Functioning Anarchy: India's National Telecommunications Policy and the Development of Basic Telephone Services


"FUNCTIONING ANARCHY":
INDIA S NATIONAL

TELECOMMUNICATIONS POLICY AND
THE DEVELOPMENT OF "BASIC"

TELEPHONE SERVICES

RAJESH SWAMINATHAN

I. INTRODUCTION

The Government of India's (GOI) efforts to implement its 1994
National Telecommunication Policy are perhaps most appropriately
summed up by paraphrasing John Kenneth Galbraith's memorable
assessment of India: as he said of the country, one may say of the Policy
that it is "functioning anarchy." Since its articulation by the Congress (I)
government of Prime Minister P. V. Narasimha Rao, it has been shown to
be haphazardly conceived, modified on an ad hoc basis, badly
implemented and abused for private gain. Nevertheless, in its own
perveise way, it has made possible the incremental and still incomplete,
but probably irreversible, liberalization of the telecommunications sector.

Nowhere is this paradox more evident than in the government's
efforts to promote the development of "basic" telecommunication services,
as envisioned in the Policy. From the outset, this endeavor has been
crippled by enduring conflicts of interest, a sometimes stunning
incomprehension about the technical aspects of the telecommunications
industry, an intermittent disregard for economic analysis and a vestigial
loyalty to the Fabian socialism of the Nehruvian state. In this paper, I
attempt to survey this process of reform, and to offer some tentative
assessments of its irregular progress.

For the purposes of this paper, I adhere to the Indian government's
tacit definition of basic services as (typically wireline-based) voice
telephony, but without subscribing to it. Indeed, an important portion of
my argument criticizes this implicit identification, and examines in some

* Associate, Davis, Polk& Wardwell. J. D. (1998), Columbia Law School; M. Phil. (1994),

University of Oxford; B. A. (1992), Williams College. The author gratefully acknowledges the
encouragement of Dean Lance Liebman of the Columbia Law School in the writing of this article.



COLUMBIA JOURNAL OF ASIAN LAW

detail its deleterious impact on the formulation and execution of
government policy. Additionally, it should be noted that while the reform
of the Indian telecommunications sector has involved a great deal more
than the liberalization of basic services, I do not address its other
dimensions except insofar as they have impinged upon the latter.

II. THE MACROECONOMIC AND REGULATORY CONTEXT OF INDIAN

TELECOMMUNICATIONS POLICY

A. Present Capacity

India has, in absolute terms, a large domestic telecommunications
network with impressive voice telephony capabilities. It has 12 million
direct exchange lines (DELs), 21,158 telephone exchanges and 10 million
telephone lines. One thousand one hundred industrial and commercial
centers have direct dialing facilities linking them to each other and to
overseas destinations.' The country also has a long distance transmission
network with 116,000 route kilometers of terrestrial microwave radio
relay, coaxial & undersea cables and 25,000 miles of optical fiber systems.
The rate of growth of voice telephone connections on a nationwide basis
is 8.4%. a full 3.4% higher than the global rate of 5%.2

On the whole, however, the voice telephony network as it presently
stands leaves much to be desired. First, it is heavily concentrated in urban
regions, with the four largest cities (Bombay, Delhi, Calcutta and Madras)
enjoying telephone densities in excess of 4 DELs per 100. By contrast,
rural areas typically have less than 0.1 DEL per 100 persons. Indeed, only
140,000 of a total of India's 604,000 villages have access to telephones
within a reasonable distance.3

Second, the system is distinguished by significant regional
imbalances. For example, the relatively industrialized states of Punjab,
Gujarat, Maharashtra and Kerala have 4 times the penetration rate of Uttar
Pradesh (UP). Unremarkably, panchayat villages 4 in the former states
have significantly greater access to voice telephony than their counterparts

I. All other locations only have trunk booking facilities.
2. ASIAN DEVELOPMENT BANK, 1996 PROPOSED LOAN FOR THE RURAL

TELECOMMUNICATIONS PROJECT (INDIA) (R258-96) [hereinafter ADB].

