A critical look at Indian telecom policy in the ’90s
By: Arun Mehta                                                    Date: 11 May 11, 2001                          In: chowk
Link: http://www.chowk.com/articles/a-critical-look-at-indian-telecom-policy-in-the-90s-Arun-Mehta.htm

This article appeared as part of the last Alternative Economic Survey, which takes a critical look at the Indian government's track record. It describes how a major opportunity to significantly raise the availability of telecom in the country was stymied by the Department of Telecommunications, which was not interested in helping competitors onto its turf. Yet, political will had brought about some improvement by the end of the decade. I am currently writing an update for the next AES, and would appreciate critical comments.


The telecom scenario in India is victim to a fundamental conflict of interests among the diverse roles that the government is attempting to play. Imagine a game in which one of the teams not only plays referee but also has the right to change the rules at any time, and you begin to understand why private companies have become increasingly reluctant players in the Indian telecom league.

Of course, the government isn’t a monolith: three government entities, Videsh Sanchar Nigam Limited (VSNL), Deparment of Telecommunications (DOT) and Mahanagar Telephone Nigam Limited (MTNL) (hereafter called the DOT parivar) act as major telecom players, sometimes stepping on each others’ toes in the process. The railways, Power Grid Corporation and other agencies are entering the fray. When it comes to the use of wireless, literally dozens of government agencies are involved in approving new installations.

The role of referee has, on occasion, been played by the DOT, Telecommunications Regulatory Authority of India (TRAI), the courts, the Comptroller and Auditor General (CAG), the Election Commission, the Parliamentary Standing Committee on Communications and the Attorney General. For the formulation of the rules of the game, i.e. the telecom policy, in addition to the DOT, The Telecommunications Ministry, the Department of Space, the TRAI and the courts, the government set up ad-hoc bodies, such as the Information Technology (IT) Task Force and the Group on Telecommunications (GOT). With such confusion, it is hardly surprising that progress has been slow.

What is the cost of this slow progress? International Consultative Committee on Telephone and Telegraph (CCITT) studies showed a correlation of better than 90 percent between Gross Domestic Product (GDP) per capita and telephone lines per capita. (“Optimum Allocation and Use of Scarce Resources in Order to Meet Telecommunications Needs in Urban or Rural Areas of a Country”, GAS-5 Economic Studies (1981-84), no. 8, ITU, 1984). A faster rate of growth in telecom density would have reflected directly in wealth creation in the economy.

Privatization

“In the weeks after the National Telecom Policy was announced on May 13, 1994, the joke in Delhi was that you couldn’t discuss strategy or business plans at a restaurant in any of the capital’s top hotels if you were a telecom professional unless you wanted a competitor listening in…Cut to September 1998. The scene couldn’t change more drastically. The gung-ho optimism of the private developers is now bordering on despair. Of the 22 circles earmarked for private entry in basic or fixed line telecom services, only six have takers more than four years after basic telecom services were deregulated. Only one has actually started operations in a limited way.”(“On hold: the great telecom boom”, Josey Puliyenthuruthel and Sreevidhya Srinivasan, Business Standard, September 5, 1998.)

In 1994, India was seen as an Asian Tiger in the making, and it actually was among the early nations to announce a policy for the entry of the private sector into telecom. Multinationals with their Indian partners bid exorbitant sums for the privilege of entry in this sector (see Table 1).

  Company Circle  Licence Fee (Rs. Cr.)
 HFCL - Bezeq  Delhi 15085 
   UP (West)  6580
   Haryana  4060
  Orissa  2065
  Hughes Ispat Maharashtra  13909
  Karnataka 5796
  Tata Teleservices AP 4200
  Basic Teleservices Tamil Nadu 11620
  Essar Commvision  Punjab  4593
 Reliance Telecom  Gujarat  3395
  Techno Telecom  Bihar  266.5
 Bharti Telenet  MP  634
 Telelink Networks  Rajasthan 1110
Table 1: License fees bid by the successful bidders

The government was overjoyed: it expected to generate a short-term financial windfall to the treasury: “the government, by creating a monopoly and capturing all or part of the monopoly rents by charging a licence fee, is merely substituting a non-tax instrument, viz., the licence fee, for tax instruments for raising revenues.” (“Stabilising telecom reform”, TN Srinivasan, Business Standard, August 21-22, 1999.)

