The political economy of India's telecommunication reforms

Telecommunications Policy, Vol. 20, No. 1, pp. 23-38, 1996

Pergamon 0308-5961(95)00045-3

Copyright ~) 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00

The political economy of India's tele( mmunicatior reforms

Nikhil Sinha

In June 1991 the Indian government launched a sweeping economic reform program that radically changed the structure of the country's economy. The reforms were initiated in response to the acute fiscal crisis the country faced in the aftermath of the foreign exchange crunch triggered by the Gulf War. The government used the short-term crisis as an excuse to overhaul the entire economic system in the hope of ensuring long-term economic growth. In May 1994 the government announced it would liberalize telecommunications as part of the overall economic restructuring that was underway. The new telecommunications policy reflected the government's view (a) that the rapid improvement and development of telecommunications was vital to the success of the wider economic reforms; and (b) that such development could not take place under the public monopoly model that had governed the sector since the country became independent in 1947. The new Indian telecommunications policy has a number of characteristics that make it perhaps one of the most interesting telecommunications reform programs in the developing world. It begins the restructuring process by introducing competition in the local loop, breaking from the normal process which begins with the liberalization of long-distance services. It forces Indian and foreign companies to form joint ventures in order to enter the bidding to provide basic services. Nikhil Sinha is Assistant Professor in the Department of Radio-TV-Film, University Instead of licensing one or two companies to provide services nationally, of Texas at Austin, CMA 6.118, Austin, TX the government plans to grant separate licenses for 18 telecommunica78712, USA (Tel" +1 512 346 3665; fax: tions regions, holding out the potential for a number of different +1 512 471 4077; email: nsinha@mail. providers to enter the market. Finally, it avoids privatization of the utexas.edu). government PTT, which will continue to provide services in head-to1The DoT will be required to provide interconnection to the private telcos, unlike in head competition with the private telcos. This article takes the position that the nature and characteristics of Mexico where Telex was not required to interconnect, thereby killing any potential telecommunication reforms in India are best understood in the context for real competition. In fact, not only will the DoT be required to interconnect, it will also of the overall restructuring of India's economy and are conditioned and constrained by the political and economic exigencies within which the continued on page 24

The new Indian telecommunications policy is one of the most interesting telecommunications reform programs in the developing world. It begins the restructuring process by Introducing competition in the local loop, and forces Indian and foreign companies to form joint ventures to provide basic services. Instead of licensing one or two companies to provide services nationally, the government plans to grant separate Iicencee for 18 regions, holding out the potential for a number of different providers to enter the market. Finally, it avoids privatizefion of the government PTT, which will continue to provide services in head-to-head competition with the private telcos. The first section of this paper Introduces the broad parameters of the institutional approach; the second briefly describes the government's new economic policies; and the third assesses the structural, technical, regulatory and service components of the government's new telecommunications policy from an Institutional perspective.

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The political economy of India's telecommunication reforms: N Sinha

reform process is unfolding. Utilizing an institutional perspective, it assesses the government's new telecommunications policy in relation to the overall economic reforms and identifies the political and economic imperatives that shaped the policy. The first section of the paper introduces the broad parameters of the institutional approach; the second briefly describes the government's new economic policies; and the third assesses the structural, technical, regulatory and service components of the government's new telecommunications policy from an institutional perspective.

Institutional perspective The restructuring of telecommunications sectors now underway in India and across the developing world has created an urgent need for the development of effective and credible institutional structures and processes. The nature and success of the reforms will depend significantly on the institutional matrix of particular countries. Institutions are the structures that constrain economic activity and, together with other constraints (capital, technology, etc), determine the choices that organizations make that shape the performance of a sector. 'Institutions consist of formal rules, informal constraints (norms of behavior, conventions, and self-imposed codes of conduct), and the enforcement characteristics of both.'2 Economic change, or at least changes in the form of economic organization and governance, involves changes in institutional rules and their enforcement characteristics. Changes in formal rules may occur as a result of legislative changes such as the passage of a new statute, of judicial changes stemming from court decisions, of regulatory rule changes enacted by regulatory agencies, and of constitutional rule changes that alter the rules by which other rules are m a d e ) Informal changes may result from a transformation of the dominant ideas and ideologies guiding economic processes in a society. These in turn may be engendered through the rise of new economic and political interests or as a response to the failure of existing ideologies to motivate economic progress. Both sets of changes will play a large part in determining the nature, effectiveness and credibility of new policies. The economic transformation underway in India has been marked by both formal and informal institutional changes. The government has successfully dismantled the legal and statutory basis for the publicsector-dominated command economy constructed during the first three decades of economic planning. In the process it has attempted, with significantly less success, to dispel the socialistic ideology which provided the rationale and justification for state planning. During the economic reform process as a whole (popularly known in India by the catch-all phrase 'liberalization'), and for the telecommunications reforms in particular, the government has constantly had to trade off among four often opposing objectives: to push through the economic continued from page 23 reforms; to do so within the limits of a parliamentary and federal be required to share its existing assets and infrastructure with the private telcos at a democracy governed by the rule of law; to ensure that the political reasonable charge. 2North, D 'Institutional change: a fallout of the reforms does not hurt the ruling party's electoral prosframework of analysis' in Sjostrand, S (ed) pects; and to counter opposition from political, industrial and labor Institutional Change: Theory and Empirical groups. In doing so the Narasimha Rao government has steered a Findings M E Sharpe, Armonk, NY (1993) difficult course, compromising and limiting its economic objectives in 36 the face of opposition from both political and economic forces. albid

