India: Adopting a Pro-Competitive Policy for Telecommunications

For Presentation to the
Telecommunications Alliance

BOARD OF DIRECTORS

By Ashok R. Menon
M.A. Commercial Diplomacy


Advisors: Geza Feketekuty & Dr. Andrew Procassini

May 12, 1999



TABLE OF CONTENTS.

Scenario
Overview

PART I – Issue Analysis

  1. Introduction
  2. Background - The WTO Agreement on Basic Telecommunications (BTA)
A.  The General Agreement on Trade in Services (GATS)
B.  The GATS Annex on Telecommunications
C.  Ministerial Decisions and the Fourth Protocol
D.  Supplementary Schedules on Basic Telecommunications Services
    1. Scheduling Methodology
    2. Telecommunication Schedules 
    3. Chairman’s Notes
    4. Pro-Competitive Principles
E.  India’s BTA Commitments
    1. Foreign Investment
    2. Market Access
    3. Regulatory Principles

F.  The History of Telecommunications Services in India
G. The Current Structure of India’s Telecommunications Monopoly

  III.  Commercial Issue Analysis
A.  U.S. Telecommunications Industry
B.  The Indian Telecommunications Market
C.  The U.S. Stake in Foreign Telecommunications Markets

   IV.  Substantive Policy Issue Analysis

A.  Substantive Policy Issue #1 - Should USTR assist US telecommunications
firms in expediting telecommunications liberalization in India?

B.  Substantive Policy Issue #2 - Should India accelerate its telecommunication
liberalization process?
    1. India’s Outdated Monopoly Rationale
    2. India’s Need for Telecom Liberalization
    V.  Political Analysis
    1. The United States
    2. India

PART II - Strategy

  1. Strategy
A.  U.S. Domestic Strategy
    1. Securing Support from Congress
    2. Securing Support from other Government Agencies
    3. Alliance Building
    4. Academia and Think Tanks
    5. Roundtable Meetings
    6. Public Relations Strategy – United States
B.  Indian Domestic Strategy
    1. Informational Campaign
    2. Grassroots Campaign
    3. Coalition Building – ICATL
    4. Conferences
    5. National Consultant
    6. Creation of a Monitoring Commission
    7. Legislative Strategy
    8. Public Relations Strategy – India
C.  International Strategy

 


Tables

Table 1 - Overview of the Basic Telecommunications Agreement

Table 2 - History of Indian Telecommunications

Table 3 - Structure of India’s Telecommunications Monopoly

Table 4 - India's Network Development (1992-1996)  24

Table 5 - Projected Demand for Telephone Lines in India

Table 6 - U.S. Telecommunication Products, Establishments, Revenue and Employment

Table 7 - Telecommunication Services Revenue

Table 8 - U.S. Exports of Telecommunication Equipment by Sector

Table 9 - Top Ten U.S. Export Markets

Table 10 - The Indian Telecommunications Market

Table 11 - Non-U.S. Telecommunication Companies Doing Business in India

Table 12 - Largest 20 Foreign Telecommunication Markets (1995)

Table 13 - Investment in the Largest 20 Foreign Telecommunications Markets (1995)

Table 14 - Members of Congress Likely to Support TA

Table 15 - U.S. Telecommunications Associations

Table 16 - U.S. Telecommunication Firms

Table 17 - Telecommunication Production by State

Table 18 - Indian Officials Who Support Reform

Table 19 - Indian Opposition to Telecommunication Liberalization

Table 20 - Indian Interest Groups that Support Telecommunication Liberalization

Table 21 - U.S. Universities and Think Tanks

Table 22 - U.S. Media

Table 23 - International Media

Table 24 - U.S. Telecommunication Assignment Writers

Table 25 - Indian Media

Table 26 - International Interest Groups and Organizations

Table 27 – Proposed Budget


Boxes and Figures

Box 1 Employment, Liberalization and Developing Countries

Box 2 The Effects of Competition on Universal Service

Figure 1 Share of the Indian Telecommunications Market (1998)

Figure 2 Forces that Drive Telecommunications Reform

Figure 3 Comparative Investment Costs for Inter-City Transmission Technologies

 


