With about 70 per cent of the counry's population still residing in ural areas, it has become critical to bring rural consumers under telecommunication cover. Though the rural teledensity has reached 21 per cent (as of December 31, 2009), the telecom sector has a long way to go before the rural-urban digital divide can be narrowed, with urban teledensity currently at over 100 per cent.

Since rural telephony is expected to drive the next level of growth, most private operators have started expediting their rural network rollouts over the past two years. The government, on its part, has also been undertaking several initiatives to increase rural connectivity.

Network rollout in rural regions, however, has its own set of challenges like insufficient power supply, difficult terrain, land acquisition issues and high costs of transporting diesel. All these lead to higher operating costs for operators. To overcome these challenges, the Universal Service Obligation (USO) Fund was set up in 2002 to provide access to telephony services to rural India at affordable prices. The corpus of the fund is raised by the government through a universal service levy (USL), currently fixed at 5 per cent of the adjusted gross revenues of telecom operators.

In December 2006, an amendment to the Indian Telegraph Act widened the scope of the USO Fund to include all telecom services including shared infrastructure, mobile services, broadband and optic fibre networks.

Since its inception, the USO scheme has made significant progress in promoting rural telephony. As of December 2009, financial support was being provided for operation and maintenance for about 570,000 existing village public telephones (VPTs), including the VPTs under the Bharat Nirman scheme.

The Bharat Nirman initiative of the government has been designed to provide subsidy support for provisioning VPTs in all the uncovered villages of the country (66,822 according to the 1991 census,) excluding those that have a population of less than 100, or lie in deep forest and insurgency-prone areas. According to the scheme, this subsidy support will be provided for a period of five years from the date of installation of the VPTs.

In addition, Bharat Sanchar Nigam Limited (BSNL) has provided VPTs in 61,186 of the 62,302 uncovered villages as per an agreement signed with the government in 2004. The remaining villages are likely to be covered by February 2011. The government has entered a similar agreement with BSNL and Reliance Communications, according to which these companies will provide 21,958 VPTs and 18,747 rural community phones (RCPs) in villages that have a population of over 2,000, but lack a public phone facility. Of the target of 40,705 RCPs, 40,694 had been provided as of December 2009.

In addition, 184,521 out of a total of 185,121 multi access radio relay-based VPTs have been replaced. About 7.05 million rural direct exchange lines (RDELs) have also been provided.

With respect to wireless services, the USO Fund has launched a scheme to provide subsidies to private telecom operators for setting up and managing 7,436 towers in 500 districts across the country, and to roll out their services in the specified remote rural regions, which were previously not connected. To further encourage operators to roll out infrastructure in these areas, the government has been promoting infrastructure sharing. Three service providers will share the infrastructure created as a part of this initiative.

The first phase of this mobile infrastructure project has been completed. There has been a capacity creation of about 24 million lines, which can also be used for providing wireless broadband services. About 6,956 towers have been set up so far. The government is commissioning base transceiver stations (BTSs) so that mobile services can be started in a phased manner. Furthermore, plans are under way for launching the second phase of the USO scheme, under which about 11,000 towers will be installed in the yet uncovered areas of the country. While the fund was fairly ambitious in fixing the commissioning time for setting up towers as one year in the first phase of the scheme, there were time overruns of at least three to four months in most cases. As a result, in the second phase, the timeline for completion has been extended to two years.

With a broadband target of 20 million subscribers, the fund now intends to provide subsidy support for broadband services in these regions. In January 2009, the government signed an agreement with BSNL to provide 888,832 fixed line broadband connections to individual users and government institutions from its 27,789 digital subscriber line access multiplexers, at the existing rural exchanges, by 2014. About 95,011 wireline broadband connections and four kiosks had been provided as of December 2009. The fund will also provide subsidy for wireless broadband connections in approximately 200,000 villages in 5,000 blocks. The government is also considering a proposal to extend broadband connectivity to gram panchayats, higher secondary schools and primary health care centres to provide egovernance and data services to rural areas in a phased manner. The existing passive and core infrastructure available with the private and state operators is likely to be utilised for this purpose.

The government is also utilising the USO Fund to augment the optic fibre cable (OFC) network between block headquarters and district headquarters. It intends to strengthen the OFC network so that sufficient backhaul capacity can be provided to integrate the voice and data traffic from the access network in rural areas to their core network. Currently, about 550,000 km of optic fibre is owned by BSNL while private operators own about 200,000 km. This scheme was initially undertaken in the Assam region. A tender was floated for the augmentation, creation and management of intra-district OFC network in the Assam circle in October 2009. BSNL, which quoted a subsidy provision of Rs 988.9 million, has been selected to implement this scheme on a build-operate-own basis. As per the terms of the contract signed in February 2010, the project has to be completed within 18 months. If successful, similar initiatives will be undertaken in other areas of the country.

The USO Fund is also planning to support initiatives on the research and development front. It has invited applications for pilot projects for the induction of new technological developments in the telecom sector that will further the government's promotion of rural telephony. Also, since power outages are a major concern in rural regions, the government is planning to provide support for renewable energy sources like solar, wind and diesel hybrid solutions for about 20 sites on a pilot basis. Provision of subsidy is extremely critical in this case since the capex for renewable energy is quite high. Support is also being considered for mobile charging stations in 5,000 villages through The Energy and Resources Institute's "Lighting a Billion Lives" project.

The fund will also support submarine connectivity for islands like the Andamans and Lakshadweep as well as provide broadband connectivity on satellite for remote regions.

While the government is undertaking these initiatives to promote rural connectivity, certain issues need to be addressed for sustained growth in this area. The most crucial issue pertains to the revamping of the disbursement mechanism for the USO Fund to make it more efficient, since a large part of these funds remain unutilised. Recently, the Department of Telecommunications (DoT), the primary agency for USO Fund disbursements, came under the scanner of the Comptroller and Auditor General (CAG), who criticised it for not utilising funds of over Rs 180 billion collected in the past few years. While a total levy of Rs 261.64 billion was collected between 2002 and 2009, only Rs 79.71 billion was disbursed by DoT for enhancing rural connectivity. The majority of the funds were used for bridging the government's budgetary deficit.

Earlier, in 2008, the Telecom Regulatory Authority of India had also proposed an amendment to the USO Act that simplifies the sanction process, and allows independent management of the fund without any involvement of the government's budgetary process.

Other issues pertain to the limited scope of the USO Fund. There is a need to make these funds available to not just telecom operators but also other stakeholders in the rural telecom value chain. Also, the government needs to step up public-private partnership (PPP) initiatives for faster growth in the rural segment. As of December 2009, out of the 100,000 broadband internet-enabled common service centres scheduled to be rolled out in rural areas on a PPP basis, only 58,954 had been set up. Moreover, with the completion of the 3G spectrum auction process, there is a need for devising a way to expedite 3G rollout in rural regions for enhanced connectivity.

Although the USO Fund is working on several schemes and projects to facilitate rural telephony, without the coordinated effort of the telecom industry, it is going to be difficult to achieve complete connectivity and infrastructural development in remote parts of the country.