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The political economy of India's telecommunication reforms: N Sinha

Economic reforms The years 1990-91 were among the most difficult in India's recent history. After a decade of Congress rule, the opposition National Front party came to power in 1990 with high expectations of setting the country on a new path of social and economic development. But the National Front government collapsed within a year and a stopgap government formed in its wake also fell with a few months. Two successive governments in one year not only caused considerable political uncertainty but also pushed the economy into a downward spiral. The aftermath of the Gulf War further aggravated the country's economic crisis. Foreign exchange reserves dipped to levels below one month of imports, imports exceeded exports by over 50% and the government's budget deficits soared. When the Congress government under Narasimha Rao was elected in 1991, it faced one of the country's most severe economic crises. Spearheaded by Finance Minster Manmohan Singh, the new government's response to the crisis was twofold. It put into motion a series of steps to overcome the immediate balance-of-payments problem, and it initiated a sweeping set of measures aimed at restructuring the country's economic system by taking aim at the economic policies which it identified as responsible for the deeper economic malaise. According to the government, controls on production and licensing restrictions along with high protective barriers had fostered monopolistic trends within Indian industry, making it import intensive and inward looking. The lack of competition provided little incentive to companies to engage in technical innovations. Most companies, including those in the public sector, imported more than they exported and, given its reliance on imports of petroleum and other bulk products, the country incurred increasingly large trade deficits. The foreign account collapsed whenever oil prices shot up, for instance in 197%80 and again in 1990-91. With a parallel decline in cheap concessional aid, the country had to rely increasingly on costly foreign commercial borrowings, further weakening the balance-of-payments position. Alongside the foreign exchange problem was the sustained rise in fiscal deficits over the years. The pumping of money into the economy created strong inflationary trends, which in turn pushed up interest rates. This increased the government's debt burden and added to the budgetary deficit in a classic vicious cycle. Fiscal deficits mounted because of problems in both the revenue and expenditure accounts. On the revenue side the level of taxation increased to a point that it was hurting growth and encouraging evasion. On the expenditure side rising subsidy bills and the growth of establishment expenditure and defense spending created a situation where the need to maintain investment in productive and social sectors required increased borrowing. Together with rising public sector losses, this limited the government's ability to spend on infrastructure, education, health and poverty removal programs. The excessive protection offered to domestic industry through licensing and exorbitant import tariffs produced another major problem. In the absence of both domestic and international competition there was very little pressure on Indian industry to lower costs, and Indian companies relied more on costly capital than on cheap labor. Thus industrial growth did not generate as much employment as it should have and failed to attract the poor away from agriculture-based employ25

The political economy of India's telecommunication reforms: N Sinha

ment. Thus, while the lack of labor intensity in manufacturing stunted employment growth and depressed incomes, the fiscal crisis limited the government's ability to intervene through more spending on povertyalleviation and job-generation programs. The Narasimha Rao government used the immediate fiscal crisis to launch an attack on the entire structure of the economy. In the first instance it initiated steps to deal with the immediate crisis, avert the danger of defaulting on its debt repayments, raise the level of foreign exchange reserves and restore overall confidence in the economy. A massive loan from the IMF took care of the immediate fiscal crisis, but it also initiated a widespread new economic policy to restructure the economy and eliminate its basic problems. Clearly, some of the reform measures stemmed from the need to meet the conditions imposed by the IMF as part of the loan. But they also reflected the new government's belief that long-term growth was possible only through an overhaul of the entire economy. As Finance Minister Singh put it, the government fashioned a policy to treat not just the symptom but also the disease, to 'cauterize the root of the problem' .4 Taken together, these actions constituted the government's New Economic Policy (NEP). The NEP had five many components: • Devaluation: Devaluation of the rupee was aimed at increasing exports, narrowing the trade gap and preventing capital flight. • Deregulation: Deregulation, or more accurately de-licensing, was aimed at dismantling controls on domestic private industry by abolishing licensing requirements, lifting restrictions on capacity and permitting it to operate in areas previously reserved for the public sector, in effect sweeping away the so-called 'license raj'. • Privatization: Privatization has involved a number of different measures, including the outright sale of public sector enterprises, offering shares to the public and joint public-private ownership of enterprises. • Liberalization: Liberalization has involved the opening up of monopoly or oligopoly markets in both the public and private sectors to increased competition. • Globalization: Globalization in the Indian context has involved the opening up of one of the most closed economies in the world to international trade and foreign investment. First, trade polices have been revamped to lower or eliminate restrictions, quotas and tariffs on imported goods while providing significant incentives for exports. Second, the terms and conditions of foreign investment have been restructured to attract greater volumes of investment into the country and to encourage foreign companies to relocate productive activities in India. The NEP lacked explicit goals or policies aimed at reducing income inequalities, fostering balanced economic growth, reducing concentration of the means of production or fostering the development of the public sector, which had been the cornerstone of the socialistic policies of the previous four decades. Gone also was the goal of economic self-reliance, at least in terms of manufacturing locally most, if not all, 4Singh, M 'New economic policy, poverty the critical goods and services required by the economy. Self-reliance and self-reliance' in Prasad, S and Prasad, was recast as the ability to generate the foreign exchange required to d (eds) New Economic Policy: Reforms and Development Mittal Publications,New pay for imports. Perhaps the most dramatic change in the country's Delhi (1993) 16 economic orientation was the move away from the import substitution