Exhibits

Exhibit 1 Sample News Release

Exhibit 2 Sample Press Statement

Exhibit 3 Sample Questions and Answers

Exhibit 4 Sample Fact Sheet

Exhibit 5 Sample Congressional Testimony

India
United States

Exhibit 6 Sample Op-eds

India
United States

Exhibit 7 Sample Letters to the Editor

India
United States

Exhibit 8 Sample Letter to Member of Congress

Exhibit 9 Sample Letter to U.S. Telecommunication Company Executive

Exhibit 10 Sample Letter to Foreign Telecommunication Company Executives andGovernment Officials

Exhibit 11 Sample White Paper

Exhibit 12 Budget

Exhibit 13 Timeline


Annexes

Annex I Political Landscape Chart
Annex II Key Players Chart
Annex III Negotiating Chart
Annex IV India's National Telecommunication Policy (NTP) of 1994
Annex V Explanatory Paper on Additional Commitments by India


Bibliography


 

Scenario

For the purpose of this project, I assume the fictitious role of Government Affairs Specialist at a fictitious American industry association, the Telecommunications Alliance (TA). After receiving numerous complaints from member companies about their difficulties in gaining access to the Indian telecommunication products and services market, TA tasked me to develop a plan for expediting telecommunication market liberalization in India.

 


Overview

On February 15, 1997, World Trade Organization (WTO) successfully concluded the negotiation of a Basic Telecommunications Agreement (BTA). The vast majority of the BTA’s 69 signatories made far-reaching commitments that are significantly liberalizing the $725 billion global market for telecommunication goods and services. WTO member states are generally satisfied that commitments made in the WTO Basic Telecommunication Agreement (BTA) are bringing competition to the global telecommunication industry at a sufficient pace, and therefore, telecommunications will not be a major issue during the upcoming Millennium Round negotiations.

Nonetheless, six countries (including India) tabled just minimal commitments that bind them to observe only regulatory principles of their own creation.

This report demonstrates that:

  1. The U.S. government needs to engage in bilateral discussions with India in order to demonstrate that an accelerated pace of liberalization in the telecommunication sector will help spur India’s economic development by increasing exports and bringing numerous other benefits to India's economy and people.
  2. Although adopting and implementing all the BTA commitments will pose a significant challenge for India, Indian policymakers should build on the commitments they’ve already made.
  3. If India is able to signal its commitment to liberalization and to the adoption of a pro-competitive regulatory environment, it will be in a better position to attract capital flows needed to improve its telecommunication infrastructure. Private investors will be willing to invest in modernizing India's telecommunications infrastructure only if they can count on fair and stable rules of the game.

 


Part I
Issue Analysis

I. Introduction


India’s telecommunications products and services market is potentially worth over $60 billion. However, because India chose not to accept all of the principles set forth in the Reference Paper of the WTO Basic Telecommunications Agreement (BTA), U.S. telecommunications firms still encounter formidable difficulties in entering the Indian market. Current challenges for U.S. telecommunication product and service providers in India include changing political climates and an uncertain, evolving regulatory environment. In addition, U.S. firms contend with:

  1. Discriminatory government procurement policies;
  2. India’s lack of a transparent regulatory regime;
  3. Corruption and bribery;
  4. India’s lack of compliance with negotiated trade agreements;
  5. Non-tariff barriers such as burdensome licensing and approval procedures; and
  6. Standards and service-related obstacles.

Indian bureaucrats need to understand that policies should be implemented to facilitate investment in telecommunications and these policies need to be strictly enforced.

This report begins with a background analysis of the current state of telecommunications reform in India. It then identifies and analyzes important commercial and policy arguments in order to demonstrate that the introduction of competition to India’s telecommunications sector is vital to the development and health of India’s economy. The report also identifies important people and groups that will need to be mobilized in order to ensure compliance with national and international obligations.