3. MINISTRY OF FINANCE, UNION BUDGET, 1996-1997 (1996). Just over one-half of the
country's 232,000 panchayat villages [larger rural administrative centers that serve as the seats of
local government] have access to voice telephony.

4. For a definition ofpanchayat village, see supra note 3.

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INDIA 'S TELECOMMUNICATIONS POLICY

in the latter: all such villages in Kerala and 80% of those in Tamil Nadu
have direct access to a telephone facility, compared with 20% in UP.

Third, relative to other developing countries in Asia, India's
telecommunications system compares very unfavorably in terms of
network coverage and expansion. Its telephone density of 1.3 DEL per 100
persons is among the lowest in Asia.5 Moreover, in the period between
1991 and 1993, India's wireline voice telephony network grew by one-
third (from 4.6 million to 6.8 million DELs). But the waiting list increased
from a total of 1.7 to 2.8 million prospective subscribers. Since 1993, the
situation has deteriorated further, so much so that as late as 1996,
aggregate unexpressed demand for voice telephone connections exceeded
supply by 42%.6 Today, many potential subscribers do not even bother to
apply for a connection, as they know service will not be available for a
minimum of two years.

The significance of such pronounced underdevelopment in basic
services is obvious, not least to large numbers of Indian policy-makers. It
is clearly a major constraint on economic and social development. At the
grassroots level, capacity constraints in this area impede the successful
implementation of (Government-run) social welfare programs in public
health care and education, particularly in rural areas. According to a non-
governmental organization active in 6 Indian states, a basic voice
telephone link between a north Indian village and the district office of the
government Primary Health Care Worker would so noticeably improve the
latter's pre-natal monitoring and preventive care capabilities that it would
effectively reduce the infant mortality rate in that community by about
eight percent.7

Moreover, structural deficiencies in the basic services network
undermine the ability of India's newly liberalized, export-oriented
economy to attract the international capital inflows necessary to finance its
expansion in a sustained manner. Equally, they severely inhibit the ability
of Indian private sector firms to effectively compete effectively with their
foreign counterparts. As one might expect, the small and medium-sized
firms that comprise India's emerging mnittelstand-and are crucial to its
export strategy-bear a disproportionate share of this burden.

5. Forinstance, even low-incomeAsian countries such as China and Pakistan have telephone
densities of 1.7 DELs and 2 DELs per 100 people. A Newly Industrializing Economy (NIE) such
as Malaysia has 13 DELs per 100 people.

6. ADB, supra note 2.
7. Interviews with participants, Symposium on Governance, Development Alternatives (June

10, 1995).

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Finally, because voice telephone services are so critical to the
successful pursuit of national public health, education and social welfare
efforts, they are essential to the improvement of the country's human
capital endowments. In this regard, their retardation has profound
consequences for the emergence of a literate and healthy workforce
capable of servicing export-oriented industries, and possessed of the
requisite skills to negotiate an increasingly flexible labor market. Thus,
basic services are an important interface between the "hard" dimensions of
development, such as macroeconomic, regulatory and structural reform,
and its "soft" aspects, such as health, education, and social welfare.

It is tempting to believe that these testaments to the importance of
voice telephony persuaded the GOI in 1991 to officially recognize that the
general inadequacies of its telecommunications network were
unacceptable; that its programmatic public sector-based efforts to remedy
them had, at best, met with limited success over the course of forty years;'
and most importantly, that it would have to reverse longstanding policies
and significantly liberalize its telecommunications sector. Such an
assessment would be misplaced, however, fundamentally because the
GOI's reform efforts were precipitated and sustained by the massive
balance of payments crisis suffered by the Indian economy in 1991.
Indeed, the peculiar and involuntary nature of this impetus for reform
determined the scope and pace of the GOI's liberalization program, so
much so that it explains its haphazard conception and implementation.
Therefore, any discussion of the GOI's efforts to promote basic telephone
services must necessarily begin with a consideration of the wider
macroeconomic and regulatory environment of the early 1990's in which
the GOI formulated its telecommunications policies.