However, as a result of the enthusiasm of the private operators, this implicit tax on the telecom industry was so high that it severely impeded the growth of the industry, resulting in far lower revenues than might have been collected had the tax been lower. The goose was killed before it even began to lay golden eggs.

By 1999, it was clear that the licence fee regime was not working, and an alternative had to be found. This was not going to be easy. Congress spokesperson Kapil Sibal asked for a CBI probe into what he called the great telecom scam, “in which Rs. 70,000 crore is alleged to have been gifted to favoured telecom firms over 20 years … the fact is the losses Sibal’s talking of are notional. They represent the fees that these firms would have paid if their subscriber base kept growing – in the case of the metro-cellular services where Sibal claims Rs. 40,000 crore has been gifted, the fees were Rs. 6,000 per year per subscriber. So, if the firms didn’t grow, as there weren’t, they wouldn’t have been able to pay up anyway.” (“The real telecom scam is overlooked”, Sunil Jain, Indian Express, September 11, 1999.)

The problems with changing the terms of the licence arrangement midstream were several: besides questions regarding the propriety of providing relief to large and rich multinationals, there was also the question of the reaction of losing parties in the licence bidding, who could legitimately feel aggrieved for being punished for having been responsible during the bidding. The views of the attorney general were sought, and a taskforce called the Group on Telecom (GoT) set up to formulate a new telecom policy, before a complicated scheme for migration to a revenue-sharing arrangement was announced, under which the telecom companies had to still pay a share of their overdue licence fees.

Despite these serious headaches in trying to rectify a flawed tendering process, no lessons seem to have been learnt by the government. This is manifest in the way the Sankhya Vahini project (“Sankhya Vahini -- Not Tonight, Naidu”, Sumit Mitra, India Today, May 1, 2000.) is being handled. This is a proposed joint venture between the government and IUNet, a subsidiary of Carnegie Mellon University to set up a 40 Gbps backbone to connect universities, etc. While most experts welcome the high bandwidth, and the opening up of government infrastructure to private sector projects, they are concerned that over half the equity will go to a foreign company that will simply assemble freely available bought out equipment. The Parliamentary Standing Committee on Communications expressed concern that normal tendering processes were not followed in this case. Fears have also been expressed that such heavy foreign involvement in a project of significant national interest may open us to the same sort of blackmail in spares and supplies that we faced in the case of nuclear power plants built with foreign collaboration.

Technology strait jackets and company size

Apart from blunders in the licensing process, telecom growth in the country has been hampered by the authoritarian attitude of the DOT with regard to choice of technology. While private companies have had almost no choice in what technologies they might adopt, the DOT parivar has had complete freedom in technology selection. While private e-mail providers were forced to use the X.400 system under the value-added services guidelines (“Guidelines for Value Added Services” No. 8424/93-TM, DOT, March, 1994.), VSNL quickly abandoned X.400 and offered full Internet connections based on Transmission Control Protocol-Internet Protocol (TCP-IP) in 1995. It was only in 1999 that these e-mail service providers were grudgingly allowed to migrate to TCP-IP (“DoT allows E-Mail operators to upgrade to ISP network”, Indian Express, February 17, 1999.).

The same guidelines imposed a starting license fee or Rs. 25 lakhs per annum on e-mail service providers, going up to Rs. 50 lakhs per annum, while Bulletin Board Service (BBS) operators (typically run by students who allow users to dial into their computers and leave messages for each other) were asked to pay an amazing Rs. 15 lakhs per year for permission to run such a free service! (“DoT monopoly a threat to electronic media”, Arun Mehta, The Pioneer, May 9, 1994.) Of course, VSNL paid no licence fees for a service that offered far more than just e-mail. Similarly, cellular operators were forced to use GSM technology, although cheaper alternatives might have been far more popular in a poor country. When MTNL started to offer mobile telephony, it did not feel bound by this restriction, and chose Code Division Multiple Access (CDMA) technology.

would be within reach of 15-20% of the country’s Professor Ashok Jhunjhunwala of IIT Madras has developed a Wireless in the Local Loop system called corDECT, which reduces the cost of connecting a new subscriber to the telephone network from Rs. 35,000 in urban areas and Rs. 75,000 in rural areas to a figure close to Rs. 10,000. While the conventional technology could only be afforded by one percent of the population without cross subsidies, the cheaper technologypopulation. (“Affordable telecom, Internet services key to growth”, interview with Professor Ashok Jhunjhunwala by Vidya Viswanathan, Business Standard, December 12, 1998). Yet, this pathbreaking technology could hardly be exploited in India because of feet-dragging by the DOT in providing wireless and other clearances.