 


II.  Background: The WTO Agreement on Basic Telecommunications

 

Signatories to the WTO Basic Telecommunications Agreement (BTA) include the United States and 68 of its trading partners, which together represent over 90 percent of global telecommunication service revenues. Subject to explicit exceptions listed by signatory countries, the agreement provides U.S. telecommunication carriers access to local, long-distance, and international service markets through all means of network technology (e.g., wireline, cellular, and satellite technology). The agreement also ensures that U.S. investors can acquire or establish telecommunication companies in many countries, and it obligates most U.S. trading partners to maintain or implement new, pro-competitive telecommunication regulations. Parties to the agreement scheduled binding, most-favored-nation commitments with respect to market access, investment, and regulatory principles. Signatories’ commitments became operative on February 5, 1998, when supplementary telecommunication schedules were folded into the General Agreement on Trade and Services.

No single document embodies the basic telecommunication agreement. Rather, the agreement is comprised of the following documents:

  • The Fourth Protocol to the General Agreement on Trade in Services (GATS);
  • Fifty-five supplementary schedules of commitments;
  • Nine lists of most-favored-nation (MFN) exemptions;
  • A Reference Paper on pro-competitive regulatory principles; and
  • Two notes on scheduling methodology from the Chairman of the WTO's Group on Basic Telecommunications (GBT).

The General Agreement on Trade in Services

The principle document shaping the telecommunications agreement is the General Agreement on Trade in Services (GATS), which is an annex to the Agreement Establishing the World Trade Organization signed in Marrakech, Morocco, on April 15, 1994. The GATS comprises three elements: (1) a framework of general obligations and disciplines for government regulation of trade and investment in services; (2) a series of annexes and ministerial decisions that supplement rules found in the framework and provide a timetable for follow-up activities and additional negotiations; and (3) individual country schedules that commit national governments to accord foreign service providers market access and national treatment, subject to defined exceptions (see Annex V).

The GATS framework lists 14 obligations and disciplines intended to facilitate international trade and investment in services. The telecommunications agreement incorporates the obligations set-forth in the framework and, in some instances, highlights certain obligations, making them directly applicable to basic telecommunication services. For instance, the telecommunication agreement incorporates rules on:

  • Most Favored Nation (MFN) treatment—Article II obligates WTO members to accord other members treatment no less favorable than that accorded to any other country;
  • Regulatory transparency—Article III requires prompt publication of measures relevant to trade and investment in services and notification of changes to these measures;
  • Domestic regulation—Article VI requires that all measures affecting trade in services be administered in a reasonable, objective, and impartial manner;
  • Monopolies and exclusive service providers—Article VIII requires signatories to ensure that monopolies and other firms with market power do not act in a manner inconsistent with scheduled commitments.

GATS Annex on Telecommunications

The GATS Annex on Telecommunications ensures that all firms requiring the use of telecommunication networks will be provided adequate access to national telecommunication infrastructures. The annex stipulates that negotiations were to focus on "public telecommunication transport networks and services," thereby signaling that WTO members would negotiate conditions of access to, and use of, telecommunication facilities, as well as the provision of services. The annex also stipulates that cable and broadcast distribution of radio and television programming would fall outside the scope of negotiations. With respect to network access, the annex stipulates that foreign firms requiring the use of telecommunication networks would be accorded access to and the use of public telecommunication networks (PTNs) on reasonable and nondiscriminatory terms and conditions.

Ministerial Decisions and the Fourth Protocol

Two ministerial decisions also shaped the telecommunication agreement:

    1. The Ministerial Decision for Negotiations on Basic Telecommunications, issued December 15, 1993, indicated that negotiations on basic telecommunication services would be undertaken on a voluntary basis and would be comprehensive in scope, with no basic telecommunication service excluded. It also established the Negotiating Group on Basic Telecommunications (NGBT) to undertake negotiations and indicated that the NGBT should make its final report no later than April 30, 1996.
    2. The Decision on Commitments in Basic Telecommunications. This decision, issued April 30, 1996, replaced the Negotiating Group on Basic Telecommunications (NGBT) with the Group on Basic Telecommunications (GBT). The GBT set January 15 to February 15, 1997 as the period during which WTO members could modify or supplement schedules and MFN exemption lists. The GBT also adopted the Fourth Protocol of GATS in order to preserve the best offers to date, and to incorporate finalized schedules and MFN exemptions in GATS. Finally, the GBT invited WTO members who had not participated in the negotiations to submit commitments and MFN exemptions for approval by January 1, 1998.

