Back to the Main ET Page

A triumph of reforms

Arvind Panagariya

The story of telecommunications reforms in India offers a fascinating example of how determined leadership can overcome even the fiercest opposition to reforms, says Arvind Panagariya

The total number of phones in India as of October 31, 2007 is placed at 256 million. India has been adding phones at the rate of 6.65 million per month. Tele-density — the number of phones per 100 individuals — now stands at 22.52. As recently as March 31, 1999, this figure was a tiny 2.8.

What has changed? Many public policy writers routinely attribute this revolution to the advent of cellular technology. While technological change has been an essential element, the real credit for the revolution must go to Prime Minister A B Vajpayee And finance minister Yashwant Sinha who brought the same systematic reforms to telecommunications that Prime Minster Narasimha Rao and finance minister Manmohan Singh had brought to trade and industry via an end to licensing.

The story of telecommunications reforms offers fascinating example of how determined leadership can overcome even the fiercest opposition to reforms. The challenge to this reform came from within: the department of telecommunications (DoT), which was simultaneously the policy-making body and the monopoly provider of telephone services. The DoT would not initiate reforms that would effectively clip its own wings. Indeed, it would even resist any efforts at reforms from top. Given it was a significant contributor of budgetary revenues and employed almost half a million workers, the DoT also had the necessary political muscle to make its resistance to reforms effective.

Before I get to this story, as an aside, let me note that the first attempt to introduce cellular technology was actually made by the DoT via a collaborative project with multinational firm Ericsson in 1987. But, unfortunately, charges in the press by the then popular telecommunications figure Sam Pitroda that “luxury car phones” were “obscene” in a country where “people were starving” found a sympathetic ear in Prime Minister Rajiv Gandhi and the project was abandoned.

Oddly, a few years earlier, communications minister C M Stephens had described even the regular phone service as a luxury while defending against the charges of poor service. Ironically, Pitroda, a non-resident Indian, had himself returned to India in the mid-1980s with the mission to fix this “luxury service.” He had promised Rajiv Gandhi to indigenously design a digital technology that would rapidly spread across rural India.

In the event, while a different, organisational innovation helped spread the so-called STD booths across urban India, nationwide tele-density rose to barely 0.6 in March 1990 from 0.4 in March 1986. In 1990, India had just 5 million phones in total — less than what it currently adds every month.

The government of Prime Minister Rao attempted to give entry to private cellular service providers in metro cities of Mumbai, Delhi, Chennai and Calcutta in 1992 but it failed due to faulty evaluation and the award process adopted by the DoT. The government then introduced the Telecom Policy 1994, which aimed to give entry to two private cellular operators and one fixed line operator in the four metro cities and other telecom circles defined to broadly correspond to states.

But DoT took another four years to auction licences for the cellular service and placed such roadblocks in the way of fixed line providers that as late as 1999, they had entered only two circles. Worse, it did everything to render private cellular providers unprofitable:

It gave itself and MTNL (a public sector company with monopoly on fixed line service in Bombay and Delhi) cellular licences at no fee in all circles; set per-minute cellular charges at extra-high levels in relation to its own fixed line charges; required all interconnections to go through its fixed lines and charged a hefty fee for it; and denied cellular operators the facility of making or receiving international calls.

Unsurprisingly, cellular operators were able to recruit just 1.2 million customers until as late as March 1999. They incurred heavy losses and accumulated several hundred million dollars in unpaid licence fees to the DoT.

Although Parliament created the Telecom Regulatory Authority of India (Trai) in March 1997 as an independent regulatory body, it was unsuccessful in creating healthy competition. The Delhi High Court effectively refused to recognise the pricing and licensing authority of the Trai over the DoT.

It was at this critical juncture the government of Prime Minister Vajpayee acted decisively by introducing the landmark New Telecom Policy (NTP) in March 1999. After the 1999 election returned the National Democratic Alliance of Vajpayee to power with clear majority, the prime minister’s office became actively involved in the implementation of the NTP, providing the necessary counterweight to the DoT.

It appointed the ‘Group on telecom and information technology convergence’ (GTC) with finance minister Sinha as chair and several influential cabinet ministers as members and entrusted it with the task of implementing the NTP.

The first step was the passage of the Trai (Amendment) Act 2000, which split regulatory and dispute settlement roles of the original Trai.

The latter role was assigned to the newly created independent Telecom Dispute Settlement and Appellate Tribunal whose decisions could only be appealed to the Supreme Court. The second important step was transferring the service providing function of the DoT to the newly created independent corporate entity, Bharat Sanchar Nigam Ltd.

Together the two steps paved the way for effective regulation of public and private providers by the Trai, leaving the DoT to concentrate on policy. Arrears of private providers on licence fees were replaced by a revenue-sharing arrangement between them and the government. The government also fully freed up entry into domestic and international long-distance service.

The final major reform, undertaken in November 2003, was the introduction of a Unified Access Service licence that allows the holder to provide fixed line as well as cellular service in the area. Existing licence holders were given the option to migrate to this licence. This single reform put an end to a multitude of legal disputes and opened the door to rapid expansion of telecommunications in India.

(The author is a professor at Columbia University and Non-resident Senior Fellow at the Brookings Institution)

Economic Times December 27 2007

.