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Telecommunications policy in India: The political underpinnings of reform
Telecommunications Policy, Vol, 20, No. 1, pp. 3%51, 1996
Pergamon 0308-5961(95)00046-1
Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
Telecom m u n ications policy in India: the political underpinnings of reform
Ben A Petrazzini
In the mid-1980s India became one of the first developing countries to launch reforms in its telecommunications services; yet 10 years later little change had been Introduced In the sector. Then in 1994 the government launched a new national telecommunications policy which has a considerable number of important features that are rather puzzling and uniquely Indian. This paper argues that the slow pace and uniqueness of India's telecommunications reform are to be explained in terms of the country's institutional arrangements. Radical telecommunications reforms move at a slow pace, take pacullar local twists or fall In implementation when (1) the state is highly permeable and vulnerable to demands from powerful, domestic interest groups that oppose changes in the sector; and/or (2) top government officials diverge and clash over the reform agenda, generally due to the head of state's lack of power.
The author is with the Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong (Tel: 852 2358 7641 ; fax: 852 2358 2421; email: [email protected]). My thanks to Nikhil Sinha, Bella Mody and Girija Krishnaswamy for their support and constructive comments during the preparation of this article.
India was one of the first countries in the developing world to introduce reforms in its telecommunications sector. In the mid-1980s the Rajiv Gandhi administration initiated an energetic and significant restructuring of the sector. Most of the changes took place between 1985 and 1986. By the mid-1990s, however, India had become one of the laggards in the developing world. Little change was introduced in the sector for almost a decade (other than the liberalization of some non-basic services between 1992 and 1994). In other words, after an early start in the 1980s, India shied away from reform. In 1994 several radical and sweeping policy changes were developed. The government aimed at bringing private capital into the sector as well as introducing competition to all segments of the market (with the exception of international calls and some types of long-distance services). Although there is nothing special about allowing private capital and competition in the market - several other less developed countries (LDCs) have already implemented such policies - the Indian reform has some unique features that are as puzzling as the slow pace at which reform moved in previous years. Privatization of the state-owned Department of Telecommunications (DOT), for example, was ruled out from the beginning, but private capital was brought in to compete with the DoT. The country was divided into 'telecommunications circles', with the DoT competing with one private operator in each circle. This peculiar market configuration has turned India into the first LDC to place the national state-owned telecommunications enterprise (SOTE) in competition with private operators. How do we explain this rather unique reform strategy in India? What are the factors that shaped the reform in the way it did? This paper argues that the answer lies largely in the institutional arrangements of the country and in the particular political dynamics that evolved around telecommunications reform. The analysis places India
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
in the international context and compares India's reform dynamics with those of other LDCs. The first section highlights the roots of the reform process, while the second builds a conceptual framework to explain the pace and nature of the Indian reform. The third section explores how institutional and political factors affected the pace of reform. The final section explores the effects that these factors have had on the nature and direction of the new policies.
Roots of India's telecommunications reform
1By serving the metropolitan areas of New Dehli and Bombay, MTNL controls more than 20% of the nation's installed lines. Prhe following section relies heavily on previous work by the author. For an extended analysis of how institutional and political factors have affected reform in the developing world see, Petrazzini, B The Political Economy of Telecommunications Reform in Developing Countries: Privatization and Liberalization in Comparative Perspective Greenwood Press, Westport, CT (1995).
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Reforms in the Indian telecommunications sector came hand in hand with larger macroeconomic reforms. Telecommunications, however, have come to play a key role in the reform process. As the dominant development policies gradually shifted away from an inward protectionist, self-reliant strategy to one that emphasizes open markets and export-led growth, the role of infrastructure - in particular that of telecommunications infrastructure - has become crucial to economic development. In an effort to overcome the chronic structural and managerial deficiencies of the Indian telecommunications system, the Rajiv Gandhi administration was the first to introduce significant transformations to the sector. One of the first moves in the reform process was the creation in 1985 of the Department of Telecommunications, under the Ministry of Communications. With the creation of the DoT, telecommunications services were separated from the Department of Posts, and the Telecom Board - now the Telecom Commission - was set up to develop policy for the sector. A year later two new corporate entities were established: Mahanagar Telephone Nigam Ltd (MTNL) and Videsh Sanchar Nigam Ltd (VSNL). MTNL provides local services in the metropolitan areas of New Delhi and Bombay, while VSNL has an exclusive license to provide international services. 1 Both MTNL and VSNL have mixed public/private ownership. In MTNL the government owns 67% of the shares, while the remaining 33% are traded on the stock market. In the case of VSNL the government owns 85% of the shares, and the remaining 15% are traded on the stock market. The mid-1980s mark the beginning of telecommunications reform in India. However, despite its energetic start, by the mid-1990s significant transformations have yet to sweep across the Indian telecommunications landscape. The slow progress of telecommunications reform is, no doubt, a puzzling phenomenon. It has been argued elsewhere that in the particular institutional arrangements of the country and in the power distribution within the political system lie key elements to understand this intriguing reluctance to carry out reform - something which is not unique to India, and has been experienced in several other LDCs. 2 Conceptualizing telecommunications reform dynamics Telecommunications services in LDCs were provided for a long time under a public utility regime in which business principles and entrepreneurial spirit never became a driving force. In other words, the state, through cross-subsidies and other mechanisms (such as widespread hiring based on political and social criteria), turned SOTEs into political tools to achieve redistributive goals. However, faced with the failure of centralized economic management and the drying up of fiscal resources,
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
3Aharoni, Y 'On measuring the success of privatization' in Ramamurti, R and Vernon, R (eds) Privatization and Control of StateOwned Enterprises World Bank, Washington, DC (1991) 78; and Cowan, G Privatization in the Developing World Greenwood Press, New York (1990) 12 4See, for example, Hamilton, N The Limits of State Autonomy Princeton University Press, Princeton, NJ (1982). SAn elaborate analysis of how the Indian state is attempting to reassert itself through the current reform process can be found in Mody, B 'State consolidation through liberalization of telecommunications services in India' Journal of Communication 1995 45 (1). SSee, for example, Haggard, S and Kaufman, R 'Democratic transitions and economic reform' Paper delivered at the Southern California Workshop on Economic and Political Liberalization, University of Southern California, Los Angeles, May 1993; and Haggard, S Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries Cornell University Press, Ithaca, NY (1990).
most states in the developing world have shifted toward strategies that favor capital accumulation and private business initiatives. Such reversals of the status quo tend to trigger opposition from the traditional beneficiaries of the public utility model, ie telephone workers, equipment providers, politicians and citizens who benefited from state subsidies (such as residential users of local services). Resistance from these relatively powerful political actors has often played a major role in slowing down or neutralizing reform programs. But resistance is not limited to societal actors. Since privatization carries with it a significant reduction of the power and control exercised by state officials, there is also strong resistance within the state itself. In most cases government officials, state managers and civil servants have resorted to all sorts of legal and not-so-legal instruments to delay or block the implementation of reform projects. 3 Two factors seem crucial to the explanation of the state's relative effectiveness in implementing telecommunications privatization policies despite these sources of opposition: the relative autonomy of the state vis-a-vis interest group coalitions, and the degree of cohesion among the governing elite, or, in its absence, the degree of power concentration within the state. The very existence of the state is closely linked to two basic economic functions: capital accumulation and redistribution. Which function the state prioritizes at various points in time generally determines the degree of state autonomy available to it, and from whom it would have to seek insulation to implement policy changes. In other words, if state policies are aimed at achieving redistribution of resources among lower-income populations, pressures against such policies will often come from interest groups that support capital accumulation, such as large business. 4 However, if the state seeks policies that are aimed at capital accumulation and the expansion of the entrepreneurial class such as privatization - then government officials must gain autonomy from other politically powerful actors, such as workers, consumers, protected and subsidized small entrepreneurs, state managers, politicians and others who may have benefited from the redistributive functions of the welfare state. 5 The second variable crucial to understanding the outcome of telecommunications policy reform is the concentration of power at the state level - more specifically, the degree to which that power is centralized in the head of the executive branch. Political scientists and economists have highlighted the fact that treating the state as a homogeneous institutional actor conceals a variety of conflicting and contradictory interests constituted by the pubic sector. Mindful of the existence of conflicting forces within the state, social scientists have argued that cohesiveness of policy makers is crucial to effective state intervention. 6 It is one of the basic conditions for the articulation of a persuasive discursive front for shaping or changing the preferences of reticent social groups. The cohesiveness of state officials is also central to the deployment of state resources to fragment, neutralize and/or counter societal opposition. In short, states are more effective in introducing and implementing reform policies when bureaucrats and government officials share the same goals and use the same means than when their administrations are divided internally. Cohesion is, however, threatened when the issue around which state constituents converge is the reduction of their political and economic
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
power through privatization. In privatization attempts, an important reduction of bureaucratic control over the economy is implied, which leads to disagreement and resistance among state constituents that, in turn, tend to be an important factor in the program's success or failure. When cohesion of policy makers does not emerge naturally, the dominance of the top leader or leaders in the executive branch over competing groups becomes crucial to the effectiveness of state actions and policy implementation. State autonomy and the concentration of power in the executive have appeared in telecommunications reform initiatives in LDCs as crucial variables directly associated with the success or failure of reform efforts. 7 That is, in countries where these two conditions were present governments have succeeded in implementing reform, while in the countries where one or both of these factors were absent the government had to postpone or indefinitely cancel the program. Governments which have canceled or postponed (totally or partially) their reform programs include Argentina (1983-87), Thailand (1987), Colombia (1991), South Africa (1991), Uruguay (1992) and Greece (1993). Those which have successfully implemented their reform plans include Chile (1987), Jamaica (1988-90), Malaysia (1987), Argentina (1990), Mexico (1990), Venezuela (1991) and Peru (1994). Does the Indian experience replicate in any significant ways the patterns found in other LDCs? Are state autonomy and power concentration in the Indian Prime Minister's Office (PMO) relevant variables to understanding the pace and nature of telecommunications reform in India? This paper argues - and attempts to show - that the sluggish telecommunications reform in India reflects and supports the premise that the lack of state autonomy and power centralization leads to a troubled implementation of changes in the sector. During the past decade India has suffered from an increasingly weakened and atomized governing party and a rapid erosion of state autonomy. The prospect of enforcing controversial and unpopular policies has therefore diminished considerably.