Supplementary Schedules on Basic Telecommunications Services

Scheduling Methodology

GATS signatories schedule commitments on both market access and national treatment with respect to four distinct modes of supply (i.e., cross-border supply, consumption abroad, commercial presence, and presence of natural persons), meaning that eight explicit or implicit schedule entries are recorded for each of the industries currently covered under the GATS. To date, 131 countries have specified commitments on trade and investment in services.

Within national schedules, signatories made:

  • Full market access and/or national treatment commitments, which indicate that no sector-specific restrictions exist; or
  • Partial commitments, which describe existing restrictions; or
  • Unbound limitations on commitments, which indicate that a country preserves its right to impose additional restrictions on market access and/or national treatment in the future without penalty.

Telecommunication Schedules

Commitments on basic telecommunication services appear in supplementary schedules and constitute the bulk of the telecommunication agreement. Basic telecommunication schedules are especially complex because they not only delineate market access and national treatment commitments regarding the seven basic telecommunications services, but also communicate commitments regarding distinct geographic telecommunication markets (e.g., local, long-distance, and international markets), distinct network technologies (e.g., wireline, cellular, and satellite networks), and facilities-based and resale services. Supplementary schedules further delineate commitments regarding regulatory principles.

Chairman's Notes

To simplify commitments on geographic markets, network technologies, and facilities-based and resale services, the Chairman of the GBT issued a note to WTO members on January 6, 1997, indicating that, unless otherwise specified in a country’s schedule, commitments pertaining to basic telecommunications would apply to:

  • Local, long-distance, and international services for public and non-public use;
  • Networks based on all transmission technologies (e.g., wireline, cellular, and satellite networks); and
  • Facilities-based and resale services.

Thus each supplementary telecommunication schedule implicitly or explicitly indicates through its market access and national treatment commitments the extent to which foreign telecommunication firms may gain access to local, long-distance, and international service markets through all means of network technologies on a facilities basis or through resale. Additionally, each supplementary schedule indicates the extent to which foreign firms may acquire, establish, or hold a significant share in national telecommunication firms.

 

Pro-Competitive Principles

In order to safeguard the value of market access commitments, GBT signatories also made supplementary schedule commitments on pro-competitive regulatory principles. Itemized in a Reference Paper, these pro-competitive principles include commitments to:

  • safeguard against anticompetitive practices, including cross-subsidization, among monopolies or other firms with market power;
  • provide timely and cost-based interconnection under nondiscriminatory terms, conditions, rates and quality;
  • provide transparent and nondiscriminatory universal service requirements that are no more burdensome than necessary;
  • provide transparent and publicly available licensing criteria and reasons for denial;
  • ensure the independence of regulators from suppliers of basic telecommunication services; and
  • allocate scarce resources, including frequencies, numbers, and rights of way, on an objective, timely, transparent and nondiscriminatory basis.

In February 1997, 57 of the 69 governments scheduled the pro-competitive commitments listed in the Reference Paper in whole or in part. Six other countries scheduled commitments that bind them to observe regulatory principles of their own creation.

Table 1 provides an overview of the World Trade Organization's Basic Telecom Agreement.

 

Table 1 - Overview of the Basic Telecommunication Agreement

Document

Provisions

Ministerial Decision on Negotiations on Basic Telecommunications

(December 15, 1993)

  • Specified that WTO members would participate in negotiations pertaining to basic telecommunication services on a voluntary basis.
  • Specified that negotiations should be comprehensive in scope.
  • Established the Negotiating Group on Basic Telecommunications (NGBT).
  • Specified that negotiations should commence no later than May 16, 1994, and conclude by April 30, 1996.