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The political economy of India's telecommunication reforms: N Sinha

policies of previous regimes and the opening up of the country's economy to direct foreign investment. The government maintained that it needed to use all the means available to realize its economic goals, including foreign direct investment (FDI). Finance Minister Manmohan Singh argued that the country needed the global links, foreign technology and marketing expertise of foreign companies in order to improve the international competitiveness of Indian industry. 5 Foreign investment was also designed to raise the level of investment in the country. Domestic savings were seen as inadequate to fuel the government's ambitious growth targets. FDI was considered a cheaper option to meet the investments gap than the usual mode of external borrowings. FDI, in addition to supplementing domestic savings, was also seen as offering advantages such as technology transfer and job creation and could put competitive pressures on local manufacturers to improve productivity and growth. Critics of the reform movement argued that the decontrol of industry and easier entry of multinationals would hurt the country's economy and weaken its economic sovereignty in the long run. The opposition came from four main sources. Politically, the government was attacked from the right by the Bharatiya Janata Party, which argued that the easier entry of multinationals would hurt domestic industry, and from the left by the National Front parties (Janata Party, and the two Communist parties) which accused the government of forsaking the country's anti-poverty and income redistribution goals. But in both cases there was little direct opposition to the principle that radical reforms of the economy were both necessary and desirable. The government also faced some political opposition from within the Congress Party, with some prominent party members breaking away to form a splinter party on the ostensible grounds of opposition to the reforms. But unlike the situation faced by the Rajiv Gandhi government in the 1980s, there was no sustained opposition to the reforms from the rank and file of the Congress Party. 6 The government also faced opposition from some parts of Indian industry which, while welcoming the dismantling of the license raj, felt threatened by the anticipated competition from multinationals. The third important source of opposition was the trade unions. Trade unions had played an important role in scuttling many of the Rajiv Gandhi's liberalization initiatives, 7 and they have slowed a number of the present government's plans as well. The particulars of the government's reform measures, and in particular the scope of the reforms in telecommunications, are a direct outcome of the struggle between the government's objectives and the resistance generated by these three major forces.

Telecommunications reforms

51bid 6See Kohli, Atul 'Politics of economic liberalization in India' World Development 1989 17 (3) 305-328

7/bid

The government's onslaught on the traditional structure of telecommunications in the country was launched once it was recognized that a modern telecommunications system was essential to the success of the entire economic reform program. By 1992 the government had realized that poor infrastructure was one of the main bottlenecks to modernizing the economy and that the reforms might well flounder on the country's inability to provide reliable power, transportation and communications. Consequently, a new phase of the economic reform program saw the government paying particular attention to the development of power,

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The political economy of India's telecommunication reforms: N Sinha

ports, roads and telecommunications. But the price tags associated with the rapid development and modernization of infrastructure were staggering: $40 billion for roads, $30 billion for the power sector and $17 billion for telecommunications. This represented an increase in investment from about 4--5% of GDP at present to about 7-8% of GDP within a decade. 8 The government realized that it would have to engage in widespread changes in the structure of these industries if its new economic policies were to be successful. The government began its task of infrastructure improvement by focusing on the power sector, but by 1994 it had come to realize that reform of telecommunications was an essential component of long-term success and could no longer be ignored. The critical role of telecommunications in the economic reforms was acknowledged in the government's annual survey of the country's economy in 1994: 'Telecommunication is important not only because of its role in bringing the benefits of communication to every corner of India but also in serving the new policy objectives of improving the global competitiveness of the Indian economy and stimulating and attracting foreign direct investment. '9 This realization was clearly articulated in the New Telecommunications Policy Statement released in May 1994: The new economic policy adopted by the Government aims at improving India's competitiveness in the global market and rapid growth of exports. Another element of the new economic policy is attracting foreign direct investment and stimulating domestic investment. Telecommunication services of world class quality are necessary for the success of this policy. It is, therefore, necessary to give the highest priority to the development of telecommunications services in the country.I° The Policy Statement, guidelines issued in September 1994 to implement the policy and the hundreds of clarifications the government has issued in response to queries from potential private bidders, comprises a package of policies and objectives that make up the government's telecommunications reforms. Together, they take four main forms: structural reforms, service obligations, technical and equipment requirements, and regulatory reforms. Structural reforms Privatization versus liberalization. The May 1994 Policy Statement begins by detailing the poor state of telecommunications in India: only 0.8 lines per 100 persons (now 1%) - less than in China, Pakistan, Malaysia and a number of other developing countries; a waiting list as large as one-fourth of the installed base of 8 million lines; less than one-fifth of all villages covered by telephone services. It sets ambitious targets for the growth of the sector: telephones on demand by 1997; all villages to be covered by 1997; and a public call office (PCO) for every 500 persons in urban areas, also by 1997. Given the rapid growth of demand forecast by the government, the policy document estimates that aClift, J 'India's reform shopping list has an additional $7 billion will be required by the end of the 8th Five Year hefty price tag' Reuter's News Service 20 Plan period in 1997. The inevitable conclusion generated by these June 1995 numbers is spelled out baldly: 'Clearly this is beyond the capacity of 9Economic Survey of India 1993-94 Publications Division, Government of India, Government funding and internal generation of resources. Private New Delhi investment and association of the private sector would be needed in a 1°National Telecommunications Policy big way to bridge the resource gap. '11 However, the policy document 1994 Ministryof Communications, Government of India, New Delhi also makes very clear that private initiative would be used to comple111bid ment the Departmental efforts to raise additional resources and provide