Reform in slow motion
reform programs have been dominated by the introduction of various forms of private participation - mostly
7These
through the corporatization or total or partial privatization of the state-owned carriers.
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India is a constitutional democracy with a bicameral system. The lower house or House of the People (Lok Sabha) is elected by universal adult suffrage, while the upper house or Council of States (Rajya Sabha) is elected by the state legislatures based on state quotas. The president is elected every five years by the parliament and state legislatures. His or her powers are constrained by the Council of Ministers, the members of which are chosen by the prime minister. The prime minister is elected by the lower house of parliament. Law is enforced by an independent judiciary system headed by a Supreme Court. In sum, India has a highly interdependent political system in which it is extremely difficult for top government officials to act autonomously without putting their political capital on the line. Despite these formal interdependencies built into the political system, top decision makers in the country operated for several decades after independence in a fairly autonomous fashion, the basis of which can be found in the hegemonic position the Congress Party gained and maintained until recently. Hegemony of the party in the national
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
political arena led to the formation of a fairly autonomous and powerful state bureaucracy that was most of the time unwilling to challenge its political masters. However, state autonomy is not a structural feature of the political system, s The historical genesis of a state, for example, tends to affect the degree of its autonomy in the years to come. Historical evidence points to the fact that states which arise following major social dislocations - such as revolutions and civil wars - generally gain and maintain high degrees of insulation from societal demands for an extended period of time, while those which emerged out of progressive transformation of the political and social system become more vulnerable and permeable to social pressures in the short term. 9 In India widespread political violence and ethnic clashes gave rise to a powerful state in the early days after independence. However, state insularity has been progressively eroding in recent years, exposing political decision making to the contradictory demands of various interest groups and coalitions. Slow progress in the reform programs of recent administrations is closely related to the growing vulnerability of the Indian state to sociopolitical pressures from civil society and to the lack of concentration of power in the head of the government. Some of the key actors who have affected the pace and direction of reform in recent years are labor, opposition parties, the courts, and dissidents within the government and the Congress Party. Labor has been a key player in most telecommunications reforms in LDCs. In India workers have challenged most of the telecommunications reforms proposed since the mid-1980s. They feared that any change in the sector would inevitably lead to the DoT's privatization, which in turn would generate massive unemployment. ~° Restructuring initiatives by the Gandhi administration were challenged and often blocked by labor activism. Later, in 1991, recommendations by the Athreya Commission advocating the corporatization of the DoT were also challenged by labor, who saw the initiative as the first step toward the privatization of the carrier. Although the recommendation highlighted an inevitable strategic reform if the DoT is to remain competitive and alive in a progressively liberalized Indian telecommunications market, it was never adopted by the government due to political pressures. Efforts to bring private capital to the telecommunications sector by the Rao administration have been meet by resistance from the more than 450 000 telecommunications employees. Strike threats from the National Federation of Telecom Employees (NFTE), the Federation of 8See Skocpol, T 'Strategies of analysis in National Telecom Organizations (FNTO) and Bharatiya Telecom Emcurrent research' in Evans, P, Skocpol, T ployees Federation (BTEF) were made public as soon as the new and Rueschemeyer, D (eds) Brining the State Back In Cambridge University Press, telecommunications policy was announced in May 1994. A year later, in Cambridge, UK (1985). June 1995, workers launched a massive strike in an effort to stop the 9See Neher, C Southeast Asia: In the New bidding process. Workers were against what they called 'deviations from International Era Westview Press, Boulthe original telecommunications policy'. They feared that private comder, CO (1991). 1°Events elsewhere have shown that it is panies, which would launch operations with new sophisticated technolonot privatization but competition that brings gy, would take a large number of subscribers away from the DoT, which about considerable layoffs in telecommunications companies. The irony is that would be detrimental to workers' job prospects. After almost a week of by opposing pdvatization, telecommunicaresistance and growing threats of wholesale dismissal by the governtions workers have bargained in favor of a ment, the strike was called off. Although labor has been unable to liberalized competitive market, ie the market configuration that is more likely to lead dismantle the current Indian reform program, workers' opposition has to massive retrenchment. had a major impact on the pace and direction of the reform, such as the
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
11This strategy has turned India into the first developing country to license private competition against its state-owned national carrier. 12Bodhisatva G 'Open sesame' Business India 5 June 1995, 55 13For more details, see McDonald, H 'Don't mention it' Far Eastern Economic Review 30 March 1995. ~4Asia-Pacific Telecom Analyst 22 May 1995
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a d o p t i o n of an u n o r t h o d o x choice of liberalization without privatization. 11 The unease and hesitancy of the Rao administration in carrying out reform have been increased by the fact that in recent state elections opposition parties have won by campaigning against the government's economic reforms. The opposition, which argues that the current economic reforms are pro-rich and do not benefit the poor in any significant way, snatched from the control of the ruling party two southern states in the November 1994 election. In the February 1995 election the Congress Party lost two more states - this time the crucial industrial states of Maharashtra and Gujarat. Due to these results the ruling Congress Party retains control over states that comprise only one-quarter of the country's electorate. With respect to telecommunications specifically, the Bharatiya Janata Party (BJP), which has gained considerable national support in recent elections, is challenging the government on its reform program, and threatening to review the process if it comes to power in the 1996 national election. The secretary general of the party, Pramod Mahajan, argues that 'the liberalization process has been on for four years'. He asks then, 'Why has the telecommunications sector opened up now just ahead of the elections?' In his view the answer is simple: 'The Congress Party intends to use the proceeds from the tendering process to finance its electoral campaign. '12 One of the most recent example of the difficulties in implementing draconian reforms in the highly politicized decision-making system of India can be found in the crafting of the most recent national budget. While during the fiscal years 1991-92 the government was willing to pay the political cost of curbing a fiscal deficit that had surpassed 8% of GDP, in 1995 it approved a budget that reflects electoral concerns in regard to the forthcoming 1996 national election more than the IMF's recommendations for macroeconomic stabilization.13 Furthermore, the Indian judicial system, which is often held to be one of the key factors that sets India apart from some of its Asian neighbors because it provides legal security to private investment, has recently been used by groups with vested interests in the sector to block the progress of reform. In cellular services, for example, the first batch of licenses to be granted by the DoT to private consortia in the cities of Delhi, Bombay, Madras and Calcutta was challenged by unsuccessful bidders. The courts have taken more than two years to resolve the dispute. Although the controversy was presumably settled in November 1994, some of the losers were considering further judicial actions against the government. In May 1995 employees of the state-owned equipment manufacturer, Indian Telephone Industries (ITI), relied on the Indian judicial system to block the bidding process on the basis that the policy was threatening universal service obligations and national security. The Guwahati High Court, in response to the workers' demand, ordered a stay on the tender for basic services. The political nature of the move is reflected in the fact that the case was submitted to a court which is located 3000 km from ITI's headquarters in Bangalore. According to the ITI Union president, the rationale behind the action is that 'different courts in the country view the issues differently'. 14 The stay order was canceled one day before the bidding deadline by the Supreme Court, allowing the DoT to move on with the tender.
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
The progress of reform has also suffered considerably due the lack of cohesion within the governing elite. Lack of power concentration in the head of the state, rebellious state officials and governing party members have emerged in other countries in the developing world (Argentina, Colombia, Greece, Thailand, South Africa and Uruguay) as major obstacles to reform. In India reform under the Rajiv and Rao administrations has been hampered by disagreements and clashes among state officials and the ruling party rank and file. During the Rajiv administration opposition to reform within the ruling Congress Party was a major factor in slowing down and in some cases canceling reform plans. 15 In the current Rao era opposition to telecommunications reform comes from both state officials and party members. The initial stages were littered with controversies between the communications minister who opposed fast-track reform and widespread private participation in the sector on one side, and the prime minister and the head of the Telecom Commission who favored both strategies on the other. A few months after the chair of the Telecom Commission, Nagarajan Vittal, was removed to overcome some of the political hurdles created by his position on the reform; the Ministry of Finance entered the fray to battle with the Minister of Communications and the DoT on several fronts. 16 The permanent conflict among state officials has created an institutional environment often defined as a 16His initial economic reform plan was 'multiple-veto system'. opposed by the Congress Party rank and Although the insularity of India's policy makers has, in general terms, file. The finally approved plan was condiminished in recent years, there have been moments when particular siderably different from its predecessor and recommited Rajiv and his administraeconomic or political events have offered them, for a limited period of tion to socialist economic strategies. For time, the necessary conditions to push forward controversial reforms more details, see Kohli A Democracy and Discontent: India's Growing Crisis of Gov- formerly stalled by political conflicts. Economic crises are one example ernabi/ity Cambridge University Press, of such events. By weakening or dismantling pre-existing coalitions of Cambridge, UK (1990) 319. interest groups and often reversing a country's entrenched political leBusiness South Asia February 1995 17On the matter, see Gourevitch, P Poh'tics dynamics, they provide state officials a limited period of insulation from in Hard Times: Comparative Responses to domestic pressures. 17 That seems to be the case in India, where the Internationa/ Economic Crisis Cornell Uni- economic crisis of 1991 provided Narasimha Rao with the required versity Press, Ithaca, NY (1986); and Torleverage to implement significant and controversial economic reforms. ~8 re, J 'Building democracies in hard times: the current Latin American experience' Unpublished MS, Buenos Aires (1992). ~SOther factors that have enhanced the implementation of reforms in recent years are related to: (a) growing demand for better infrastructure from domestic and foreign corporations; (b) pressures from international agencies and foreign governments (mainly the USA) in favor of economic liberalization; (c) the shift from centrally planned to market economies elsewhere in the world; and (d) the direct and personal involvement of the Prime Minister in the reform process. ~gForfurther details on the segments of the market open to competition and the players in each of them, see Petrazzini, B and Krishnaswamy, G 'The socioeconomic impact of telecommunications reform in developing countries: India in the international context' Paper delivered at the PICT International Conference on the Social and Economic Implications of Information and Communication Technologies, London, 10-12 May 1995. 2°State-owned firms were banned from entering the bidding process.