B. Institutional and Policy Reform Initiatives Pertaining to "Basic"
Services: A Chronology

Until the 1980's, the GOI pursued quasi-socialist import-substitution
industrialization (ISI) policies predicated on "a vast regulatory apparatus
designed to support a large public sector (producing key inputs such as
steel, power, transport .... [commercial finance and telecommunications].
Suffused with more than a residual antipathy to capitalism, which the
Indian political classes associated with colonial exploitation, the GOI

8. See, e.g., THE MINISTRY OF FINANCE, REPUBLIC OF INDIA, ECONOMIC SURVEY OF INDIA

(1991).

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restricted the private sector to the production of consumer goods (imports
of which were banned)." 9 Forty years of government policy based on this
strategy created a well-diversified but highly dirigiste mixed economy
distinguished by "protection[ism,] tight controls over industry and
investment, and a legal framework [that] prevent[ed] the free movement
of capital and labor."'0 But though these features made for lackluster GDP
growth and frequent state intervention in the economy, India maintained
a consistent record of macroeconomic stability based on cautious financial
policies." Widening fiscal deficits and a mounting debt burden during the
1980s, however, raised serious questions about the sustainability of the
country's current account.' 2 Then, the outbreak of the Gulf War in 1991,
combined with domestic political turmoil delivered two successive shocks
to the Indian economy. Capital flight, a precipitous decrease in exports,
and a sharp rise in oil import bills so weakened India's balance of
payments profile 3 that in June, both Standard & Poor and Moody's
downgraded India's credit-worthiness to the lowest level. In response, the
international capital markets cut off short-term credit, 4 leaving the country
with less than one billion dollars in foreign exchange reserves, or the
equivalent of two weeks worth of import cover.

Aware that it was on the verge of defaulting on its US$71 billion
external debt,' 5 the GOI turned to the International Monetary Fund (IMF)
and the World Bank for emergency assistance. 6 The multilaterals'
response was unexpectedly generous. The IMF extended US$635 million
in compensatory financing to boost reserves, as well as a 20-month loan of
US$2.2 billion through the standby credit facility.' In return, the Fund
ordered the government to abolish statutory controls on foreign exchange
flows, devalue the rupee by 18% against the dollar, and sharply reduce
government spending.'8 The World Bank loaned India a further US$ 3
billion through the Structural Adjustment Lending (SAL) window, on

9. Ranjit Teja, Crisis. Recovery and Transformation in India. in 29 FIN. & DE%. 32 (1994).
10. SeegeneralyTHEINDANEcONOY:PROBLISANDPROSPECTS(Bimalialaned., 1992).
II. Teja, supra note 9, at 32.
12. Id. at 32.
13. Id. at 32.
14. Dilip Das, India Gives Up On Free-Market Reform. ASIAN WALL ST. J., Jan. 20. 1992.

available in Westlaw Library, WSJ-ASIA file.
15. Cynthia Owens, India Reaches Economic Watershed: Effort to End Years of Self-Imposed

Isolation Cheers Foreign Executives, ASIANWALLST.J., Aug. 8, 1991, available in Westlaw, WSJ-
ASIA file.

16. Das, supra note 14.
17. Id.
18. Id.

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condition that India undergo structural adjustment and IMF-mandated
fiscal stabilization.' 9 In particular, the Bank required India to abolish
industrial licensing, and raise the statutory ceiling on foreign equity
ownership to 51 %.20

The government accepted the multilaterals' conditionalities and
began its tenure by presenting a remarkably austere 1991 federal budget.
Adopting an extremely restrictive fiscal stance, the federal government
curtailed expenditure on subsidies, defense needs, capital expenditure, and
loans to the states and the public sector.2' In this way, it managed to
reduce the fiscal deficit from 9% to 6.5% of GDP.22