Another grievous technology choice made by the government is the ban of Internet telephony, while all along, the DOT parivar has been making plans to eventually offer the service. But so paranoid was VSNL on the subject, that it even blocked access to Internet sites offering information on the subject (“Sorry, your web site has been disconnected”, Amy Louise Kazmin and Sheri Prasso, Business Week, May 11, 1998).

Internet telephony is cheaper than conventional for a number of reasons. “Conventional telephony is "circuit switched," in which the telephone exchange maintains a data flow rate of 64 kilobits per second in both directions, irrespective of whether you are speaking, or silent. Net telephony is packet-switched whereby the available bandwidth is shared among all users. Sophisticated compression techniques allow Net telephony to carry 16 phone conversations on a line on which conventional telephony only carries one. The software for a conventional switch is proprietary, so that every manufacturer of telephone exchanges essentially re-invents the wheel at huge cost.

On the Internet, software is developed cooperatively by a large number of universities and other organisations, and made available to the world almost free. Then again, conventional telephony relies on a complex system of billing, which needs to track, how long you spoke to which number, and when. For long distance calls, revenue has to be shared between the telcos at each end, based on an archaic rate that is much higher than the true cost of completing the call. Net telephony suffers from none of these handicaps and is therefore much cheaper…As pointed out by leaders of the Net telephony industry in an open letter to US Vice-President Al Gore, "The telecommunications and computer industries have grown ten-fold for each unit of cost performance improvement. Success in the computer industry depends on constant innovation resulting in a thousand-fold cost performance increase over the last twenty years and sustained 30 percent growth rates. Success in the telecommunications industry depends more on the action of lawyers than innovation. We observe only modest cost performance improvement and 7 percent annual growth rates. There exist no technical obstacles to computer-like cost performance improvements in telecommunications and computer-like growth of the telecommunications industry. The difference between 30 percent and 7 percent growth amounts to more than $2,000,000,000,000 worth of jobs, tax receipts, and wealth creation over five years." (“Ringing in the old”, Arun Mehta, Business India, October 5-18, 1998.)

Internet telephony and corDECT technology are both eminently suited to a new paradigm for telecommunications, which does not need to rely on large monopolistic multinationals. Instead, similar to the Internet model, a large number of small to medium players can connect to national and international optic-fiber backbones. The DOT recipe for privatisation only allows large players, since each must be in a position to cater to a circle, typically an entire state.

Wireless and Cables

departments and ministries, each of which manages the spectrum in its own domain. Anyone wishing clearance for using wireless needs clearance from dozens of Besides the high licence fees, there were other problems private operators faced. It took them many months to get spectrum clearance to use wireless. Spectrum allocation is in a terrible mess in the country. Essentially, the available spectrum has been parceled out to several governmentgovernment departments.

In other countries, information pertaining to all broadcasting antennae is fed into a single computer programme. Anyone wishing to use wireless is required to provide information pertaining to the antenna, direction, height, power, frequency etc. which is also fed into the computer programme, which then clearly indicates whether or not this new antenna will interfere in any way with existing equipment. In India, because of the poor state of spectrum management, this level of clarity is simply absent. The government is losing enormous revenue by failing to use this resource in a sane fashion. Unlike oil, which if not exploited today can be taken out in the future, spectrum wasted today is money lost forever.

If wireless is hard to use, digging to lay cables is no simple task for the private operator. “The National Highways Authority of India (NHAI) demanded it be paid Rs. 75,000 per km if the cables were being laid along the nation highways… the DOT pays only reinstatement charges, which are a fraction of this… in each case, the operators had two choices – petition the government and wait out the delays, or just bribe the authorities.” (“The real telecom scam is overlooked”, Sunil Jain, Indian Express, September 11, 1999.)