Politics and the nature of Rao's reforms Faced with a considerable downturn in the national economy, the Rao administration pushed forward reforms in various sectors of the economy, including telecommunications. Thus in the early 1990s several non-basic telecommunications service markets were progressively open to limited competition. 19 By 1994, however, a booming economy and the subsequent demand for considerable increases in the quantity, quality and diversity of telecommunications services exposed the constraints and limitations of the reforms carried out until then. In its effort to induce drastic changes in telecommunications, the government announced in May 1994 the long-expected National Telecommunications Policy. In September 1994 new official guidelines specified the terms for private sector participation and other market issues. The main features of the new policy are as follows: • There would be no privatization of the DoT or any other Indian SOTE, such as MTNL or VSNL. Only locally incorporated private firms, in which foreigners were permitted to own up to 49% of the 45
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
•
•
•
•
21Bidders for basic fixed services must have, by January 1995, experience as a service provider or as a network operator of a public switched telephone network of at least 500 000 lines. In cellular services bidders must have experience operating a cellular network of at least 100 000 subscribers. To comply with this requirement a foreign company can draw on the experience of its parent company, one of its subsidiaries or one of the parent company's subsidiaries. For the carrier's experience to be considered the foreign firm must have at least a 10% equity stake in the consortium. This stake must remain in place for five years for basic service operators and three years for mobile operators. Bidders for fixed basic services must also have a combined net worth of Rs 3 billion (circles A), Rs 2 billion (circles B) and Rs 500 million (circles C). For mobile service bids Rs 1 billion (circles A), Rs 500 million (circles B), and Rs 300 million (circles C) were required. 22Circles have been divided into three categories (A, B and C) based on their market value. 23There are no restrictions on the number of circles for which each consortium can bid. However, the DoT retains discretion over the number of circles granted to any bidder to avoid the risk of monopolies. 24There are penalties for successful bidders that do not comply in time with the license fee or do not meet the proposed target on the other three criteria. ~The Indian Telegraph Act (Section 3[6]) needed to be changed to remove existing legal impediments to the existence of TRAI.
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•
•
shares, were allowed to bid. 2° Bidding firms were not allowed to be part of more than one consortium. 21 The licensing of private operators would be granted on a 'circle basis', with the country being divided in 20 telecommunications circles for local basic fixed network services, and 18 circles for mobile cellular services. 22 No more than one private company would be licensed in each circle to compete with the DoT and MTNL in basic wireline, value-added and multimedia services - including cable television. Two operators will be licensed to provide mobile services. 23 Licenses would be granted initially for 15 years, and could be extended by an additional 10 years. Private operators would be allowed to provide intra-circle longdistance services (where 60% of long-distance traffic calls occur). Inter-circle communication remains under the exclusive control of the DoT, and VSNL maintains an exclusive license over international services for at least five years. Successful bids would be selected based on the following weightings of the main criteria for bid evaluation: (a) net present value of the license fee - 72%; (b) network rollout plan for the first three years 10%; (c) percentage of rural lines installed in excess of mandatory ones - 15%; and (d) use of indigenous equipment - 3 % . 2 4 The new private operators are required to maintain a balance in their coverage between urban and rural areas. More specifically, they are required to allocate 10% of all installed lines to connect villages. Pilot projects in remote and sparsely populated regions with lucrative potential will get priority if they bring in the latest technology. New networks should be mostly based on fiber-optic cable and wireless local loop. The use of locally produced equipment is encouraged. Higher points would be granted to bidding consortia that offer to rely heavily on locally produced hardware. Those that do not comply with the offer would be punished with severe penalties. An autonomous regulatory body - the Telecom Regulatory Authority of India (TRAI) - will regulate standards and technical compatibility, pricing mechanisms and interconnection issues (such as revenue-sharing agreements, access charges and time frames for connection availability) as well as protect consumer interests. TRAI is to be headed by a current or former judge of the Supreme Court or a current or former chief of justice of the High Court, and two other members who hold or have held a rank equivalent to Secretaries of the Government. 25
The new policies no doubt reflect economic and technological considerations and concerns. But most of their peculiar 'Indian' patterns are the product of political pressures, bargaining and trade-offs. The current market-oriented reforms fly in the face of policies that Indians have supported for decades. Since enforcing reform in a top-down fashion - as could have been done in other Asian nations - also runs against the democratic principles entrenched in Indian society, the government developed a reform program that, although far from ideal in economic and technical terms, is viable at the lowest possible political cost. The following paragraphs explore the political underpinnings of several key issues of the policy program, namely, ownership and market structure, universal service and other social 'obligations', and regulation.
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini Ownership and market structure
28The well-publicized official and public attacks on the Enron power plant deal in the state of Maharashtra is a good example of such a sensitive issue in Indian political life. For a discussion of the Enron project cancellation and its implications see Economist 12 August 1995. 27The active opposition of labor has dismantled privaUzation initiatives in several other LDCs, and there were no reasons to believe that this was not going to be the case in India. 28Total demand rose by 50% between April 1992 and April 1994 and was expected to rise even further in the following three years. ~ T h e idea of private participation in the sector was - and still is - controversial. However, if there was need of evidence in support of private entry into the sector the DoT itself provided it. By March 1995, at the close of the 1994/95 fiscal year, the Department was far from meeting the network expansion targets for the year. Out of the original 1.6 million lines, the DoT had installed only 915 000 - that is, 57% of the annual target. Similarly deficient performance was evident in the installation of public telephones in rural areas and trunk lines, tasks in which the DoT had achieved only 41% and 64% of its planned target: Asia-Pacific Te/ecom Analyst 13 March 1995.
India's electorate is well known for its entrenched distrust of private business, and in particular of foreign firms. 26 Therefore handing over the whole national telecommunications system to private interests through the full privatization of the national carrier - as in Latin America - was never seriously considered by the government. Furthermore, India has not suffered the profound economic and fiscal troubles that Latin American countries confronted in the 1980s. The absence of such major economic crises strengthened those in government who opposed privatization and weakened arguments in favor of radical and draconian economic reforms. In a context of 'politics as usual', and facing deeply entrenched negative perceptions and distrust of foreign and local businesses among the Indian population, it became extremely difficult for the government to justify economic strategies that the central administration itself had attacked in past years. Besides the difficulties of justifying privatization the government confronted the very real and powerful opposition of telephone workers, who feared that any form of private participation in the sector would lead to a massive reduction of the telecommunications workforce. 27 The sector is one of the largest employers in India with almost half a million employees, and their opposition to reform programs had the support and sympathy of the other 18 million public sector workers. In other words, a direct and non-negotiated confrontation with labor over the privatization of the DoT would have been political suicide. There were other issues related to giving away control of the national telecommunications system over which the government itself felt uneasy. Security still remains high on the national political agenda. Friction with Pakistan over Kashimir and insurgency in the northeastern states of Arunachal Pradesh, Nagaland and Mizoram have revived the relevance of the matter. The government, however, had ambitious infrastructure plans to support the fast-growing national economy. In the telecommunications sector it determined that by 1997 telephones should be available on demand, all villages should be covered, one public call office (PCO) should be provided for every 500 persons in urban areas, and all internationally available VANS should be introduced in India - preferably by 1996. To achieve these targets and satisfy the rapidly growing demand for new services the government would have to increase its target of installing 7.5 million lines during the 8th Five Year Plan to 10 million lines, zs It was estimated that under current demand scenarios the DoT would require approximately US$17 billion to meet expansion requirements by 1997, yet it would be able to raise at most US$5 billion by that date. Under such a scenario, private capital would have to be brought into play to supplement the shortfall. 29 Once the government became convinced that private capital was a must to achieve the required expansion goals, some began to question the extent to which local capital alone would be able to meet the financial requirements of the program. Similar doubts arose in relation to the technical and managerial expertise of the local entrepreneurs to run the future private networks. Since there was no local expertise in the sector - other than that of state-owned companies - and local capital seemed too scarce for the magnitude of the project, it became evident that the entry of foreign business was required. With those concerns in mind, the government built into the legislation requirements - such as
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
experience in operating networks with a large number of lines/ subscribers - that made partnership of local companies with foreign operators almost inevitable. The permissible percentage share of a foreign firm in a bidding consortium was the subject of heated debates and intense controversy. Some government officials - such as the former Telecom Commission chair N Vittal and the Foreign Investment Promotion Board (FIPB) director A N Verma - favored a 51% stake for foreign investors. This criterion was, of course, supported by potential foreign bidders and their governments. But other powerful players involved in the reform process - such as Communications Minister Sukh Ram and Prime Minister Narashima Rao - opposed majority foreign ownership. 3° Their position was backed by the recommendations of the Joshi Committee and the telecommunications working group of the Industrial Credit and Investment Corporation of India (ICIC), which suggested limiting foreign presence to no more than 40% of shares - due to national security concerns and the fact that leading countries, like the USA, also restricted foreign companies to a minority share. Powerful domestic industrial groups also launched an intense lobbying campaign to restrict foreign investors' participation. The final decision to allow foreign owners up to 49% of shares was another product of political compromise in which the government offered foreign investors the most attractive possible option, while avoiding at the same time accusations of giving control of the telecommunications sector to foreigners. 31 India is an interesting case, not only because it is the first LDC to allow private business to compete with the national state-owned carrier, 3°The position of Minister Ram on the but also because it is one of the first countries to liberalize the local loop issue changed as events evolved. While in before opening its long-distance and international services markets to the early stages he favored no preset limit competitive entry. 32 The policy seems to have succeeded, if not in on the equity participation of foreign companies, he later became a strong advocate gaining support for the project, at least in neutralizing potentially of the minority share ownership option for harmful opposition from various local and foreign groups with clashing foreign companies. See Telenews 2 June interests. On the one hand, opening local services (the least profitable and 14 July 1994. 31Although restrictions are placed on the segment of the market) first was a powerful bargaining chip to placate extent of equity share ownership, there is domestic resistance to reform. On the other hand, the risk of alienating nothing that bans foreign firms from gain- private capital with the not so attractive local market was diminished by ing control of the venture through public shareholding or other forms of corporate offering the possibility of providing intra-circle long-distance services restructuring. In fact, several foreign firms and the prospect of further liberalization in the long-distance and - such as Bell Atlantic, France Telecom international market in five years' time. The strategy, although someand Singapore Telecom - demanded control over the consortium as a precondition what unorthodox, has achieved the double objective of appeasing for any substantial investment: Business opposition and attracting private investors. South Asia November 1994 The criteria for selecting the winning bids have also been prone to 32Mexico liberalized its local loop before it political struggles, with the DoT trying to retain as much discretion as allowed competition into its long-distance services market, but Telmex - the incum- possible and bidding companies pushing the government for a public bent - had no obligation to interconnect, announcement of the criteria to be used. 33 The DoT managed for making unviable any potential competitor's business. The regulation has changed, several months to avoid addressing the issue, arguing that a public and the local company lusacell is planning announcement of the weight to be attributed to the various aspects of to offer local basic services in a joint ven- the bid might drive would-be operators to coalesce into a cartel. ture with foreign partners. 33pressure for clarifications came from However, not long before the deadline for bid submission those who both foreign bidders and local industry supported the specification option - deploying the argument that the associations such as the Federation of process should be as transparent as possible - won out over the DoT's Indian Chambers of Commerce, the Confederation of Indian Industries and the position. On 23 May 1995 Communications Minister Sukh Ram announced the selection criteria. Telecom Services Industries Association.