After receiving another US$300 million loan from the Asian
Development Bank in 1992 to assist in reforming the financial services
sector,23 India began negotiating with the IMF in 1993 for a further US$9
billion loan partly under the Extended Fund Facility, and partly through the
concessional Enhanced Structural Adjustment Facility (ESAF) window. 4

In return for this additional financing, the IMF, in consultation with the
World Bank, specified further conditionalities to reduce the fiscal burden
of the federal government.25 Specifically, it required India to accelerate
financial sector reforms, remove unproductive farm subsidies, liberalize
consumer imports and deregulate the labor market, especially by adopting
legislation that would allow employers to "hire-and-fire" employees at
will.2 6 India agreed in principle to these policies, but stressed that some
politically sensitive reforms, such as those pertaining to the liberalization
of labor laws, would have to be very gradually undertaken.

That the GOI undertook to liberalize its telecommunications policy
in this context is highly significant, particularly with regard to basic
services. Until 1991, its regulation of the sector simply consisted of
federal political oversight by the Parliamentary executive: under the Indian
Telegraph Act of 1885,27 all telecommunications services were directly

19. Fiammetta Rocco, Gandhi Murder May Delay Key IMF Loan: New Funds Urgently
Needed to Solve India's Growing Balance of Payments Problems, INDEP. ON SUNDAY, May 23, 1991,
available in Westlaw Library, INDEPENDENT file.

20. Das, supra note 14.
21. Id.
22. Id.
23. Id.
24. India Launches Talks with 1MF for Big Loan, AGENCE FRANCE PRESSE, July 26, 1993,

available in LEXIS, Nexis Library, AFP file.
25. Id.
26. Id.
27. The Indian Telegraph Act, 1885, INDIAL. DIG., available in Westlaw Library, Martindale-

Hubbell International Law Digest file.

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operated as government-owned and -operated monopolies by the federal
Ministry of Communications (MOC), which also administered and owned
the postal services. Firmly underpinning this macroeconomic and
regulatory regime was the ruling paradigm of Nehruvian socialism: since
the state was deemed the guardian, benefactor and representative of
citizens' interests, the wealth-creating potential of the "commanding
heights of the economy, [namely heavy industry, were] to be reserved for
its public sector"'2 organs. Conversely, these resources had to be protected
from appropriation by private economic actors, (particularly if they
happened to be foreign,) not only because such transfer of control would
lead to the enrichment of a few at the expense of many, but also because
public control of such sectors, which were important to the vitality of the
Indian military-industrial complex, was essential to ensure the vitality of
the country's defensive capabilities.

Thus, like all other public sector enterprises, the MOC was mandated
to pursue three sets of public corporate objectives in addition to the
sectorally specific aims of providing universal service and promoting the
development and installation of the most sophisticated telecommunications
technology. 29 First, it was expected to create and sustain profitable and
competitive operations by achieving the maximum possible efficiency,
imposing minimal costs on consumers, and increasing the range and
availability of services. Additionally, it was to help fulfill the social
welfare obligations of the Nehruvian state by providing stable employment
to a sizeable proportion of India's formal sector labor force. Third, it was
to ensure the perpetuation of direct governmental responsibility for the
sector in the interest of national security.

Prior to 1991, none of these goals of GOI telecommunication policy
was ever questioned, even during periods of intermittent administrative
reform of the sector by the MOC. Indeed, the most far-reaching of these
structural reorganizations, which were ordered by the Rajiv Gandhi
government in the latter half of the 1980's, very much exemplified the
ministry's tendency to acquiesce in the prevailing consensus on the state's
role as regulator and economic actor.

The Gandhi government's reforms were implemented in three stages.
In 1985, the MOC divided its joint responsibility for telecommunications
and postal services into two departments, and entrusted the newly-created

28. JAWAHARLAL NEHRU, OCCASIONAL SPEECHES 45 (Menon ed., 1967).
29. See, e.g. Michael Boon, No Bargains in India's Market, COMM. INT'L, OC., 1996,

available in LEXIS.