Security

Security concerns are repeatedly brought in to hold up privatization. The government attitude to opening up wireless seems to stem from an antiquated image of the spy huddling over a wireless transmitter. Only a stupid spy these days would risk getting caught using a transmitter, rather than simply walking into a cybercafe and sending an encrypted message to a Hotmail address, possibly hidden in an innocuous picture of Madhuri Dixit.

This approach of the government in bringing up security concerns as a means of promoting the commercial interests of the DOT parivar not only cheapens our genuine security interests, but also reminds one of the joke about the hapless old woman looking for her ring under a lamppost on the street. When others start helping her find it, and ask where she dropped it, she responds, “In my kitchen – but there is no light there, so I decided to search outside.” Encryption and the Internet have changed the security paradigm. Rather than seriously attempting to deal with the transformed situation, the government is attempting to control whatever it can, rather than finding out what it truly needs to.

Regulation

It was hoped that the formation of the Telecom Regulatory Authority of India (TRAI) in 1997 would increase the confidence level of the private operators.

“TRAI’s brief according to the TRAI Act of 1997 (soon to be modified) was to regulate, oversee and promote competition and growth in telecom. Growth needs substantial investment, about 50 billion dollars in the next five years. This is beyond the government’s or DoT’s fiscal capacity. This investment has to come mostly from private and foreign sources who need some assurance of a level playing field and a pro-competitive regime. Hence the need for a credible and strong independent regulator. While competition is being promoted, what’s the role of the regulator? To ensure a level playing field especially since new entrants have to reckon with a giant government owned incumbent which owns much of the existing network. Also to prevent anti-competitive behaviour including use of cross-subsidies, establish terms and conditions for non-discriminatory interconnection, administer universal service obligations, utilise transparent criteria for licensing and adopt objective and fair criteria for allocation of scarce resources such as radio frequencies, right of way and numbers. The over-arching objective being the healthy and rapid growth of the telecom infrastructure, through mainly non-government finances” (“The Trials and Tribulations of TRAI, Economic Times Online, March 14, 2000, http://economictimes.com/140300/14opin02.htm)

However, this body was tainted from the start: not only was it rather weak in the powers conferred on it by the TRAI Act, it was also largely staffed by officers on short-term deputation from the DOT parivar, organizations it was meant to oversee. It very quickly got into a turf battle with the DOT and MTNL. It stayed a DOT bid to encash bank guarantees of six cellular operators who had not paid licence fees, and in 1998 it prevented MTNL from entering the cellular market and ruled DOT’s Internet policy invalid. The government operators took the matters to the Delhi High Court, which ruled later that year that the regulator did not have jurisdiction over the DOT’s licensing powers, and threw open private entry into Internet services.

The government attempted to clarify the function of the TRAI as “an adjudicator between telecom service providers” (“TRAI gets arbitrator’s role”, Business Standard, March 28, 1999.) Essentially, though, after the High Court judgement, the TRAI was left with a single thankless task, setting tariffs. Here too, it met controversy every step of the way. It had court battles with MTNL on tariff issues pertaining to its mobile phone service, and when it tried to reduce the subsidy that long-distance services were providing to local traffic, the DOT used various political stratagems to block it (“TRAI Act gives govt room to intervene”, Deepak Arya, Business Standard, April 7, 1999.). Consumers were unhappy that fixed line calls to a mobile phone would cost more. In an environment in which the government had a monopoly over the lucrative long-distance traffic, which it used to subsidize local calls, private basic services could never take off, since private operators did not have this ability to cross-subsidize. TRAI’s rebalancing proposals were thus essential for a healthy competitive environment, however this argument did not come across successfully to the media and the public.

Regulators have a difficult job at the best of times. Their goal is to make themselves redundant, so the main focus of a regulator should be to promote conditions that allow a multitude of players to flourish. Setting tariffs is not required in a competitive environment, but until that situation is reached, the regulator needs to communicate very well, and always be perceived to be on the side of the public. Besides lacking the powers to do its job effectively, the TRAI never seemed to realize that it was operating in a highly charged political atmosphere, and it needed the public and media on its side if it wished to prevail against the clout of the mighty DOT. Its attempts at curbing MTNL’s entry was perceived as anti-consumer, as it was limiting competition and keeping prices high. Its failure to project tariff rebalancing as essential for enabling competition was a similar failure in its public relations.