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
34After the results of the bidding presenta-
tions were announced domestic pressures on the government grew to avoid a concentration of licenses in the hands of the Reliance-Nynex group.
Universal service and other 'obligations' The creation of the telecommunications circles can be convincingly explained from a technical and economic point of view. A more incisive inquiry into the process, however, shows that this policy also has strong social and political roots, and is closely related to the goals of universal service. From the early stages of reform the Rao administration has been worried about its political consequences, and has done everything it can to avoid accusations of supporting a program that benefits the rich and offers little to the poor. Since the government was seeking nationwide support for its reform program, it feared that national licenses could have created an uneven development of the network. A national private operator could easily have engaged in cream-skimming, concentrating on states with good market potential (such as Maharashtra, Gujarat and Delhi) and ignoring poor ones (such as Madhya Pradesh, Uttar Pradesh and Bihar) or those with little economic potential (such as Mizoram, Nagaland and Meghalaya). Several of the latter states have large electorates, and in a country like India where the use of votes to punish unpopular political decisions is becoming widespread, a national license with potential for regional cream-skimming could have provoked a national electoral backlash. Therefore in the initial stages of the reform the country was divided into areas with high, intermediate and low market potential; the last category would probably require subsidies rather than provide profits. Interested private operators would be required to operate in each of the three areas - that is, they would have to deploy networks and services in a similar way in both profitable and unprofitable areas. However, a strong lobbying campaign by potential bidders and the official fear that the requirement would scare away a large number of investors induced the government in December 1994 to change its initial approach in favor of the current 'telecommunications circles' strategy. With the creation of telecommunications circles, which closely replicate political divisions in the country, and hoping that private operators would be attracted to all of them, the government thought it had achieved a well-balanced telecommunications development program for the entire country. The outcome of the bid applications, however, has not been very encouraging. Some circles (such as Kashimir-Jammu in basic and cellular services, and the Adaman-Nicobar Islands in cellular services) received no bids. In basic fixed services there were five circles that received only one bid (from Reliance-Nynex), and another four received only two bids (one of them from Reliance-Nynex). The lack of interest shown by private investors in certain circles revived criticism regarding the government's lack of concern with universal services. Critics of the government saw the changes to the original plan (of linking attractive with unattractive circles) as evidence of the official disregard for universal service goals. Furthermore, since nine circles received only one or two bids each, the government found itself in the difficult position of having either to avoid the concentration of market power in the hands of the Reliance-Nynex group or to face the risk of deserted circles - which would again raise the specter of uneven national network development. 34 Attacks on the official policy based on universal service arguments grew as the reform program evolved. By May 1995 the issue had become a supporting argument for the Guwahati High Court to order a stay on 49
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
the tendering process. To buffer criticisms that it was favoring private investors or rich consumers at the expense of low-income users, the government, which was at a certain point considering dumping the requirement that 10% of all installed lines should be deployed in rural areas, has not only retained this condition but it has boosted its importance by granting 15% of the bid selection weight to rural lines offered in excess of the mandatory 10%. The political significance of the decision has been heightened by public announcements of heavy penalties for those that do not comply with their rural services commitments. Similar penalties would be applied to forthcoming operators that do not honor their local equipment procurement offers. Official emphasis on this matter is also tied to domestic political pressures. Opposition parties, local industrial groups and telecommunications workers have resisted the reform policy, arguing that it would dismantle existing local telecommunications equipment industries. In an effort to placate such accusations the government has linked the issue to the granting of licenses. That is, bidders that offer the most extensive use of indigenous hardware get higher points than those that rely on foreign equipment. In most other LDCs 'buy local' has not being factored into the selection criteria, but in India the government's vulnerability to domestic pressures has given it a pre-eminent position among the bidder selection criteria.
Regulation Finally, given the power and influence that TRAI will have in the sector, the decisions on its creation, attributes, jurisdiction and the like could not have been excluded from the politics of reform. Divergent interests over the institutional configuration and powers of the agency gave rise to two opposing camps: the Ministry of Communication (MoC) on one side arguing in favor of retaining control over the regulatory process, and the PMO and potential bidders on the other advocating an autonomous agency that would function beyond the control of the M o C . 35 The timing for a decision on this matter was also drawn into the controversy. While the MoC resisted defining the profile and powers of TRAI prior to the deadline for submitting bids, potential bidders and telecommunications workers pressed hard for early establishment of the regulatory agency. On both of these matters the PMO and bidders seemed to have got their way. In May 1995, one month prior to the closing date for the submission of bids, the cabinet approved the formation of TRAI, which will have considerable autonomy and powers. The agency is a non-statutory body but has clearly defined functions and responsibilities.
Conclusion
3r'The MoC also wanted to insert a legal requirement by which TRAI would have to coordinate its regulatory decisions with those of the Telecom Commission, which would remain the policy advisory arm of the MoC.
50
In the mid-1980s, when most other countries in the developing world were not even thinking about changing their telecommunications policies, India was already pushing for reform. Yet by 1995, 10 years later, reform in the sector had made little progress. Furthermore, when policy changes did come they took a unique 'Indian' twist that challenged traditional recipes for sector reform. The questions this paper has attempted to tackle are: Why did reform move so slowly? and, When it did move, why did it take the direction it did?
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
The paper has argued that, although technical and economic factors have to be factored into the analysis, it has been primarily politics that has affected the pace and shape of the new national telecommunications policy in India. More precisely, once reform is adopted as an official policy, the pace and viability of its implementation are largely affected by the degree of state autonomy and the cohesion of the governing elite, or, in its absence, the degree of power concentrated in the head of state. Due to the public utility status that telecommunications held for many decades in LDCs, reforms geared towards the commercialization and privatization of services will most likely face severe opposition from social groups with entrenched interests in the status quo. In general, labor, certain local industrial groups, state managers, politicians and some highly subsidized users will tend to oppose reforms. To overcome resistance from these politically powerful groups, governments need to gain a degree of insulation from civil society and develop a highly cohesive group of state officials in charge of reform implementation. In India it seems that neither of these factors was dominant throughout the years of reform. In fact, one can argue that reform slowed to a halt during the Rajiv Gandhi administration due to a rapid erosion of the government's strength and popular support, an increase of social demands for welfare policies, and a lack of cohesion among government officials in support of reform programs. During the Rao administration, although economic and fiscal crises provided the leverage to push changes through, the poor insulation of the central administration from domestic pressures and the lack of a unified front at the state level affected the shape of reform. The fact that privatization of the DoT was not put on the reform agenda in any serious way is largely a product of official calculations of the political costs that such a policy would have incurred. The creation of telecommunications circles also reflects political concerns tied to the achievement of universal service goals on a national basis. Licenses on a circle basis will presumably avoid regional cream-skimming and achieve more equitable network growth throughout the country. In a similar way, several other policy decisions, such as the limit on foreign ownership, the criteria for the selection of bids, the requirements on local equipment procurement and the creation of a regulatory agency, were shaped by the political forces that are progressively crafting the future of the Indian telecommunications sector.
