Creative destruction

In the bad old days, it was very hard to make phone calls in India, except from your own land line. Coin-operated pay phones were rare, and mostly didn't work. And, even if one worked, it would not do long distance calls. You booked a trunk call from home and waited for the operator to get through.

Then was a time when STD or ISD calls were a ripoff. The State monopolies charged prices like Rs.75 per minute for these rarities. There was a complex maze of different prices for calling different cities, different prices at different time of day, etc.

In that environment, in 1987, entered a brilliant idea - the STD/ISD booth. DOT forced standardisation of the equipment at every STD booth, so you were assured that calls would be metered and priced correctly. These booths were a tremendous success, and there are now over 12 lakh of them. Averaged over India, this corresponds to an amazing outreach of roughly one PCO in every 3.3 square kilometres.

It is striking to see how this industry sprang up from nowhere, and suddenly it is a substantial employer. There are perhaps 1 to 1.5 million people employed in the STD booths. This is a significant number even by the enormous standards of the Indian labour market.

The business model of the PCO was based on the high prices of STD/ISD calls and on the incompetence of the PSU phone companies. If calls were expensive, then even affluent customers tended to not have long distance calling at home, particularly when the phone companies were known to suddenly come up with bills for calls you did not make.

Further, the high price of calls supported the overhead costs of the booth and the staff. If a ten minute call costed Rs.500 then it was possible to impose an overhead of Rs.100 on it, and there was the revenue stream to support the owner of the PCO.

Elsewhere in the world, they do not use STD booths. Outside India, phone calls are cheap, and labour is costly. Hence, countries moved into building infrastructure consisting of pay phones and calling cards. It is striking to see how the difference in relative prices in India (i.e. expensive phone calls and cheap labour) led to a very different allocation.

This world has fallen apart, and the PCO industry is headed for death. STD/ISD prices have collapsed, thanks to India's success in wresting telecom policy out of the control of DOT and the PSU telecom companies. The complexity of tariffs has also been eliminated. For most owners of cellphones, an STD call is Rs.3/minute, anytime, anywhere. Private telecom companies are a bit more effective at not billing you for calls that you did not make. Most importantly, an overead of Rs.0.3-0.6/minute does not support the labour and capital cost of the PCO.

STD booths are already costlier than cell phones for making most calls. It is a tribute to the inflexibility of DOT, and a striking display of mistakes in our telecom policies, that owners of PCOs are prohibited from dumping their land lines, obtaining cell phones and running STD booths using cell phones. Following the cut in STD tariffs, the booth operators have been losing close to 60 per cent of their revenues every month. Though they get a commission ranging from 20 to 25 per cent of their revenues, with falling volumes, they have been making big losses.

In the current system STD charges are higher for those who cannot affort to own their own telephones. By not allowing provision of STD services using cell phones on a commercial basis, the system is biased against the poor.

Now that phone calls are cheap, India will embark on a whole new direction in obtaining the old as well as innovative new services that STD/ISD PCOs deliver. Cell phones are already ubiquitous, and they increasingly have roaming and STD. Some of the STD booths may survive in new forms while some may die.

There is currently a project in place wherein companies such as Sun Microsystems, Compaq Computers, Datacard Corporation, Pico-Peta Simputers and others have formed an industry consortium to re-invent the old isolated STD/ISD/PCO booths as a multi-purpose communications network. The consortium hopes to bring all PCO/STD booth operators under one banner and upgrade them to provide high-speed Internet and a range of new services like utility bill payment, low priced Net telephony, point-to-point video-conferencing and text/voice messaging.

Under this project it is reported that the public will access the new services through pre-paid re-loadable smartcards, which will be issued by the PCO/STD booths. These cards can be purchased, loaded, reloaded, used and refunded at all booths. The IT companies plan to have a revenue sharing arrangement with the booth operators, and there will be no equity participation.

This is a striking example of flexibility in the Indian economy. Relative prices have changed, so an industry will die. It will be replaced by new and cheaper ways of getting the same work done. The STD/ISD booth industry came from nowhere to employ over a million people, who man STD booths, and these people will now move on into other occupations. While old industries suffer from the rigidities introduced by labour laws and lack of an exit policy, the new economy races ahead with changing prices, shifting capital labour ratios and new and innovative products.

This story, of the rise and fall of STD/ISD booths, is a striking example of the vitality and dynamism of entrepreneurship and the labour market in India. Discussions about economic reforms in India routinely dwell upon the profound mistakes of labour law, which inhibits hire and fire, accords a role to trade unions, prevents closure of firms, etc. It is often argued that dramatic changes to labour law are required to ignite high economic growth in India.

However, the bulk of India's labour market is based on sound market principles, where hire and fire is a everyday reality, where firms are born and die based on pure competitive forces, where trade unions do not exist, and labour is genuinely mobile and adaptable. Over a million people switched professions to become operators of STD booths, and over a million people will now switch out of STD booths and acquire new skills. These large changes are not 'dislocations', and generate no political ripples. Thanks to the lack of government interventions in the labour market, prices adjust and the labour market broadly clears.

Labour market flexibility in India is reality for all but a small labour aristocracy. This flexibility in the bulk of India's labour market is an important strength, in coping with changes in technology and economic policy, and in producing economic growth.

The author is at ICRIER. These are her personal views.

Ila Patnaik

Ila Patnaik
ila at icrier dot res dot in