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The political economy of India's telecommunication reforms: N Sinha

services, not to supplant it. ~z In short, the policy rules out the privatization, either full or partial, of the Department of Telecommunications (DOT). Privatization, as commonly used, refers to the 'transfer of ownership and control from the public to the private sector, with particular reference to asset sales'. 13 The government chose to stay away from this course of action, for good reasons. At the most elementary level, none of the preparatory work that makes privatization successful had been done. Corporatization, the process of converting a government department into a public sector enterprise (PSE), was largely incomplete. The government had successfully separated out from the DoT international services and local services in the metropolitan cities (beginning in Delhi and Bombay) with the setting up of two PSEs, Videsh Sanchar Nigam Ltd (International Communications Corporation or VSNL) and Mahanagar Telephone Nigam Ltd (Metropolitan Telephone Corporation, or MTNL) but domestic long-distance services and local services in the rest of the country continued to be provided by the DoT. It was doubtful that without further corporatization an attempt to privatize DoT would have been very successful. Even with corporatization it was not altogether certain that divestiture would attract the requisite private capital. VSNL, for instance, has twice had to postpone global share offerings because of the lack of investor interest. More broadly, there is considerable evidence that ownership changes are rarely appropriate instruments with which to improve economic activity in developing countries, whether they come in the form of nationalization as they did in the 1950s, 1960s and 1970s, or of privatization as in recent years.14 In economic terms, privatization is unlikely to generate major gains in efficiency unless it is accompanied by other reforms, such as liberalization which increases the number of service providers in that sector. In most developing countries, India included, the distinction between public and private enterprises is blurred, at least insofar as performance is concerned. The incentives to engage in rent seeking, corruption and patronage, which came to characterize both public and private enterprises in India during the period of the license raj, are linked more to the fact that prevailing prices do not reflect the scarcity value of goods and services and less to the pattern of ownership. If privatization has little economic impact, the political, ideological and symbolic impact of privatization may be significant in maintaining the viability of the reform process and its widespread acceptance and in reshaping perceptions about the state's rightful place in the economy. In this context, the Rao government had to ensure that the reform process was politically acceptable and did not threaten the viability of the government itself. This has not been easy. The government had already experienced electoral defeats in key states, and though it could be argued that localized causes may have been more important than national issues like the reforms, there is no doubt that the opposition parties made the government's economic reforms a major electoral 2 Ibid issue. Ideologically, the government was faced with the long-standing ~3Hernmin, R and Mansoor, A Privatization suspicion of private industry, particularly multinational corporations, and Public Enterprises Occasional Paper bred during the 40 years of socialistic policies. While privatization may No 56, International Monetary Fund, Washington, DC (1988) have been easier to push through for loss-making PSEs operating in the ~4See for instance Van de Walle, N 'Privaconsumer goods sector, in a highly visible infrastructure sector like tization in developing countries: a review of the issues' World Development 1989 17 telecommunications it was fraught with political consequences that the (5) 601-615 government could not ignore. 29

The political economy of India's telecommunication reforms: N Sinha

Nor was the government prepared to deal with the fall-out of selling one of the country's largest employers. The DoT employs 450 000 unionized workers and its employees are represented by some of the strongest trade unions in the country. Even without privatization the unions have been a major stumbling block in the government's efforts to restructure the sector. A nationwide strike in June 1995, coupled with an appeal to the country's courts, almost prevented the government from opening the tenders that had been submitted by private telcos for cellular and basic service licenses. The government has been at pains to placate the trade unions. Communications Minister Sukh Ram has publicly announced that a substantial part of the Rs 100 000 crore (US$30 billion) the DoT hopes to generate through license fees and revenue sharing over the next 15 years will be used to upgrade manpower skills and undertake welfare programs for its employees. 15 Rejecting privatization as a viable policy option, the government chose to attract private investment into telecommunications by opening up various parts of the sector to private industry. The liberalization of telecommunications equipment had already begun in the 1980s and early 1990s with the licensing of equipment providers in the customer premises and switching and transmission segments. In 1992 the government initiated the gradual liberalization of value-added services such as electronic mail, voice mail, information services, audiotext and videotext services, videoconferencing and paging. The government also licensed two competing cellular companies in each of the four metropolitan cities of Delhi, Bombay, Calcutta and Madras. Despite initial problems in the evaluation of the bids for these licenses which required a judgment by the country's Supreme Court to resolve, these eight companies will be in a position to start offering services by the end of 1995 or early 1996. However, the most significant step in the liberalization of Indian telecommunications came in the 1994 policy statement in which the government announced the opening up of cellular services in the rest of the country and, more dramatically, the entry of private companies to provide fixed basic telephony. The policy statement and the guidelines that were issued to implement the policy stipulated that private companies would be allowed to provide basic services in competition with the DoT. Only companies registered in India were permitted to apply for licenses. By stipulating that potential bidders were required to have a track record of having run a system of at least 50 000 lines for five years, the government virtually forced Indian companies to enter into partnership with foreign telcos. But the government also limited foreign participation to 49% of the equity holding of the joint venture company. The government divided the country into 18 circles, each more or less corresponding to a state boundary, and invited separate bids for each of the circles. By stipulating that only one private company would be licensed in each circle, the government set up a duopolistic market structure in each of the circles, with the private telco competing head to head with the DoT for fixed basic services. In cellular services two private companies are to be licensed in each circle. All the private companies are to be licensed for 15 years but they have been kept out of ~5Only privatization can bring funds, says the long-distance (national and inter-circle) market for at least five Sukh Ram, Economic Times 7 June 1995, years, with the government committed to reviewing that decision at the 4 end of that period.