General Agreement on Trade in Services (GATS)

(April 15, 1994)

  • Called on WTO members to observe 14 general obligations conducive to trade and investment in services (e.g., MFN treatment, regulatory transparency, domestic regulations, monopolies and exclusive service providers).
  • Called on WTO members to schedule market access, national treatment, and additional (optional) commitments specific to certain industries, including basic telecommunications and enhanced telecommunication, in enhanced schedules of commitments.
  • Called on WTO members to observe eight annexes, two of which pertain to telecommunications (the Annex on Telecommunications and the Annex on Negotiations on Basic Telecommunications).

Annex on Telecommunications

(April 15, 1994)

  • Required signatories to allow service providers access to and use of public telecommunication transport networks and services (PTTNS).
  • Required signatories to interconnect private-leased or owned circuits with PTTNS or with circuits leased or owned by another service supplier.
  • Required signatories to allow the use of protocols of the service supplier's choice in the supply of any service.
  • Required signatories to allow service suppliers use of PTTNS for the movement of information within and across borders, including for intra-corporate communications of such service suppliers.
  • Provided for technical cooperation through bodies such as the International Telecommunication Union (ITU) and the International Organization for Standardization (ISO).
  • Excluded cable and broadcast distribution of radio and television programming from the scope of negotiations.

Document

Provisions

Annex on Negotiation on Basic Telecommunications

(April 15, 1994)

  • Required signatoreis to accord MFN treatment by agreed date if negotiations succeed, or by April 30, 1996, if negotiations did not succeed.

Decision on Commitments in Basic Telecommunications

(April 30, 1996)

  • Adopted the "Fourth Protocol to the General Agreement on Trade in Services."
  • Established January 15, 1997 to February 15, 1997 as the period during which WTO members with schedules attached to the Fourth Protocol could supplement or modify national schedules and lists of MFN exemptions.
  • Established the Group on Basic Telecommunications (GBT) to carry negotiations forward to February 15, 1997.
  • Allowed WTO members that had not attached national schedules or lists of MFN exemptions to the Fourth Protocol to submit such documents by January 1, 1998.

Fourth Protocol to the General Agreement on Trade in Services

(April 30, 1996)

  • Annexed national schedules and lists of MFN exemptions concerning telecom to the GATS.
  • Established November 30, 1997, as the deadline for acceptance of the protocol (and thus final national schedules and lists of MFN exemptions).
  • Indicates that the Protocol will enter into force on January 1, 1998.

Chairman's Note of

January 16, 1997

  • Outlined the assumptions that underlie the scheduled commitments on basic telecommunication services.
  • Indicated that, unless explicitly exempted in the schedules, basic telecommunication services:
  1. Encompass local, long-distance, and international services for public and non-public use;
  2. May be provided on a facilities basis or by resale; and
  3. May be provided through any means of network technology (e.g., wireline, terrestrial wireless/cellular, or satellite).
  • Indicated that private-leased circuit services involve the ability to sell or lease any type of network capacity (e.g., wireline, cellular, or satellite networks) for the provision of any type of basic telecommunication services, unless explicitly exempted.
  • Stipulated that signatories may maintain separate entries for cellular and mobile services.

Chairman's Note of

February 3, 1997

  • Indicated that signatories do not need to list as market access restrictions frequency/spectrum management policies, including the ability to allocate frequency bands taking into account existing and future needs.

Document

Highlights

Report of the Group on Basic Telecommunications

(February 15, 1997)

  • Summarized issues addressed since April 30, 1996.
  • Indicated that 55 schedules (submitted by 69 countries) and nine lists of MFN exemptions had been submitted by February 15, 1997.
  • Indicated agreement among WTO members that differential accounting rates applied to international traffic should not give rise to dispute settlement procedures as MFN violations, yet indicated this understanding will be reviewed no later than January 1, 2000.
  • Noted that further national schedules and lists of MFN exemptions may be submitted prior to January 1, 1998.

55 Schedules of Commitments and 9 Lists of MFN Exemptions

(February 15, 1997)

  • Listed market access and national treatment commitments on basic telecommunication services in 69 countries.
  • Listed commitments on pro-competitive regulatory principles found in the Reference Paper.
  • Listed exceptions to MFN treatment by nine WTO members.