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Department of Telecommunications (DOT) with primary responsibility for
the provision and oversight of all services concerned with the
telecommunications sector. The following year, the government created
two public sector corporations within the DOT: Mahanagar Telephone
Nigam Limited (MTNL) ["Metropolitan Telephone Company Limited"],
which was charged with the ownership, management, and operation of the
metropolitan local loop networks of Delhi and Bombay, and the Videsh
Sanchar Nigam Limited (VSNL) ["International Telecommunications
Company Limited"], which was entrusted with ownership, management,
and operation of international telephone services. Much like the multitude
of other public sector corporations, MTNL and VSNL enjoyed financial
and administrative autonomy, were able to directly raise investment funds
by tapping international and domestic capital markets, and were intended
to be commercially viable. For its part, the DOT retained ownership,
management and operation of all telecommunications services and
facilities for the rest of the country.30

Finally, in 1989, the GOI created another agency within the MOC,
the Telecommunications Commission (TC), and invested it with broad
responsibility for policy development. Additionally, it was also entrusted
with primary responsibility for perspective planning to promote all
telecommunications services in India, including technology, production
and services.

Far from altering the dirigisme of the underlying regulatory regime,
these structural changes demonstrated remarkable fidelity to both its spirit
and standard operational procedures. For instance, in their contributions
to the Seventh (1985-1990) 31 and Eighth (1990-1995) Five-Year Plans, 32

as well as the Perspective Plan for Telecommunications Services (1990-
2000),33 the newly re-constituted MOC, TC and DOT extrapolated from
contemporary levels of unrealized demand for voice telephone connections
to arrive at numerical targets to be realized during the subsequent phase of
network expansion. The DOT was then given formal responsibility for
financing the process out of federal budgetary allocations, and physically
installing the required capacity.

Pursuant to these instructions, the federal government, acting through
the MOC, the DOT and the TC, aimed to install 1.7 million new telephone

30. ADB, supra note 2.
31. PLANNING COMMISSION, SEVENTH FIVE-YEAR PLAN (1984).

32. PLANNING COMMISSION, EIGHTH FIVE-YEAR PLAN (1989).
33. MINISTRY OF COMMUNICATIONS, PERSPECTIVEPLAN FOR TELECOMMUNICATIONS SERVICES

(1990).

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connections within the Seventh Plan period. Moreover, during the Eighth
Plan period, it hoped to install an additional 8.6 million new telephone
connection, more than eight times what it set out to achieve during the
earlier Plan period. Indeed, by the end of 1997, the GOI planned to have
raised national telephone density levels to 1.1 DELs per 100 persons, and
to have installed a telephone in each of India's 597,000 villages. It also
aimed to maintain this trajectory of network expansion so that, by 2000,
DOT would have installed a telephone in each of India's 232,000
panchayat villages under a federally-funded and -administered "Phone in
Every Village Scheme"; and the waiting time for voice telephone
connections in both urban and rural areas would have been reduced to a
maximum of a few months. Beyond 2000, the GOI aimed to raise
telephone density levels to between 6 and 7 DELs per 100 persons in urban
areas, and from between 0.9 and 2.3 DELs per 100 persons in rural areas.

As the targets and action-plans of the various Plans demonstrate, the
structural reorganizations of the MOC had little or no success in altering
the fundamental orientation and substance of Indian telecommunications
policy, particularly with regard to basic services. Indeed, they were quite
plainly not designed to bring about such a change. That the MOC, DOT
and TC continued to adhere to the long-established practice of target-
setting by central government ministries, and to rely on the DOT to
implement policies designed to realize them, suffices to establish that, to
a very large extent, the organizational reforms were cosmetic.
Telecommunications policy in India was still predicated, almost as a matter
of faith, on sustained state action and federal budgetary support. By
extension, it would and could not challenge or alter the underlying
regulatory regime.

