very well interested in laying fresh fiber.
    I agree, regulation too creates problem. Resale of bandwidth was banned, which was not allowing operators to use their backbone effectively.
    The bottom line is that we have two kinds of situation. In one their is over capacity deployment and in another under capacity. Rural telephony may be included.
    Our telecom policy must encourage effective utilization of the infrastructure and it must open doors for collective efforts.


  15. Somebody compared Comcast and Iqara connections to BSNL’s dataone.

    Let them be reminded of the fact that the BSNL connection has a data transfer ceiling of 400MB.
    And extra downloads are charged at Rs. 1.50/MB


  16. I’m ready to pay what ever is asked if a BroadBand Connection is given to me in Pune. No provider is ready to lay the wires in this so called high city.


  17. Hi Dravidian,

    I saw your response on July, 2006.
    Is the DSL provider better now? How long it takes to get a broadband connection in Pune? (within 1 month possible?)

    We are moving to Pune and wanted to know about broad band connection.


  18. I see that many writers are being apologetic for the Indian governmenr policies, ISPs and the mafia that is blatantly overcharging by saying that the cost in the US is comparable or higher than in India. This is totally untrue. A mere Google search would show that most broadband connections in the US (for example)have at least 1 Mbps down and most are at least 3 Mbps down. The price varies from $30 to $50 depending on whether you use other services (phone or cable TV). In New York, this is true while in some remote places, the cost could be higher. Of course, there is no 256 Kpbs broadband offered in any major locations anymore – hence comparing it with severely limited cheaper plans is not correct. The key here is UNLIMITED and SPEED. We are catching up on speed but the UNLIMITED remains a distant dream except for very low speed connections.

    The excellent reply by Anonymous Coward shows that there is plenty of unused bandwidth available, but they would rather waste it than have the pleasure of fleecing customers. I understand that Reliance had to go to the International Court of Arbitrations as VSNL-TATA tried to prevent it from using the landing points to avoid competition.

    Distribution, as I read somewhere, should not be a problem for at least cable operators. Apparently, even a 4 Mbps connection would use only a tiny fraction of the coaxial cable’s capacity to transmit data and they carry much larger amount of data for TV purposes at much lower cost.

    So despite what the devious and misleading statements made by central ministers and even the President of India, the truth is that the Government of India, corrupt ministers and officials and greedy ISP operators have colluded to defraud the public. They do this by limiting the amount of data you transfer so that they can sell it at exhorbitant prices when it costs them nothing more or very little to do so.

    The argument that things are expensive in india is humbug. The entire premise behind the outsourcing boom in India is based on lower cost of operation (including installation) in India. I cannot believe that the costs are higher in India considering the large wage differential between US/Europe and India and don’t forget the legal charges which are exhorbitant in the US.

    So Indian government thieves, stop looting us for a change. At least please take our shirt and pants, but leave us our underwear.


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