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The political economy of India's telecommunication reforms: N Sinha

Foreign versus domestic ownership. The particulars of the liberalization policy reflect the diverse economic and political objectives the government sought to achieve. They also reveal some of the major problems in the government's approach. The government's decision to allow foreign telcos to participate in the licenses appears to have been motivated by three main considerations. First, it was evident that domestic companies would have considerable difficulty in raising the huge investment involved by themselves. Nor would the domestic and foreign capital markets be very interested in investing in these projects without some foreign participation, since no private company in India had any expertise in the area. This lack of experience also made the government uncertain of the ability of domestic industry alone to deploy the technology and run the service. Second, forcing domestic companies to tie up with foreign telcos contributed to the government's overall design of encouraging FDI into the country. By current estimates, the 20 or so foreign telcos that have partnered with Indian companies to bid for cellular and basic service licenses will bring about US$5 billion into the country over the next 10 years. Finally, foreign participation was encouraged to achieve the technological leapfrog that would be needed to build a world-class telecommunications network. However, while encouraging foreign participation was important, the government also had to involve domestic industry in the reform process. Politically, the government has sold liberalization to the public and to Indian industry by limiting the extent of the participation of foreign companies in Indian enterprises. Very few foreign companies have been given permission to set up 100% owned ventures in the country, and even 51% ownership has been limited to a select list of high-priority areas. Not only has the government been faced with political objections to liberalization from the country's opposition parties, it has also had to deal with complaints from Indian capitalists that the reform program threatened the viability of Indian industry. Organized objections have come in the form of the so-called 'Bombay Club', a group of industrialists who came together to oppose the government's opening up of the economy. By forcing the multinationals to partner with Indian companies, the government disarmed many of the objections of both the political and industrial opposition. Though there was considerable internal debate within the government on whether or not foreign telcos would be permitted to own 51%, the political imperatives of being able to successfully push through reforms in a highly visible sector like telecommunications made limiting foreign companies to minority positions virtually inevitable. Limiting the extent of foreign ownership also made good fiscal sense in an economy facing a severe foreign exchange crisis. Though by the time telecommunications came within the ambit of the reforms the exchange crisis had eased considerably, the overall purpose of the reforms was to ensure that foreign exchange levels never again fell to such dangerously low levels as in 1991. The extent of foreign equity holding in a domestic company determines the outflow of foreign exchange in the form of dividends and capital gains. In sectors which have the potential to generate significant export revenues, the extent of foreign ownership may not be a problem as long as the extent of the FDI and the export revenues exceed the outflow. But in local telephony, with no chance of export revenues, the government's cap on foreign ownership also ensured that the amount of foreign exchange generated

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The political economy of India's telecommunication reforms: N Sinha

through foreign investments in the sector would outpace the extent of outflows for a considerable period of time. Basic versus long-distance services. The decision to liberalize local

leThe financial bids for basic services were not open at the time this article was being prepared.

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services rather than the more attractive long-distance services was one of the most controversial decisions of the reform process. Both within the government and in outside agencies like the World Bank there was the conviction that opening up basic services would not attract the private investment necessary to jump-start the reforms. Indeed, many of the US regional Bell operating companies (RBOCs) stayed away from the bidding partly because the short-term profitability of the licenses for basic services was far from apparent. However, the fear that foreign telcos would stay away from the bidding in large numbers has turned out to be largely misplaced, with about 20 foreign companies bidding for licenses for both cellular and basic services with their Indian partners. The financial bids, for the cellular licenses at least, 16 have been quite high, with the government standing to earn US$7 billion in license fees alone over the next 10 years. By liberalizing local rather than long-distance services, the government disarmed potential criticism that it was selling out profitable services to private capital. By offering the prospect that the private telcos would be allowed to provide long-distance services after five years, it held out the promise of significant rewards for the private telcos in the long term. The decision also reflected the demands of both infrastructure development and economic development. India's principle sectoral problem is its low telephone density (at 1% lower than most other developing countries) and the large unmet demand for telephones reflected in the long waiting list for connections. In the 1994 telecommunications policy statement the government set an ambitious set of targets to be achieved through the reforms: telephones on demand by 1997; all villages to be covered by 1997; and at least one PCO for every 500 persons in urban areas and an additional 2.5 million lines to be installed by the end of the 8th Five Year Plan in 1997. These targets could only be met through massive investment in the expansion of the basic network. However, if liberalizing only basic services solved one set of problems, it also raised another. Expanding the basic network without corresponding increases in the capacity of the long-distance network holds out the possibility of increasing gridlock on the long-distance network, with rising call congestion and lower call completion rates. The extent to which the government is serious about allowing the private telcos into the long-distance market after five years is uncertain. However, it will have to take serious measures to expand the capacity of the long-distance network before too long, or it may well choke because of the rapid growth of the basic network. The government's decision to keep the private telcos out of the more lucrative long-distance market also dampened some of the initial enthusiasm among potential bidders. In order to continue to attract significant private sector interest in the bids, the government has had to give in to a number of demands from the private telcos. For instance, having maintained the DoT's position as the monopoly long-distance provider, the government was faced with the difficult task of setting access charges - the amount the DoT will charge from the private telcos - for carrying national and international calls. Initially the rates were set at about 50% of the DoT's current costs for a unit of national long-distance carriage and 62% of its costs for a