Nevertheless, there is little doubt that Eighth Plan and the Perspective
Plan together generated considerable economic impetus for the
fundamental transformation of the system, particularly in the context of the
balance of payments crisis that was already looming in 1990. The total
cost for the achievement of Eighth Plan targets alone amounted to well
over US $9.6 billion, a level of budgetary support that the GOI in 1989
conceded would be difficult to provide in light of its widening fiscal
deficit. Furthermore, the outlays required for the Perspective Plan's targets
beyond 2000 would have required public expenditure of even greater
magnitudes. 4

Additionally, given the dramatic increases in absolute levels of

34. ADB, supra note 2.

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unrealized demand for telecommunications services in general, and voice
telephony in particular, there was mounting concern in official circles as
to whether the DOT had the requisite physical capacity to implement
network expansion. By June 1991, at the height of the balance of
payments crisis, the GOI realized that the DOT had clearly fallen severely
behind in this endeavor, and at the current rate of increase, would fail to
meet its Perspective Plan targets. Hence, in September 1991, the GOI
announced the first substantive change to its telecommunications policy:
it formally opened the sector to private sector participation in the sphere
of so-called "value-added" services, namely cellular telephony, paging,
electronic mail, voice mail, data services, audio and video text services,
and video conferencing. Initially, it opened competitive bidding for
private licenses to provide mobile phone service in the four largest cities
(Bombay, Delhi, Calcutta and Madras,) and radio paging services in 27
other major cities. The GOI also intimated through unofficial
announcements, however, that it was framing policies to allow for more
comprehensive private participation in the telecommunications sector in
the very near future.

The bidding process for value-added services, and for cellular phone
licenses in particular, was unnecessarily complicated. It was distinguished
by a conspicuous lack of clear operational guidelines, particularly with
regard to the evaluation of private bids, and marred by substantial
procedural irregularity and allegations of official corruption. In this
regard, it presaged many of the problems that were to bedevil the
liberalization of basic services. For the purposes of this discussion,
however, this preliminary phase is chiefly important for the extent to which
it established the category, "value-added service" in the GOI's policy
lexicon, and defined it with a high degree of specificity. Thenceforth, for
the purposes of sectoral liberalization, it would be constituted by the
following eight services: cellular telephony, paging, electronic mail, voice
mail, data services, audio and video text services, and video conferencing.

Two and a half years later, the GOI issued its first official
pronouncement on private sector participation in the provision of "basic
services," when, in May 1994, the P. V. Narasimha Rao government
formally announced a new National Telecommunications Policy (NTP) in
Parliament. In contrast to its earlier initiatives with regard to value-added
services, the GOI's communication was chary of making specific

35. Interview with Giri C. Iyer, Member, Telecommunications Commission of India (Jan. 6,
1997).

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recommendations, and pointedly refrained from even defining basic
services. Rather, the government contented itself with announcing a
seminal change in policy orientation.

On closer examination, however, the thrust of the new policy was
remarkably consonant with its Nehruvian predecessor in a number of
respects. Its five stated objectives, for instance, were redolent with the
concerns of the latter, and placed a striking emphasis on state responsibility
for the sector. First, the GOI was to "ensure availability of telephones on
demand as early as possible." Second, it was to "achieve universal access
by servicing all villages as soon as possible." Third, the government was
to "ensure that the quality of telecommunications services [was] of world
standard and that the services [were] reasonably priced." Fourth, the GOI
was to "ensure that India emerge[d] as a major manufacturing base and
major exporter of telecommunications equipment." Fifth, it was to "ensure
protection of the defense and security interests of the country."'36

Moreover, the NTP was equally noteworthy for the extent to which
it relied on targets set by the federal Planning Commission, even as it
purported to "revise" them. Indeed, the changes contemplated by the NTP
were chiefly significant for the extent to which they advanced the
deadlines for the realization of these numerical goals, without altering the
form or substance of the latter.