Reference Paper on Pro-Competitive Regulatory Principles

(February 15, 1997)

  • Provided for:
  1. Safeguards to protect against anticompetitive practices by major suppliers;
  2. Interconnection to PTTNS under nondiscriminatory terms and conditions;
  3. Nondiscriminatory and competitively neutral universal service requirements;
  4. Transparent licensing criteria;
  5. Independent regulators; and
  6. Nondiscriminatory allocation of scarce resources, including frequencies, numbers, and rights of way.

Source: United States International Trade Commission and World Trade Organization



India's BTA Commitments

India's BTA schedule covers local voice services, both cellular and wireline; circuit-switched data transmission; facsimile; and private-leased circuit services. The schedule excludes long-distance and international voice services and includes only modest market access commitments. Further, India accepted only limited sections of the GBT Reference Paper on pro-competitive principles, choosing instead to make minimal commitments that bind them to observe only regulatory principles of their own creation.

Foreign Investment

India's commitments on foreign investment are actually regressive; they fall well short of India’s current policies regarding the allowable level of foreign ownership of telecommunication service providers. India committed only to allow 25 percent foreign ownership of local wireline and cellular voice service providers, but current national policy allows foreign investors up to 49 percent ownership of such carriers. India made no commitments regarding foreign investment limits for its monopoly international carrier Videsh Sanchar Nigam Ltd. (VSNL).

Market Access

India grants licenses for the provision of local wireline voice telecommunication service only if a "designated authority" determines that a need exists for such services. India neither identifies the designated authority nor requires that such authority be independent from telecommunication service providers. Further, carriers that receive licenses to provide telecommunication services are subject to unspecified terms and conditions laid down by the designated authority, the government, or the prevailing laws.

If the designated authority determines that a need exists, India will allow one additional carrier to provide local wireline services in competition with the Department of Telecommunication (DoT) or Mahangar Telephone Nigam Ltd. (MTNL) within each service area for at least 10 years. The carriers that receive licenses in each service area may provide voice, facsimile and data transmission services using circuit-switched technology. Licensees are also allowed to provide leased circuits to their customers within their service area, but they are not allowed to sell excess capacity over these circuits. They may grant franchises on a commission basis for providing payphone services.

India has not made any commitments with respect to long-distance and international telecommunication services other than to review the status of each of these markets in 1999 and 2004 respectively.

 

Regulatory Principles

India scheduled no commitment to prevent cross-subsidization, thus allowing DoT and MTNL to subsidize non-competitive local exchange operations with monopoly revenues from long-distance operations. India's commitments on interconnection provide that

interconnection with a major supplier be ensured at points "specified in the license," rather than at "any technically feasible point" as the GBT Reference Paper states. More significantly, India did not make binding commitments to Reference Paper principles that ensure interconnection in a timely fashion under terms, conditions, or rates that are transparent, reasonable, economically feasible, nondiscriminatory, or unbundled.

India accepts the Reference Paper's requirement that universal service be defined in a transparent and nondiscriminatory manner but not the obligation to make regulation of universal service competitively neutral or no more burdensome than necessary. Finally, India scheduled no commitments to publish the normal time period for reaching a decision on license applications, to allocate the use of scarce resources in a transparent and nondiscriminatory manner, or to make publicly available the current state of allocated frequency bands.

In the absence of stronger commitments on pro-competitive regulatory principles, it is not clear that market access and investment commitments pertaining to either basic or enhanced telecommunication services will materially increase opportunities for U.S. participants in India's market.

 

The History of Telecommunication Services in India

India gained independence from British rule on August 15, 1947. Along with independence came Jawaharlal Nehru and his political ideology that the state would have to capture and control the commanding heights of the economy. His political beliefs, shaped by Fabian socialism and communist central planning, reflected a profound faith in rationalism, predictability, quantification and planning. He thought competition was bad, and he had "contempt for the price mechanism." He believed that central planning, strong state control, and government knowledge would do a better job of allocating investment and determining output than the market.