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Telecom m u n ications policy in India: the political underpinnings of reform
Ben A Petrazzini
In the mid-1980s India became one of the first developing countries to launch reforms in its telecommunications services; yet 10 years later little change had been Introduced In the sector. Then in 1994 the government launched a new national telecommunications policy which has a considerable number of important features that are rather puzzling and uniquely Indian. This paper argues that the slow pace and uniqueness of India's telecommunications reform are to be explained in terms of the country's institutional arrangements. Radical telecommunications reforms move at a slow pace, take pacullar local twists or fall In implementation when (1) the state is highly permeable and vulnerable to demands from powerful, domestic interest groups that oppose changes in the sector; and/or (2) top government officials diverge and clash over the reform agenda, generally due to the head of state's lack of power.
The author is with the Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong (Tel: 852 2358 7641 ; fax: 852 2358 2421; email: [email protected]). My thanks to Nikhil Sinha, Bella Mody and Girija Krishnaswamy for their support and constructive comments during the preparation of this article.
India was one of the first countries in the developing world to introduce reforms in its telecommunications sector. In the mid-1980s the Rajiv Gandhi administration initiated an energetic and significant restructuring of the sector. Most of the changes took place between 1985 and 1986. By the mid-1990s, however, India had become one of the laggards in the developing world. Little change was introduced in the sector for almost a decade (other than the liberalization of some non-basic services between 1992 and 1994). In other words, after an early start in the 1980s, India shied away from reform. In 1994 several radical and sweeping policy changes were developed. The government aimed at bringing private capital into the sector as well as introducing competition to all segments of the market (with the exception of international calls and some types of long-distance services). Although there is nothing special about allowing private capital and competition in the market - several other less developed countries (LDCs) have already implemented such policies - the Indian reform has some unique features that are as puzzling as the slow pace at which reform moved in previous years. Privatization of the state-owned Department of Telecommunications (DOT), for example, was ruled out from the beginning, but private capital was brought in to compete with the DoT. The country was divided into 'telecommunications circles', with the DoT competing with one private operator in each circle. This peculiar market configuration has turned India into the first LDC to place the national state-owned telecommunications enterprise (SOTE) in competition with private operators. How do we explain this rather unique reform strategy in India? What are the factors that shaped the reform in the way it did? This paper argues that the answer lies largely in the institutional arrangements of the country and in the particular political dynamics that evolved around telecommunications reform. The analysis places India
39
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
in the international context and compares India's reform dynamics with those of other LDCs. The first section highlights the roots of the reform process, while the second builds a conceptual framework to explain the pace and nature of the Indian reform. The third section explores how institutional and political factors affected the pace of reform. The final section explores the effects that these factors have had on the nature and direction of the new policies.
Roots of India's telecommunications reform
1By serving the metropolitan areas of New Dehli and Bombay, MTNL controls more than 20% of the nation's installed lines. Prhe following section relies heavily on previous work by the author. For an extended analysis of how institutional and political factors have affected reform in the developing world see, Petrazzini, B The Political Economy of Telecommunications Reform in Developing Countries: Privatization and Liberalization in Comparative Perspective Greenwood Press, Westport, CT (1995).
40
Reforms in the Indian telecommunications sector came hand in hand with larger macroeconomic reforms. Telecommunications, however, have come to play a key role in the reform process. As the dominant development policies gradually shifted away from an inward protectionist, self-reliant strategy to one that emphasizes open markets and export-led growth, the role of infrastructure - in particular that of telecommunications infrastructure - has become crucial to economic development. In an effort to overcome the chronic structural and managerial deficiencies of the Indian telecommunications system, the Rajiv Gandhi administration was the first to introduce significant transformations to the sector. One of the first moves in the reform process was the creation in 1985 of the Department of Telecommunications, under the Ministry of Communications. With the creation of the DoT, telecommunications services were separated from the Department of Posts, and the Telecom Board - now the Telecom Commission - was set up to develop policy for the sector. A year later two new corporate entities were established: Mahanagar Telephone Nigam Ltd (MTNL) and Videsh Sanchar Nigam Ltd (VSNL). MTNL provides local services in the metropolitan areas of New Delhi and Bombay, while VSNL has an exclusive license to provide international services. 1 Both MTNL and VSNL have mixed public/private ownership. In MTNL the government owns 67% of the shares, while the remaining 33% are traded on the stock market. In the case of VSNL the government owns 85% of the shares, and the remaining 15% are traded on the stock market. The mid-1980s mark the beginning of telecommunications reform in India. However, despite its energetic start, by the mid-1990s significant transformations have yet to sweep across the Indian telecommunications landscape. The slow progress of telecommunications reform is, no doubt, a puzzling phenomenon. It has been argued elsewhere that in the particular institutional arrangements of the country and in the power distribution within the political system lie key elements to understand this intriguing reluctance to carry out reform - something which is not unique to India, and has been experienced in several other LDCs. 2 Conceptualizing telecommunications reform dynamics Telecommunications services in LDCs were provided for a long time under a public utility regime in which business principles and entrepreneurial spirit never became a driving force. In other words, the state, through cross-subsidies and other mechanisms (such as widespread hiring based on political and social criteria), turned SOTEs into political tools to achieve redistributive goals. However, faced with the failure of centralized economic management and the drying up of fiscal resources,
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
3Aharoni, Y 'On measuring the success of privatization' in Ramamurti, R and Vernon, R (eds) Privatization and Control of StateOwned Enterprises World Bank, Washington, DC (1991) 78; and Cowan, G Privatization in the Developing World Greenwood Press, New York (1990) 12 4See, for example, Hamilton, N The Limits of State Autonomy Princeton University Press, Princeton, NJ (1982). SAn elaborate analysis of how the Indian state is attempting to reassert itself through the current reform process can be found in Mody, B 'State consolidation through liberalization of telecommunications services in India' Journal of Communication 1995 45 (1). SSee, for example, Haggard, S and Kaufman, R 'Democratic transitions and economic reform' Paper delivered at the Southern California Workshop on Economic and Political Liberalization, University of Southern California, Los Angeles, May 1993; and Haggard, S Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries Cornell University Press, Ithaca, NY (1990).
most states in the developing world have shifted toward strategies that favor capital accumulation and private business initiatives. Such reversals of the status quo tend to trigger opposition from the traditional beneficiaries of the public utility model, ie telephone workers, equipment providers, politicians and citizens who benefited from state subsidies (such as residential users of local services). Resistance from these relatively powerful political actors has often played a major role in slowing down or neutralizing reform programs. But resistance is not limited to societal actors. Since privatization carries with it a significant reduction of the power and control exercised by state officials, there is also strong resistance within the state itself. In most cases government officials, state managers and civil servants have resorted to all sorts of legal and not-so-legal instruments to delay or block the implementation of reform projects. 3 Two factors seem crucial to the explanation of the state's relative effectiveness in implementing telecommunications privatization policies despite these sources of opposition: the relative autonomy of the state vis-a-vis interest group coalitions, and the degree of cohesion among the governing elite, or, in its absence, the degree of power concentration within the state. The very existence of the state is closely linked to two basic economic functions: capital accumulation and redistribution. Which function the state prioritizes at various points in time generally determines the degree of state autonomy available to it, and from whom it would have to seek insulation to implement policy changes. In other words, if state policies are aimed at achieving redistribution of resources among lower-income populations, pressures against such policies will often come from interest groups that support capital accumulation, such as large business. 4 However, if the state seeks policies that are aimed at capital accumulation and the expansion of the entrepreneurial class such as privatization - then government officials must gain autonomy from other politically powerful actors, such as workers, consumers, protected and subsidized small entrepreneurs, state managers, politicians and others who may have benefited from the redistributive functions of the welfare state. 5 The second variable crucial to understanding the outcome of telecommunications policy reform is the concentration of power at the state level - more specifically, the degree to which that power is centralized in the head of the executive branch. Political scientists and economists have highlighted the fact that treating the state as a homogeneous institutional actor conceals a variety of conflicting and contradictory interests constituted by the pubic sector. Mindful of the existence of conflicting forces within the state, social scientists have argued that cohesiveness of policy makers is crucial to effective state intervention. 6 It is one of the basic conditions for the articulation of a persuasive discursive front for shaping or changing the preferences of reticent social groups. The cohesiveness of state officials is also central to the deployment of state resources to fragment, neutralize and/or counter societal opposition. In short, states are more effective in introducing and implementing reform policies when bureaucrats and government officials share the same goals and use the same means than when their administrations are divided internally. Cohesion is, however, threatened when the issue around which state constituents converge is the reduction of their political and economic
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
power through privatization. In privatization attempts, an important reduction of bureaucratic control over the economy is implied, which leads to disagreement and resistance among state constituents that, in turn, tend to be an important factor in the program's success or failure. When cohesion of policy makers does not emerge naturally, the dominance of the top leader or leaders in the executive branch over competing groups becomes crucial to the effectiveness of state actions and policy implementation. State autonomy and the concentration of power in the executive have appeared in telecommunications reform initiatives in LDCs as crucial variables directly associated with the success or failure of reform efforts. 7 That is, in countries where these two conditions were present governments have succeeded in implementing reform, while in the countries where one or both of these factors were absent the government had to postpone or indefinitely cancel the program. Governments which have canceled or postponed (totally or partially) their reform programs include Argentina (1983-87), Thailand (1987), Colombia (1991), South Africa (1991), Uruguay (1992) and Greece (1993). Those which have successfully implemented their reform plans include Chile (1987), Jamaica (1988-90), Malaysia (1987), Argentina (1990), Mexico (1990), Venezuela (1991) and Peru (1994). Does the Indian experience replicate in any significant ways the patterns found in other LDCs? Are state autonomy and power concentration in the Indian Prime Minister's Office (PMO) relevant variables to understanding the pace and nature of telecommunications reform in India? This paper argues - and attempts to show - that the sluggish telecommunications reform in India reflects and supports the premise that the lack of state autonomy and power centralization leads to a troubled implementation of changes in the sector. During the past decade India has suffered from an increasingly weakened and atomized governing party and a rapid erosion of state autonomy. The prospect of enforcing controversial and unpopular policies has therefore diminished considerably.