Three of these modified targets merit specific mention. First, the
NTP mandated that by 1997, "telephones [were to be] available on
demand," with all villages enjoying at least access to them. Second, in
urban areas, one Public Call Office (PCO) offering access to voice
telephone services was to be provided for every five hundred persons.
Third, all "value-added" services available internationally were to be
introduced into India "to raise telecom services to international standards,"
ideally by 1996.37

According to the GOI, the main reason for such haste lay in the
accelerating and back-logged demand for all telecommunications services,
but particularly voice telephony. It observed that between April 1992 and
April 1994, total demand for basic service connections alone had risen by
50%, from 7.03 million people, to 10.5 million, a level that was well
beyond the current ability of the DOT to satisfy. Moreover, if demand
were to grow at that rate for the subsequent three years, it would reach 15.8
million by April 1997. The geometric growth of this demand, if unmet,

36. MINISTRY OFCONIUNICATIONS,THE NATONALTELECOMMUtNICATIONS POLCy (1994).
37. Id.

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would exacerbate already serious structural constraints on the recovering
Indian economy, and severely retard its growth.

The GOI noted, however, that meeting such high levels of unfulfilled
demand would require the release of at least 10 million basic service
connections alone by 1997, a figure that was about 2.5 million connections
in excess of the original Eighth Plan targets. Such an expansion would
require additional capital investments by the DOT of over $6.5 billion,
which the fiscal capability of the GOI would patently be unable to finance.
Therefore, with this constraint in mind, the GOI determined to invite
foreign and domestic private sector participation in the
telecommunications sector, but only to the extent it was necessary to
supplement the DOT's functions, particularly in the area of "basic
telephony." In a related vein, it categorically rule out outright privatization
of the department.38

Therefore, it is fairly clear that the entry of private sector providers
envisioned in the NTP was compelled by the straitened fiscal
circumstances in which the GOI found itself. While the Policy was no
doubt significant for the extent to which it departed from Nehruvian
orthodoxy in articulating the need for private investment in the sector, it
certainly reflected no enthusiasm on the part of the GOI about the prospect.

This reservation conspicuously manifested itself in the substance of
the policy. First and foremost, the GOI explicitly drew attention to the fact
that private operators would function in a supplementary capacity. The
primary responsibility for the development of the telecommunications
sector still lay with the DOT. Second, the NTP did not clearly define the
normative role of the DOT. Perhaps more importantly, it did not
specifically assign policy-making and oversight responsibilities for the
liberalization process to an independent regulatory authority. By default,
then, the DOT was allowed to continue in its traditional functions of
service provision and hardware manufacture, but was also made
responsible for the formulation of telecommunications policy, the
supervision of sectoral liberalization and the licensing of its private sector
competitors. In this way, the NTP set the stage for the entrenchment of a
profound conflict of interest that subsequently distinguished the DOT's
interventions throughout the entire process of liberalization.

It is tempting to speculate whether the GOI's vestigial antipathy to
the private sector was responsible for the other failures of the NTP. For

38. INDIA-TELECOM REGULATORY BUREAU, MARKET REP., Mar. 21, 1995, available in

LEXIS.

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instance, the Policy conspicuously omitted to discuss (or even disclose)
such elementary details pertaining to the mechanics of sectoral
liberalization as tariff and revenue sharing arrangements between the DOT
and private firms. While it is unlikely that the GOI's residual hostility to
private sector entry in the sector actively motivated it to neglect these
issues, it seems probable that such attitudes did not encourage acute
sensitivity to these considerations.

Arguably the most notable example in this regard is the GOI's
problematic definitional treatment of basic services, particularly in light of
the specificity of its earlier approach to value-added services. It will be
recalled that while the government had painstakingly delimited the eight
constituent elements of the latter category of telecommunications service,
it left the category of basic services totally undefined. As will be seen
shortly, this omission was to have grave consequences for the
government's understanding of the role of innovation in sectoral
deregulation, as well as the normatively critical role of cross-subsidization
of basic by value-added services in the financing of this process.