Finally, early in the year 2000, the government disbanded the TRAI and appointed a new body in its place, which it divested of judicial powers. These were handed over to a telecom disputes settlement and appellate tribunal. (“Centre disbands TRAI, to set up new regulatory body sans judicial powers”, Financial Express, January 20, 2000.)

Internet

India started Internet services relatively early, in 1986-87, funded by the UN as the Education and Research Network (Ernet) under the Department of Electronics. By the start of the ‘90s, we were among the top 30 countries with regard to Internet penetration. However, just as the rest of the world began to realize the potential of the Internet and rapidly connected universities, companies and individual users to this network that over decades doubled in size every year, in India the DOT did its best to stymie it. Obstacles were put in the path of Ernet, which was denied bandwidth and other necessary facilities by the DOT. Even when both departments were headed by a common secretary (Mr. N. Vittal) these problems could not be sorted out. Finally in 1994, when UN funding ran out, the government decided to wind up Ernet, thus threatening to wipe out India from the cyberspace map, and it was only furious lobbying by Ernet’s users that prevented this calamity. (“ERNET gasping for survival”, Pioneer October 31, 1994.)

In 1995, VSNL started Internet services. However, Internet users in the country were quickly disgusted with VSNL’s monopolistic attitude, which manifested itself in an inability to sort out chronic problems with its service or provide a modicum of customer support. Thus, the High Court order allowing private operators into the field came as a great relief to Internet users in the country. Conversely, the TRAI was vilified for holding up the spread of the Internet into the country.

IT Task Force

Among the few bright spots in an otherwise gloomy telecom landscape was the IT Task Force set up by the Prime Minister. It made a series of far-reaching recommendations that were approved by the cabinet and gazetted. These include:

1. Local call access to the Internet from anywhere in India (this has not been fully implemented)

2. For setting up ISP Operations by companies, no license fee for first five years and after five years a nominal license fee of one rupee.

3. The monopoly of the VSNL on International Gateway for Internet to be withdrawn and authorised public/government organisations allowed to provide Internet Gateway access directly without going through VSNL Gateways. So far, this too has not been implemented.

4. The Railways, Defence, State Electricity Boards, National Power Grid Corporation as well as organisations like ONGC, GAIL and SAIL who have rights of way to be allowed to host fibre optic backbone. These organisations to be allowed to provide service to the public based on this backbone by having an interface with the existing or new public networks, but without necessarily having to go through DOT network.

5. Providing access to Internet through authorised Cable TV to be permitted to any service provider without additional licensing.

6. The radio frequency band in the range of 2.4 - 2.483 GHz opened as 'public wireless' for any Government organisation or PSU or Private Sector Company to set up Spread Spectrum based non-interference type wireless data communication.

In addition, the Task Force brought in wide-ranging reduction in tariffs relating to information technology. The Internet Service Provider (ISP) policy that was announced subsequent to this report did not, as required by the Task Force, ask ISPs to pay licence fees, however, they were required to submit fairly substantial bank guarantees (Rs. Tow crores for a national ISP). Internet Telephony continued to be banned.

Conclusion

Telecommunications are vital for India’s participation in the information age, yet, this industry has been subjected to the absurd antics of government agencies seeking to retain monopoly profits, ad-hoc decision-making and interference by a multitude of agencies. A sad reflection of this state of affairs is the low telecom density of only two percent, despite all the investment and attention this industry has received. (“Telecom density crosses two per 100”, Business Standard, October 23, 1999.) Sadder still is the highly uneven distribution of telecommunications facilities, with many areas of the country having practically no access to telecom at all. (“Profiles of States”, The Centre for Monitoring the Indian Economy, 1997) There seems little hope of significant improvement in this situation, unless policy-making and monitoring become participatory and transparent, and the massive clout of the DOT parivar over these activities is eliminated.


This article appeared as part of the last Alternative Economic Survey, which takes a critical look at the Indian government's track record. It describes how a major opportunity to significantly raise the availability of telecom in the country was stymied by the Department of Telecommunications, which was not interested in helping competitors onto its turf. Yet, political will had brought about some improvement by the end of the decade. I am currently writing an update for the next AES, and would appreciate critical comments.

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