Reform in slow motion
reform programs have been dominated by the introduction of various forms of private participation - mostly
7These
through the corporatization or total or partial privatization of the state-owned carriers.
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India is a constitutional democracy with a bicameral system. The lower house or House of the People (Lok Sabha) is elected by universal adult suffrage, while the upper house or Council of States (Rajya Sabha) is elected by the state legislatures based on state quotas. The president is elected every five years by the parliament and state legislatures. His or her powers are constrained by the Council of Ministers, the members of which are chosen by the prime minister. The prime minister is elected by the lower house of parliament. Law is enforced by an independent judiciary system headed by a Supreme Court. In sum, India has a highly interdependent political system in which it is extremely difficult for top government officials to act autonomously without putting their political capital on the line. Despite these formal interdependencies built into the political system, top decision makers in the country operated for several decades after independence in a fairly autonomous fashion, the basis of which can be found in the hegemonic position the Congress Party gained and maintained until recently. Hegemony of the party in the national
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
political arena led to the formation of a fairly autonomous and powerful state bureaucracy that was most of the time unwilling to challenge its political masters. However, state autonomy is not a structural feature of the political system, s The historical genesis of a state, for example, tends to affect the degree of its autonomy in the years to come. Historical evidence points to the fact that states which arise following major social dislocations - such as revolutions and civil wars - generally gain and maintain high degrees of insulation from societal demands for an extended period of time, while those which emerged out of progressive transformation of the political and social system become more vulnerable and permeable to social pressures in the short term. 9 In India widespread political violence and ethnic clashes gave rise to a powerful state in the early days after independence. However, state insularity has been progressively eroding in recent years, exposing political decision making to the contradictory demands of various interest groups and coalitions. Slow progress in the reform programs of recent administrations is closely related to the growing vulnerability of the Indian state to sociopolitical pressures from civil society and to the lack of concentration of power in the head of the government. Some of the key actors who have affected the pace and direction of reform in recent years are labor, opposition parties, the courts, and dissidents within the government and the Congress Party. Labor has been a key player in most telecommunications reforms in LDCs. In India workers have challenged most of the telecommunications reforms proposed since the mid-1980s. They feared that any change in the sector would inevitably lead to the DoT's privatization, which in turn would generate massive unemployment. ~° Restructuring initiatives by the Gandhi administration were challenged and often blocked by labor activism. Later, in 1991, recommendations by the Athreya Commission advocating the corporatization of the DoT were also challenged by labor, who saw the initiative as the first step toward the privatization of the carrier. Although the recommendation highlighted an inevitable strategic reform if the DoT is to remain competitive and alive in a progressively liberalized Indian telecommunications market, it was never adopted by the government due to political pressures. Efforts to bring private capital to the telecommunications sector by the Rao administration have been meet by resistance from the more than 450 000 telecommunications employees. Strike threats from the National Federation of Telecom Employees (NFTE), the Federation of 8See Skocpol, T 'Strategies of analysis in National Telecom Organizations (FNTO) and Bharatiya Telecom Emcurrent research' in Evans, P, Skocpol, T ployees Federation (BTEF) were made public as soon as the new and Rueschemeyer, D (eds) Brining the State Back In Cambridge University Press, telecommunications policy was announced in May 1994. A year later, in Cambridge, UK (1985). June 1995, workers launched a massive strike in an effort to stop the 9See Neher, C Southeast Asia: In the New bidding process. Workers were against what they called 'deviations from International Era Westview Press, Boulthe original telecommunications policy'. They feared that private comder, CO (1991). 1°Events elsewhere have shown that it is panies, which would launch operations with new sophisticated technolonot privatization but competition that brings gy, would take a large number of subscribers away from the DoT, which about considerable layoffs in telecommunications companies. The irony is that would be detrimental to workers' job prospects. After almost a week of by opposing pdvatization, telecommunicaresistance and growing threats of wholesale dismissal by the governtions workers have bargained in favor of a ment, the strike was called off. Although labor has been unable to liberalized competitive market, ie the market configuration that is more likely to lead dismantle the current Indian reform program, workers' opposition has to massive retrenchment. had a major impact on the pace and direction of the reform, such as the
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Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
11This strategy has turned India into the first developing country to license private competition against its state-owned national carrier. 12Bodhisatva G 'Open sesame' Business India 5 June 1995, 55 13For more details, see McDonald, H 'Don't mention it' Far Eastern Economic Review 30 March 1995. ~4Asia-Pacific Telecom Analyst 22 May 1995
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a d o p t i o n of an u n o r t h o d o x choice of liberalization without privatization. 11 The unease and hesitancy of the Rao administration in carrying out reform have been increased by the fact that in recent state elections opposition parties have won by campaigning against the government's economic reforms. The opposition, which argues that the current economic reforms are pro-rich and do not benefit the poor in any significant way, snatched from the control of the ruling party two southern states in the November 1994 election. In the February 1995 election the Congress Party lost two more states - this time the crucial industrial states of Maharashtra and Gujarat. Due to these results the ruling Congress Party retains control over states that comprise only one-quarter of the country's electorate. With respect to telecommunications specifically, the Bharatiya Janata Party (BJP), which has gained considerable national support in recent elections, is challenging the government on its reform program, and threatening to review the process if it comes to power in the 1996 national election. The secretary general of the party, Pramod Mahajan, argues that 'the liberalization process has been on for four years'. He asks then, 'Why has the telecommunications sector opened up now just ahead of the elections?' In his view the answer is simple: 'The Congress Party intends to use the proceeds from the tendering process to finance its electoral campaign. '12 One of the most recent example of the difficulties in implementing draconian reforms in the highly politicized decision-making system of India can be found in the crafting of the most recent national budget. While during the fiscal years 1991-92 the government was willing to pay the political cost of curbing a fiscal deficit that had surpassed 8% of GDP, in 1995 it approved a budget that reflects electoral concerns in regard to the forthcoming 1996 national election more than the IMF's recommendations for macroeconomic stabilization.13 Furthermore, the Indian judicial system, which is often held to be one of the key factors that sets India apart from some of its Asian neighbors because it provides legal security to private investment, has recently been used by groups with vested interests in the sector to block the progress of reform. In cellular services, for example, the first batch of licenses to be granted by the DoT to private consortia in the cities of Delhi, Bombay, Madras and Calcutta was challenged by unsuccessful bidders. The courts have taken more than two years to resolve the dispute. Although the controversy was presumably settled in November 1994, some of the losers were considering further judicial actions against the government. In May 1995 employees of the state-owned equipment manufacturer, Indian Telephone Industries (ITI), relied on the Indian judicial system to block the bidding process on the basis that the policy was threatening universal service obligations and national security. The Guwahati High Court, in response to the workers' demand, ordered a stay on the tender for basic services. The political nature of the move is reflected in the fact that the case was submitted to a court which is located 3000 km from ITI's headquarters in Bangalore. According to the ITI Union president, the rationale behind the action is that 'different courts in the country view the issues differently'. 14 The stay order was canceled one day before the bidding deadline by the Supreme Court, allowing the DoT to move on with the tender.
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
The progress of reform has also suffered considerably due the lack of cohesion within the governing elite. Lack of power concentration in the head of the state, rebellious state officials and governing party members have emerged in other countries in the developing world (Argentina, Colombia, Greece, Thailand, South Africa and Uruguay) as major obstacles to reform. In India reform under the Rajiv and Rao administrations has been hampered by disagreements and clashes among state officials and the ruling party rank and file. During the Rajiv administration opposition to reform within the ruling Congress Party was a major factor in slowing down and in some cases canceling reform plans. 15 In the current Rao era opposition to telecommunications reform comes from both state officials and party members. The initial stages were littered with controversies between the communications minister who opposed fast-track reform and widespread private participation in the sector on one side, and the prime minister and the head of the Telecom Commission who favored both strategies on the other. A few months after the chair of the Telecom Commission, Nagarajan Vittal, was removed to overcome some of the political hurdles created by his position on the reform; the Ministry of Finance entered the fray to battle with the Minister of Communications and the DoT on several fronts. 16 The permanent conflict among state officials has created an institutional environment often defined as a 16His initial economic reform plan was 'multiple-veto system'. opposed by the Congress Party rank and Although the insularity of India's policy makers has, in general terms, file. The finally approved plan was condiminished in recent years, there have been moments when particular siderably different from its predecessor and recommited Rajiv and his administraeconomic or political events have offered them, for a limited period of tion to socialist economic strategies. For time, the necessary conditions to push forward controversial reforms more details, see Kohli A Democracy and Discontent: India's Growing Crisis of Gov- formerly stalled by political conflicts. Economic crises are one example ernabi/ity Cambridge University Press, of such events. By weakening or dismantling pre-existing coalitions of Cambridge, UK (1990) 319. interest groups and often reversing a country's entrenched political leBusiness South Asia February 1995 17On the matter, see Gourevitch, P Poh'tics dynamics, they provide state officials a limited period of insulation from in Hard Times: Comparative Responses to domestic pressures. 17 That seems to be the case in India, where the Internationa/ Economic Crisis Cornell Uni- economic crisis of 1991 provided Narasimha Rao with the required versity Press, Ithaca, NY (1986); and Torleverage to implement significant and controversial economic reforms. ~8 re, J 'Building democracies in hard times: the current Latin American experience' Unpublished MS, Buenos Aires (1992). ~SOther factors that have enhanced the implementation of reforms in recent years are related to: (a) growing demand for better infrastructure from domestic and foreign corporations; (b) pressures from international agencies and foreign governments (mainly the USA) in favor of economic liberalization; (c) the shift from centrally planned to market economies elsewhere in the world; and (d) the direct and personal involvement of the Prime Minister in the reform process. ~gForfurther details on the segments of the market open to competition and the players in each of them, see Petrazzini, B and Krishnaswamy, G 'The socioeconomic impact of telecommunications reform in developing countries: India in the international context' Paper delivered at the PICT International Conference on the Social and Economic Implications of Information and Communication Technologies, London, 10-12 May 1995. 2°State-owned firms were banned from entering the bidding process.