The political economy of India's telecommunication reforms: N Sinha

unit of international carriage. Under protest from the potential bidders that these charges were too high, the government finally set them at 40% and 50% respectively. 17 Selection criteria. There is little doubt that the financial rewards would have been considerably higher had long-distance services been thrown open to the private sector instead of basic services. And there is little doubt that the government lost some potential revenue from the license fees because of the criteria it set for the evaluation of the bids. The issue of how the bids were to be evaluated revealed disagreements within the government on the priorities of the reform program. The Finance Ministry wanted the entire evaluation to be based on the financial bids submitted by the various bidders. This would definitely have generated the maximum revenues. But the Communications Ministry wanted to give some priority to service requirements such as the speed with which the bidders would build their networks and the expansion of the network into rural areas. Eventually, the following formula was worked out: the license fee and its payment schedule would carry a weight of 72%; the network rollout plan (the number of lines to be provided) during the first three years would carry a weight of 10% ; the percentage of those lines in rural areas would carry a weight of 15% ; and, the use of indigenous equipment would carry a 3% weight. Under pressure from the private telcos and at the insistence of the Prime Minister's Office, the Communications Minister was forced to publicly announce the weightage scheme before the bids were actually submitted. This took care of the problem of lack of transparency that had plagued the evaluation of the cellular licenses in the four metropolitan cities. Service obligations

17'Basic telecommunications bid evaluation made transparent' Business Standard 24 May 1995, 1 laA model not unlike the LATA system which was established in the wake of the break-up of AT&T in the USA

Circles versus national licenses. The government sought to ensure that the expansion of telecommunications and the development of the national network took place in an uniform manner across the country and that the interests of more or less industrially advanced states and of rural and urban areas were evenly balanced. Since nationwide private providers could be tempted to cream-skim, investing only in urban areas or in states with high potential returns, the government decided not to license any national service providers, but rather broke up the national service areas into 18 circles roughly corresponding to state boundaries, is This ensured that poorer states like Uttar Pradesh and Bihar and the north-eastern states like Manipur, Mizoram and Arunachal Pradesh, which already suffered from very poor infrastructure, would not be neglected. The government hoped that it would also ensure there was no political or electoral backlash against the Congress Party in these states. The circles approach made good fiscal sense since the combined revenues generated from competitive bidding in each of the circles would probably be higher than those generated from a single national auction. It would also force the telcos to select competitive technological solutions and rollout plans based on the unique characteristics of each market. The circles were divided into A, B and C type circles according to the estimated size of the market for telephone services. Initially bidders for A category circles were also required to bid for circles in the other two categories, but the government shelved this plan due to protests from

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The political economy of India's telecommunication reforms: N Sinha

potential bidders and out of the fear that it would scare many of them away. In the end it simply asked for individual and independent bids for each of the circles. The government's plan has been only partially successful. While the overall number of bids for both cellular and basic services has been high, some circles such as the Jammu and Kashmir circle received no bids 19 for either basic or cellular services, and the Andaman and Nicobar Island circle received no bids for cellular services. Five circles have received only one bid for basic fixed service, and another four received only two bids. A final picture will emerge only after the financial bids for cellular and fixed basic services are opened and evaluated. Rural services. Along with balanced regional development, the govern-

19Nodoubt because of the terrorist activity that has engulfed the state in violence for the past three years. Presumably the government will reopen bids for the circle once the situation has stabilized, 2°See for instance Hudson, H When Telephones Reach the Village Ablex Norwood, NJ (1984); Saunders, R, Warlord, J and Wellenius, B Telecommunications and Economic Development World Bank, Washington, DC (1983); Sinha, N 'Telecommunications, capabilities and development: toward an integrated framework for development communication' Pacific Telecommunications Review 1994 (Spring) 10-20

