labels: economy - general
Charging less for more news
Kiron Kasbekar
01 January 1900

The government has finally permitted Mahanagar Telephone Nigam Ltd, the public sector telephone company in Mumbai and Delhi, to offer discounts and tariff concessions to its major commercial customers. It didn't want to. It was forced, when Hughes Ispat, the recently launched private service provider in Mumbai, began offering lower rates for bulk customers.

Why didn't the government give MTNL greater flexibility earlier? The answer is simple. There was no competition. But, by not allowing such flexibility, the government hurt the economy as well as MTNL.

Lower bulk rates help bulk users save costs. And competitive pricing helps service providers attract business and utilise their capital better.

Check out the US
The scope for negotiating is important to business. If you can sell more of something, you don't mind giving a discount. It happens in almost every business, except where the government is involved.

Perversely, in India, the more you buy of some infrastructure services, the more you have to pay. It happens with electricity, for example. Check out the US -- there, if you are a large user of electricity, you pay less than people who use less power do, rate-wise.

Clearly this helps the bulk consumer. It also helps the power supplying company, which has to sell all the power it can make. If it doesn't do that, it wastes the expensive capital that goes into a power generation plant and into the transmission and distribution network.

It's not merely a question of bulk consumption. Flexibility can be exercised in more ways than one. In India, Indian Airlines would rather fly half-empty flights than give discounts. In the US, airlines give huge discounts that might seem ridiculous to a first-time visitor to that country. Book your flight early, and your return ticket could cost you less than what a single fare would cost if you bought your ticket on the last day.

Crazy as this might seem, it makes sense because an airline seat, like power capacity, is a perishable. If it isn't used, it cannot be used the next day. It's gone. By offering discounts on early bookings an airline can ensure better capacity utilisation.

We have been so accustomed to infrastructure shortages that even as more competition comes in, the government continues with policies of the past. When there is competition, shortages are likely to vanish. When shortages vanish, and supply is actually a little more than demand, suppliers have to entice customers with better pricing and superior quality.

But isn't it unfair that large customers should be favoured? It's not, because it costs less to deliver to them. Selling anything in bulk costs less because there are economies of scale involved in production, marketing, selling, servicing and administration.

If a factory consumes, say, ten thousand times the amount of electricity that an average household consumes, imagine what it means for the power supply company. It has to make one single bill for the factory, but ten thousand bills for the households. Believe it or not, it costs money to make out bills, to track them, send reminders, collect the payment, deposit the money in the bank, and then do the necessary accounting entries to reconcile the pluses and minuses.

Billing and accounts are just one part of the business. Generating power and delivering it to customers is also cheaper when there are a few large customers instead of hundreds of thousands of small customers. Much less equipment is required to transmit and distribute the power, and much fewer people required to install, monitor and maintain the system.

Also, it is important for society to keep industrial costs low. If industry, for whom power (or, for that matter, telecom) is a large cost, could pay less (not as a favour, but because the cost of supplying to industry is lower) it will help Indian industry become more price-competitive. That means that millions of people get a wide range of goods and services cheaper. More competitiveness also means more production, which in turn means more employment.

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