Politics and the nature of Rao's reforms Faced with a considerable downturn in the national economy, the Rao administration pushed forward reforms in various sectors of the economy, including telecommunications. Thus in the early 1990s several non-basic telecommunications service markets were progressively open to limited competition. 19 By 1994, however, a booming economy and the subsequent demand for considerable increases in the quantity, quality and diversity of telecommunications services exposed the constraints and limitations of the reforms carried out until then. In its effort to induce drastic changes in telecommunications, the government announced in May 1994 the long-expected National Telecommunications Policy. In September 1994 new official guidelines specified the terms for private sector participation and other market issues. The main features of the new policy are as follows: • There would be no privatization of the DoT or any other Indian SOTE, such as MTNL or VSNL. Only locally incorporated private firms, in which foreigners were permitted to own up to 49% of the 45
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
•
•
•
•
21Bidders for basic fixed services must have, by January 1995, experience as a service provider or as a network operator of a public switched telephone network of at least 500 000 lines. In cellular services bidders must have experience operating a cellular network of at least 100 000 subscribers. To comply with this requirement a foreign company can draw on the experience of its parent company, one of its subsidiaries or one of the parent company's subsidiaries. For the carrier's experience to be considered the foreign firm must have at least a 10% equity stake in the consortium. This stake must remain in place for five years for basic service operators and three years for mobile operators. Bidders for fixed basic services must also have a combined net worth of Rs 3 billion (circles A), Rs 2 billion (circles B) and Rs 500 million (circles C). For mobile service bids Rs 1 billion (circles A), Rs 500 million (circles B), and Rs 300 million (circles C) were required. 22Circles have been divided into three categories (A, B and C) based on their market value. 23There are no restrictions on the number of circles for which each consortium can bid. However, the DoT retains discretion over the number of circles granted to any bidder to avoid the risk of monopolies. 24There are penalties for successful bidders that do not comply in time with the license fee or do not meet the proposed target on the other three criteria. ~The Indian Telegraph Act (Section 3[6]) needed to be changed to remove existing legal impediments to the existence of TRAI.
46
•
•
shares, were allowed to bid. 2° Bidding firms were not allowed to be part of more than one consortium. 21 The licensing of private operators would be granted on a 'circle basis', with the country being divided in 20 telecommunications circles for local basic fixed network services, and 18 circles for mobile cellular services. 22 No more than one private company would be licensed in each circle to compete with the DoT and MTNL in basic wireline, value-added and multimedia services - including cable television. Two operators will be licensed to provide mobile services. 23 Licenses would be granted initially for 15 years, and could be extended by an additional 10 years. Private operators would be allowed to provide intra-circle longdistance services (where 60% of long-distance traffic calls occur). Inter-circle communication remains under the exclusive control of the DoT, and VSNL maintains an exclusive license over international services for at least five years. Successful bids would be selected based on the following weightings of the main criteria for bid evaluation: (a) net present value of the license fee - 72%; (b) network rollout plan for the first three years 10%; (c) percentage of rural lines installed in excess of mandatory ones - 15%; and (d) use of indigenous equipment - 3 % . 2 4 The new private operators are required to maintain a balance in their coverage between urban and rural areas. More specifically, they are required to allocate 10% of all installed lines to connect villages. Pilot projects in remote and sparsely populated regions with lucrative potential will get priority if they bring in the latest technology. New networks should be mostly based on fiber-optic cable and wireless local loop. The use of locally produced equipment is encouraged. Higher points would be granted to bidding consortia that offer to rely heavily on locally produced hardware. Those that do not comply with the offer would be punished with severe penalties. An autonomous regulatory body - the Telecom Regulatory Authority of India (TRAI) - will regulate standards and technical compatibility, pricing mechanisms and interconnection issues (such as revenue-sharing agreements, access charges and time frames for connection availability) as well as protect consumer interests. TRAI is to be headed by a current or former judge of the Supreme Court or a current or former chief of justice of the High Court, and two other members who hold or have held a rank equivalent to Secretaries of the Government. 25
The new policies no doubt reflect economic and technological considerations and concerns. But most of their peculiar 'Indian' patterns are the product of political pressures, bargaining and trade-offs. The current market-oriented reforms fly in the face of policies that Indians have supported for decades. Since enforcing reform in a top-down fashion - as could have been done in other Asian nations - also runs against the democratic principles entrenched in Indian society, the government developed a reform program that, although far from ideal in economic and technical terms, is viable at the lowest possible political cost. The following paragraphs explore the political underpinnings of several key issues of the policy program, namely, ownership and market structure, universal service and other social 'obligations', and regulation.
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini Ownership and market structure
28The well-publicized official and public attacks on the Enron power plant deal in the state of Maharashtra is a good example of such a sensitive issue in Indian political life. For a discussion of the Enron project cancellation and its implications see Economist 12 August 1995. 27The active opposition of labor has dismantled privaUzation initiatives in several other LDCs, and there were no reasons to believe that this was not going to be the case in India. 28Total demand rose by 50% between April 1992 and April 1994 and was expected to rise even further in the following three years. ~ T h e idea of private participation in the sector was - and still is - controversial. However, if there was need of evidence in support of private entry into the sector the DoT itself provided it. By March 1995, at the close of the 1994/95 fiscal year, the Department was far from meeting the network expansion targets for the year. Out of the original 1.6 million lines, the DoT had installed only 915 000 - that is, 57% of the annual target. Similarly deficient performance was evident in the installation of public telephones in rural areas and trunk lines, tasks in which the DoT had achieved only 41% and 64% of its planned target: Asia-Pacific Te/ecom Analyst 13 March 1995.
India's electorate is well known for its entrenched distrust of private business, and in particular of foreign firms. 26 Therefore handing over the whole national telecommunications system to private interests through the full privatization of the national carrier - as in Latin America - was never seriously considered by the government. Furthermore, India has not suffered the profound economic and fiscal troubles that Latin American countries confronted in the 1980s. The absence of such major economic crises strengthened those in government who opposed privatization and weakened arguments in favor of radical and draconian economic reforms. In a context of 'politics as usual', and facing deeply entrenched negative perceptions and distrust of foreign and local businesses among the Indian population, it became extremely difficult for the government to justify economic strategies that the central administration itself had attacked in past years. Besides the difficulties of justifying privatization the government confronted the very real and powerful opposition of telephone workers, who feared that any form of private participation in the sector would lead to a massive reduction of the telecommunications workforce. 27 The sector is one of the largest employers in India with almost half a million employees, and their opposition to reform programs had the support and sympathy of the other 18 million public sector workers. In other words, a direct and non-negotiated confrontation with labor over the privatization of the DoT would have been political suicide. There were other issues related to giving away control of the national telecommunications system over which the government itself felt uneasy. Security still remains high on the national political agenda. Friction with Pakistan over Kashimir and insurgency in the northeastern states of Arunachal Pradesh, Nagaland and Mizoram have revived the relevance of the matter. The government, however, had ambitious infrastructure plans to support the fast-growing national economy. In the telecommunications sector it determined that by 1997 telephones should be available on demand, all villages should be covered, one public call office (PCO) should be provided for every 500 persons in urban areas, and all internationally available VANS should be introduced in India - preferably by 1996. To achieve these targets and satisfy the rapidly growing demand for new services the government would have to increase its target of installing 7.5 million lines during the 8th Five Year Plan to 10 million lines, zs It was estimated that under current demand scenarios the DoT would require approximately US$17 billion to meet expansion requirements by 1997, yet it would be able to raise at most US$5 billion by that date. Under such a scenario, private capital would have to be brought into play to supplement the shortfall. 29 Once the government became convinced that private capital was a must to achieve the required expansion goals, some began to question the extent to which local capital alone would be able to meet the financial requirements of the program. Similar doubts arose in relation to the technical and managerial expertise of the local entrepreneurs to run the future private networks. Since there was no local expertise in the sector - other than that of state-owned companies - and local capital seemed too scarce for the magnitude of the project, it became evident that the entry of foreign business was required. With those concerns in mind, the government built into the legislation requirements - such as
47
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
experience in operating networks with a large number of lines/ subscribers - that made partnership of local companies with foreign operators almost inevitable. The permissible percentage share of a foreign firm in a bidding consortium was the subject of heated debates and intense controversy. Some government officials - such as the former Telecom Commission chair N Vittal and the Foreign Investment Promotion Board (FIPB) director A N Verma - favored a 51% stake for foreign investors. This criterion was, of course, supported by potential foreign bidders and their governments. But other powerful players involved in the reform process - such as Communications Minister Sukh Ram and Prime Minister Narashima Rao - opposed majority foreign ownership. 3° Their position was backed by the recommendations of the Joshi Committee and the telecommunications working group of the Industrial Credit and Investment Corporation of India (ICIC), which suggested limiting foreign presence to no more than 40% of shares - due to national security concerns and the fact that leading countries, like the USA, also restricted foreign companies to a minority share. Powerful domestic industrial groups also launched an intense lobbying campaign to restrict foreign investors' participation. The final decision to allow foreign owners up to 49% of shares was another product of political compromise in which the government offered foreign investors the most attractive possible option, while avoiding at the same time accusations of giving control of the telecommunications sector to foreigners. 31 India is an interesting case, not only because it is the first LDC to allow private business to compete with the national state-owned carrier, 3°The position of Minister Ram on the but also because it is one of the first countries to liberalize the local loop issue changed as events evolved. While in before opening its long-distance and international services markets to the early stages he favored no preset limit competitive entry. 32 The policy seems to have succeeded, if not in on the equity participation of foreign companies, he later became a strong advocate gaining support for the project, at least in neutralizing potentially of the minority share ownership option for harmful opposition from various local and foreign groups with clashing foreign companies. See Telenews 2 June interests. On the one hand, opening local services (the least profitable and 14 July 1994. 31Although restrictions are placed on the segment of the market) first was a powerful bargaining chip to placate extent of equity share ownership, there is domestic resistance to reform. On the other hand, the risk of alienating nothing that bans foreign firms from gain- private capital with the not so attractive local market was diminished by ing control of the venture through public shareholding or other forms of corporate offering the possibility of providing intra-circle long-distance services restructuring. In fact, several foreign firms and the prospect of further liberalization in the long-distance and - such as Bell Atlantic, France Telecom international market in five years' time. The strategy, although someand Singapore Telecom - demanded control over the consortium as a precondition what unorthodox, has achieved the double objective of appeasing for any substantial investment: Business opposition and attracting private investors. South Asia November 1994 The criteria for selecting the winning bids have also been prone to 32Mexico liberalized its local loop before it political struggles, with the DoT trying to retain as much discretion as allowed competition into its long-distance services market, but Telmex - the incum- possible and bidding companies pushing the government for a public bent - had no obligation to interconnect, announcement of the criteria to be used. 33 The DoT managed for making unviable any potential competitor's business. The regulation has changed, several months to avoid addressing the issue, arguing that a public and the local company lusacell is planning announcement of the weight to be attributed to the various aspects of to offer local basic services in a joint ven- the bid might drive would-be operators to coalesce into a cartel. ture with foreign partners. 33pressure for clarifications came from However, not long before the deadline for bid submission those who both foreign bidders and local industry supported the specification option - deploying the argument that the associations such as the Federation of process should be as transparent as possible - won out over the DoT's Indian Chambers of Commerce, the Confederation of Indian Industries and the position. On 23 May 1995 Communications Minister Sukh Ram announced the selection criteria. Telecom Services Industries Association.