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ment sought to ensure that the private telcos invested in the expansion of the rural network. It mandated that 10% of all new lines should be installed in rural areas and that all villages should have access to at least a PCO by the end of 1997. In addition, 15% of the weight for the evaluation of the bids for basic services would be based on the number of lines in rural areas a company committed to install in excess of the mandatory 10%. The government has also announced that heavy penalties (Rs 66 or US$2 per day for each rural telephone line not installed) would be levied on companies that do not meet their rural installation commitments. The emphasis on rural expansion clearly had a strong political component to it. It not only deflected the charge that the government's policies were pro-rich, it also provided a shield against accusations that the government was allowing the private telcos to engage in creamskimming. But the emphasis on rural expansion was also an important part of the government's larger economic objective of promoting the accelerated development of industrially backward areas. A major goal of the government's industrial policies has been to encourage industries to locate manufacturing facilities in designated industrially backward areas and states. The central and state governments have together offered a number of financial and tax incentives for companies opening up new plants in such areas, most of which are in rural areas. The government has also been trying to encourage the development of agro-based industries in rural areas in order to relieve the pressure on cultivation to provide the main source of livelihood for the 70% of the country's population that lives in rural areas. But the response has been slow, primarily because of the lack of adequate infrastructure facilities. By forcing the telcos to commit to expanding their networks into rural areas, the government hopes to overcome one of the main bottlenecks in the industrialization of rural and backward areas. There is now considerable theoretical and empirical evidence that the spread of telecommunications into rural areas is not only a indicator but also a facilitator of development. 2° The government hopes that access to reliable telecommunications will encourage the industrialization and accelerated development of rural India. Technical requirements N e t w o r k rollout. Given the ambitious targets the government set for the

expansion of basic services in the policy statement, it has put great emphasis on the speed with which the licensees roll out their networks. Ten per cent of the weight of evaluating the bids is to be given to the

The political economy of India's telecommunication reforms: N Sinha

number of lines the bidders commit to install during the first three years. The government has announced that it will penalize the licensees Rs 11 (approximately US$0.30) per day for every line short of their commitment. By placing such emphasis on the pace of the network expansion, the government hopes that quick results, like the reduction of waiting lists, will blunt criticism of the reforms and generate for it some political capital as well.

Broadband network. The government has also used the licensing procedure to set the basis for establishing a fiber-optic-based broadband network. To provide adequate incentive to the providers to deploy fiber extensively throughout the network, the government has allowed licensees to offer multimedia services (such as cable TV, home shopping and online banking) and value-added services (such as toll-free calling and caller identification) over their networks. The operators can provide facilities to third-party operators or offer their own services. This decision puts a question mark over the nearly 60 000 small cable operators who have been the vanguard of the expansion of cable in the country. But it also provides a boost to the number of small companies struggling to provide information services across the country. Local equipment. The government's approach to equipment and technical issues also reveals the same dual purpose approach that characterizes its political tactics and its economic objectives. Faced with the criticism that the introduction of foreign private service providers into the sector would undermine the domestic telecommunications equipment industry, the government assigned 3% of the weight for the evaluation of the basic tenders to the use of indigenous equipment. Here too the government has announced heavy penalties if the licensees do not keep their commitment to buy indigenously. If the licensees fail to install any locally manufactured equipment, the penalty has been set at 6% of the license fee to be reduced on a pro rata basis as the failure rate falls below 100%. However, the definition of what constitutes indigenous equipment has been changing under the government's liberalization policies. In 1992 the government permitted foreign companies to enter the equipment manufacturing sector, allowing them to own up to 51% of joint ventures in the area. Since then AT&T, Siemens, Alcatel, Fujitsu, Ericsson and GPT have set up domestic manufacturing enterprises. The decision to allow foreign equipment manufacturers into the small switching systems business was especially difficult, considering the government's commitment to developing indigenous technology and protecting local industry. It was fiercely resisted by the Telecommunications Equipment Manufacturers Association (TEMA), which called for severe restrictions on the entry of foreign companies. It also called into question the future of the government's R&D wing C-DOT (Center for the Development of Technology). However, by encouraging the licensees to install domestically manufactured equipment and by allowing the world's leading telecommunications equipment manufacturing companies to set up shop in India, the government hopes to establish an internationally competitive telecommunications equipment manufacturing industry. It hopes that the private telcos will bring in the equipment manufacturers on their coat-tails.

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The political economy of India's telecommunication reforms: N Sinha