 

Table 2 - History of Indian Telecommunications

Year

 

1851

First operational land lines were laid by the government near Calcutta (seat of British power)

1881

Telephone service introduced in India

1883

Merger with the postal system

1923

Formation of Indian Radio Telegraph Company (IRT)

1932

Merger of ETC and IRT into the Indian Radio and Cable Communication Company (IRCC)

1947

Nationalization of all foreign telecommunication companies to form the Posts, Telephone and Telegraph (PTT), a monopoly run by the government's Ministry of Communications

1985

Department of Telecommunications (DOT) established, an exclusive provider of domestic and long-distance service that would be its own regulator (separate from the postal system)

1986

Conversion of DOT into two wholly government-owned companies: the Videsh Sanchar Nigam Limited (VSNL) for international telecommunications and Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas.

1997

Telecom Regulatory Authority created.


The perception that the state could be trusted and that the market could not was consistent with post-World War II experience, the views of leading economists, as well as the advice of international donor agencies. Thus, independent India decided that its telephone and telegraph systems would be strictly a government monopoly administered by its own civil service (see Table 2).

What ensued has become known as the "Permit Raj," a complex, irrational and almost incomprehensible system of regulations and licenses that controlled every step of production, investment, and foreign trade. Permission from state bureaucrats was required for setting up or closing factories, increasing or decreasing capacity, or downsizing the labor force. India's drive for self-sufficiency—manifested in inward-looking, import-substitution policies fashionable in the developing world in the 1950s and 1960s—ultimately stifled competition and economic growth.

Under pressure from domestic and foreign capital, international lending agencies, and foreign governments, India began to open its markets and divest its public sector enterprises in the 1980s. India began to face the harsh fact that the welfare-maximizing benevolent state it had envisioned decades earlier had never materialized. What did develop was massive corruption of the public domain characterized by deals between politicians, bureaucrats and enterprise leaders.

In the mid-1980s, Rajiv Ghandi’s administration removed restrictions on imports and exports, which led to an enormous increase in imports to meet the pent-up demand of the Indian middle class. But the lack of a comparable increase in exports led to a trade deficit.

The problem reached crisis proportions when oil prices skyrocketed during the Gulf War and caused India’s already fragile balance of payments deficit to soar. In 1991, the state was forced to chose between defaulting on its external debt payments or going to the International Monetary Fund (IMF) for loans. The government opted for taking medium-term loans from the World Bank and IMF to repay its short-term debt. In return, India agreed to remove barriers to private domestic and foreign capital investment and to integrate its economy into the global capital market. The crisis gave Indian free-market leaders an opportunity to force change that would hopefully cure the fundamental ailments of the economy—too much regulation and control and not enough competition.

Prime Minister Narshimha Rao kept with the changes initiated by the Rajiv Gandhi administration and the interests of the expanding middle class. Upgrading India’s telecommunications infrastructure was among the numerous goals set-forth in Rao’s New Industrial Policy of 1991. The government’s increased awareness of the important role of telecommunications was exemplified in the Government of India's Economic Survey of 1993-1994:

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.

(Economic Times, 1994)

Nonetheless, India has decided to follow a relatively cautious path of telecommunications liberalization. The reasons are complex and varied, but four main concerns have prevented more rapid restructuring. The government and other interest groups fear that:

  1. in a region full of conflicts, liberalization and privatization would threaten national security;
  2. in the absence of pressure from large business users or high-tech communities, telecommunications services will not improve;
  3. privatization would lead to unemployment; and
  4. the government would not be able to replace revenue it now gets from its state-run telecommunications network.

Owing to its historical and economic circumstances, as well as its need for internal political accommodation, India has been slow to move toward privatization of its telecommunications sector. Lacking significant pressure from large business users or high-tech communities and fearful of the costs of competition, India has made only gradual liberalizations that do not meet the recommendations of the WTO, international lending institutions, and the United States.

But subject to increasingly fierce international competition from callback services, Internet phone, low-earth-orbit satellites, and global operators, there is little doubt that new technology will progressively and irreversibly erode the market position of India's telecommunication monopolies and their high profit margins. As a result, the financial value of these companies will deteriorate, making them less attractive to future investors. India has everything to gain from accelerating its telecommunications liberalization effort.

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