48
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
34After the results of the bidding presenta-
tions were announced domestic pressures on the government grew to avoid a concentration of licenses in the hands of the Reliance-Nynex group.
Universal service and other 'obligations' The creation of the telecommunications circles can be convincingly explained from a technical and economic point of view. A more incisive inquiry into the process, however, shows that this policy also has strong social and political roots, and is closely related to the goals of universal service. From the early stages of reform the Rao administration has been worried about its political consequences, and has done everything it can to avoid accusations of supporting a program that benefits the rich and offers little to the poor. Since the government was seeking nationwide support for its reform program, it feared that national licenses could have created an uneven development of the network. A national private operator could easily have engaged in cream-skimming, concentrating on states with good market potential (such as Maharashtra, Gujarat and Delhi) and ignoring poor ones (such as Madhya Pradesh, Uttar Pradesh and Bihar) or those with little economic potential (such as Mizoram, Nagaland and Meghalaya). Several of the latter states have large electorates, and in a country like India where the use of votes to punish unpopular political decisions is becoming widespread, a national license with potential for regional cream-skimming could have provoked a national electoral backlash. Therefore in the initial stages of the reform the country was divided into areas with high, intermediate and low market potential; the last category would probably require subsidies rather than provide profits. Interested private operators would be required to operate in each of the three areas - that is, they would have to deploy networks and services in a similar way in both profitable and unprofitable areas. However, a strong lobbying campaign by potential bidders and the official fear that the requirement would scare away a large number of investors induced the government in December 1994 to change its initial approach in favor of the current 'telecommunications circles' strategy. With the creation of telecommunications circles, which closely replicate political divisions in the country, and hoping that private operators would be attracted to all of them, the government thought it had achieved a well-balanced telecommunications development program for the entire country. The outcome of the bid applications, however, has not been very encouraging. Some circles (such as Kashimir-Jammu in basic and cellular services, and the Adaman-Nicobar Islands in cellular services) received no bids. In basic fixed services there were five circles that received only one bid (from Reliance-Nynex), and another four received only two bids (one of them from Reliance-Nynex). The lack of interest shown by private investors in certain circles revived criticism regarding the government's lack of concern with universal services. Critics of the government saw the changes to the original plan (of linking attractive with unattractive circles) as evidence of the official disregard for universal service goals. Furthermore, since nine circles received only one or two bids each, the government found itself in the difficult position of having either to avoid the concentration of market power in the hands of the Reliance-Nynex group or to face the risk of deserted circles - which would again raise the specter of uneven national network development. 34 Attacks on the official policy based on universal service arguments grew as the reform program evolved. By May 1995 the issue had become a supporting argument for the Guwahati High Court to order a stay on 49
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
the tendering process. To buffer criticisms that it was favoring private investors or rich consumers at the expense of low-income users, the government, which was at a certain point considering dumping the requirement that 10% of all installed lines should be deployed in rural areas, has not only retained this condition but it has boosted its importance by granting 15% of the bid selection weight to rural lines offered in excess of the mandatory 10%. The political significance of the decision has been heightened by public announcements of heavy penalties for those that do not comply with their rural services commitments. Similar penalties would be applied to forthcoming operators that do not honor their local equipment procurement offers. Official emphasis on this matter is also tied to domestic political pressures. Opposition parties, local industrial groups and telecommunications workers have resisted the reform policy, arguing that it would dismantle existing local telecommunications equipment industries. In an effort to placate such accusations the government has linked the issue to the granting of licenses. That is, bidders that offer the most extensive use of indigenous hardware get higher points than those that rely on foreign equipment. In most other LDCs 'buy local' has not being factored into the selection criteria, but in India the government's vulnerability to domestic pressures has given it a pre-eminent position among the bidder selection criteria.
Regulation Finally, given the power and influence that TRAI will have in the sector, the decisions on its creation, attributes, jurisdiction and the like could not have been excluded from the politics of reform. Divergent interests over the institutional configuration and powers of the agency gave rise to two opposing camps: the Ministry of Communication (MoC) on one side arguing in favor of retaining control over the regulatory process, and the PMO and potential bidders on the other advocating an autonomous agency that would function beyond the control of the M o C . 35 The timing for a decision on this matter was also drawn into the controversy. While the MoC resisted defining the profile and powers of TRAI prior to the deadline for submitting bids, potential bidders and telecommunications workers pressed hard for early establishment of the regulatory agency. On both of these matters the PMO and bidders seemed to have got their way. In May 1995, one month prior to the closing date for the submission of bids, the cabinet approved the formation of TRAI, which will have considerable autonomy and powers. The agency is a non-statutory body but has clearly defined functions and responsibilities.
Conclusion
3r'The MoC also wanted to insert a legal requirement by which TRAI would have to coordinate its regulatory decisions with those of the Telecom Commission, which would remain the policy advisory arm of the MoC.
50
In the mid-1980s, when most other countries in the developing world were not even thinking about changing their telecommunications policies, India was already pushing for reform. Yet by 1995, 10 years later, reform in the sector had made little progress. Furthermore, when policy changes did come they took a unique 'Indian' twist that challenged traditional recipes for sector reform. The questions this paper has attempted to tackle are: Why did reform move so slowly? and, When it did move, why did it take the direction it did?
Telecommunications policy in India: the political underpinnings of reform: B A Petrazzini
The paper has argued that, although technical and economic factors have to be factored into the analysis, it has been primarily politics that has affected the pace and shape of the new national telecommunications policy in India. More precisely, once reform is adopted as an official policy, the pace and viability of its implementation are largely affected by the degree of state autonomy and the cohesion of the governing elite, or, in its absence, the degree of power concentrated in the head of state. Due to the public utility status that telecommunications held for many decades in LDCs, reforms geared towards the commercialization and privatization of services will most likely face severe opposition from social groups with entrenched interests in the status quo. In general, labor, certain local industrial groups, state managers, politicians and some highly subsidized users will tend to oppose reforms. To overcome resistance from these politically powerful groups, governments need to gain a degree of insulation from civil society and develop a highly cohesive group of state officials in charge of reform implementation. In India it seems that neither of these factors was dominant throughout the years of reform. In fact, one can argue that reform slowed to a halt during the Rajiv Gandhi administration due to a rapid erosion of the government's strength and popular support, an increase of social demands for welfare policies, and a lack of cohesion among government officials in support of reform programs. During the Rao administration, although economic and fiscal crises provided the leverage to push changes through, the poor insulation of the central administration from domestic pressures and the lack of a unified front at the state level affected the shape of reform. The fact that privatization of the DoT was not put on the reform agenda in any serious way is largely a product of official calculations of the political costs that such a policy would have incurred. The creation of telecommunications circles also reflects political concerns tied to the achievement of universal service goals on a national basis. Licenses on a circle basis will presumably avoid regional cream-skimming and achieve more equitable network growth throughout the country. In a similar way, several other policy decisions, such as the limit on foreign ownership, the criteria for the selection of bids, the requirements on local equipment procurement and the creation of a regulatory agency, were shaped by the political forces that are progressively crafting the future of the Indian telecommunications sector.
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