Regulatory reforms Perhaps the most contentious aspect of the government's plans, and the one issue the government has handled rather poorly, is that of regulating the new telecommunications environment. Prior to the new policy the DoT had combined the roles of service provider and regulator, and initially it appeared that it would continue to exercise the regulatory function despite its very clear conflict of interest. This was partly the reason why a few of the US RBOCs were reluctant to participate in the tenders. After intense lobbying from both Indian and foreign companies and the US Commerce Department, the government announced that an 'autonomous' three-member Telecommunications Regulatory Authority of India (TRAI) would be set up, empowered to set standards, regulate prices, ensure technical compatibility among the different service providers, develop revenue sharing arrangements, fix access charges, enforce service requirements and resolve disputes among service provides. However, the government resisted setting up TRAI as a statutory body, which would have put it on a par with such independent bodies as the Election Commission and the Finance Commission. This again raised the specter that TRAI's decision would be subject to interference and manipulation from the government. Eventually the government compromised its control over TRAI by agreeing to vest it with the powers and protection of a statutory body without actually writing the powers into a new law. The government passed a one-line amendment to the Indian Telegraph Act of 1885 allowing it to set up TRAI. But during the passage of the bill the government assured Parliament that it would have no authority to override TRAI's decisions, even though the watchdog body would be of a non-statutory character to start with. It pledged that the orders of TRAI would only be challenged before the High Courts or the Supreme Court and would not be subject to review by any executive body. Nor would the decisions of TRAI be reversible by any arm of the government, including the Cabinet. During the debate on the amendment in Parliament, the government attempted to send a strong signal to the private telcos that TRAI would 'act independently, impartially, in an objective manner to protect the interests of the private operators as also of the subscribers'. 21 Though TRAI would be a non-statutory body to start with, officials of the Communications Ministry told Parliament that the government would like the body to be autonomous in 'due c o u r s e . . , after a year or two', based on how it functions. 22 The government maintained that it would ensure the independence of TRAI by appointing as its chair a retired or serving Chief Justice of a High Court or a retired or serving judge of the Supreme Court. The other two members would have worked in government service at a rank no lower than Additional Secretary to the Government of India (a rank second only to Secretary in the civil service's hierarchy) for at least three years. They would have the status of Secretary to the Government of India during their tenure and their removal would require the same safeguards as are available to the judges of the Supreme Court. Their emoluments and other terms and conditions of service would also not be 21,TFIAI to have statutory powers' Busi- changed to their disadvantage during their term. h e s s Times 7 August 1995, 1 Despite the government's reassurances, a number of key regulatory 2aQuotocl in ibid issues remain unresolved: 36

The political economy of India's telecommunication reforms: N Sinha

• What will be the revenue-sharing arrangements between the telcos and the DoT? • How will TRAI resolve interconnection and network management disputes? • How insulated will it be from the entrenched telecommunications bureaucracy? • Will it be strong enough to handle both the trade unions and the private telcos? The success of the entire reform process may well depend on the effectiveness of TRAI, and its functioning will be closely watched. 23

Conclusions

23For a detailed analysis of the importance of regulatory mechanisms determining the s u c c e s s of telecommunications reforms in developing countries, see the author's chapter 'Telecommunications regulatory reform in the Third Word: an institutional perspective' in Mody, B, Straubhaar, J and Bauer, J (eds) Telecommunications Privatization in the Third World and Eastern Europe Lawrence Erlbaum, Newbury Park, CA

A country's economic policies reflect a mix of imperatives that flow from the institutional matrix of its politico-economic system. This matrix consists of the formal structure of its political and economic systems and the informal ideological and economic climate within which they operate. Policies which are initiated in periods of transition often reveal a compromise between existing and emerging institutional structures. India's efforts to restructure its telecommunications system are best understood in the context of the larger economic institutional transition initiated by the Narasimha Rao-led Congress government over the past four years. This transition has sought to transform the basis of economic planning and policy-making in the country from a model based on limited private and foreign investment, widespread public sector infrastructure development, import substitution and restrictive trade regulations to one based on private-sector-led growth, stepping up foreign direct investment, export promotion and a liberalized trading regime. It also marks a significant break from the socialistic rhetoric that has provided the ideological underpinnings of much of the country's economic planning since its independence. The telecommunication reforms provide evidence of the difficult compromises the government has had to cobble together as it seeks to manage the overall institutional transition of the country's economy. They represent an obvious compromise among the various political, economic and bureaucratic interests within the telecommunications arena. These include multinational corporations, domestic private sector companies, local equipment manufacturers, the DoT's 450 000 unionized workers, and the nearly 5 million current or anticipated consumers waiting for a telephone connection. They also represent the compromises the government has had to make to prevent opposition parties making the reforms a political issue and ensure that the new policies do not hurt its electoral chances. Based on the presumption that a world-class telecommunications system was critical to achieving the overall goals of the new economic policy, the government set a series of ambitious targets for the growth of the sector over a three- to five-year period. Liberalization of basic services and the decision to allow private Indian companies, in partnership with foreign telcos, to provide services in competition with the DoT are expected to provide the structural, fiscal and technological engines required to arrive at those targets. The decision not to privatize or even corporatize the DoT, maintaining its monopoly over longdistance services and limiting the extent of foreign participation, 37

The political economy of India's telecommunication reforms: N Sinha

provides evidence of the government's continued sensitivity to making the reforms politically palatable as well as its inability to fully free itself from the economic nationalism which has guided past policies. The first phase of the reform process, leading up to the submission of bids for licenses to provide cellular and basic services, appears to have been reasonably successful. While some circles have not attracted more than one or two bids, the response has been good enough that the government has not been forced to resort to re-tendering. The outcome of the next phase of the reform process, the setting up and functioning of TRAI and the formulation and functioning of guidelines for network management, interconnection and technical compatibility, rate regulation and revenue sharing, and enforcing the 'universal service' provisions of the licenses, is very much in the balance. A lot will depend on how India's political and economic institutional matrix adjusts to the transition from a state-dominated to a market-dominated economy. In particular, the speed and impartiality with which the country's judicial system moves to enforce and protect contractual obligations and the extent to which TRAI can function as an independent and impartial arbiter of conflicting claims will be essential in determining the success of the reforms in the long run. The reforms also have to stand the test of political transitions, particularly if one or a coalition of opposition parties come to power in next spring's general elections.

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