In light of the carelessness inspired by its vestigial resistance to
liberalization, however, it is not difficult to see why the GOI proceeded in
this way.39 Historically, the DOT, MTNL and VSNL had never been able
to provide value-added services, of which a limited number were quite
well-known in India, for consumer use. Indeed, they had never had the
requisite financing nor technological expertise to pursue such a project.
Hence, it seemed intuitively justifiable and desirable in official circles to
identify seven or eight of these services, and allow private sector joint
ventures whose foreign partners were both acquainted with the technology
and capable of making it commercially available in India, to provide them.
By contrast, voice telephony seemed, at a similarly intuitive level, to
constitute the most "basic" form of telecommunications which Indian
consumers had long been able to avail of. Hence, in formulating the NTP,
they reflexively identified "basic" services with voice telephony, without
ever making that association clear. Ultimately, such official carelessness
probably delayed the entire reform effort by about two years.

But if the GOI was insufficiently aware of the magnitude of its errors,
it was quite conscious that specific content would have to be infused into
its generalized statements of policy. Therefore, soon after announcing the
NTP, it sought expert advice on how best to carry out the reform process.
With regard to basic service provision, it instructed the Industrial Credit

39. Interview with Giri C. Iyer, supra note 35.

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and Investment Corporation of India (ICICI), the country's leading private
sector investment and development finance institution, to recommend an
appropriate regulatory framework to encourage private sector participation.

The ICICI Report on Entry Conditions for Basic Telecom Services
was presented to the GOI on June 13, 1994, within a month of the
announcement of the NTP. While its contents are far too voluminous to
summarize here, it made a number of important suggestions to the TC and
the GOI about how best to proceed with sectoral liberalization. 40 First, it
recommended that the GOI completely separate and establish institutional
"firewalls" between the three main functions of the DOT under the NTP:
licensing, regulation and operations. Second, it advised the creation of a
sector specific Telecommunications Regulatory Authority which would be,
and be perceived to be, independent of both the licensing and operating
arms of the DOT. Third, it counseled the enunciation of a long-term tariff
policy by the DOT that explicitly defined its period of validity and the
reasons for, or points in time at which it would be reassessed or changed.
Fourth, it recommended that private operators be allowed entry into the
sector either by leasing an existing portion of DOT assets or through the
purchase of such assets for the relevant geographic area of operations at a
mutually negotiated price. Fifth, ICICI suggested that the transition from
a regulatory regime distinguished by public monopoly, to a perfectly
competitive one governed by market forces, be gradually effectuated. It
suggested that initially, private licenses providing for exclusive operational
rights within the relevant delimited area be issued to individual private
operators for a period of fifteen years. In that time, these operators were
to be licensed to compete with the DOT, without the distraction of
additional competition from other private sector firms. After the
termination of that five-year period, however, ICICI strongly argued for
the introduction of additional basic service operators into that area, to
gradually introduce markedly stronger competitive forces. As the
subsequent phases in the sectoral liberalization demonstrated, however,
neither the GOI nor the DOT took these eminently sensible
recommendations to heart; and the entire process of reform was much the
poorer for it.

On September 19, 1994, the GOI formally invited Indian private
sector telecommunications companies incorporated under the Indian
Companies Act of 1956 to build and operate basic telephone service

40. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA, REPORT ON ENTRY

CONDITIONS FOR BASIC TELECOM SERVICES 32 (1994) [hereinafter ICICI].

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INDIA'S TELECOMMUNICATIONS POLICY

networks, in collaboration with foreign joint venture partners' Pursuant
to the MOC's assessment of the ICICI report, it announced the
establishment of an independent Telecommunications Regulatory
Authority of India (TRAI) in the near future, but took no further action
pertaining to its institution. Rather, it authorized the DOT to lay down a
framework of guidelines to help structure the process of deregulation. 42

Chief among these regulations was a competitive bidding procedure,
which stipulated that private service providers, in conjunction with their
foreign partners, could enter the sector by submitting competitive bids to
install and run basic service networks in one or more of the twenty
telecommunications "Circles" into which the DOT divided the country.
The Circles were roughly coincident with India's state boundaries, and
respectively encompassed a population of almost 50 million people.
Additionally, they were classified into three categories (A, B, C), based on
the relative economic development of the states they encompassed, and
hence, on the effective rates of return they promised private sector
operators of basic phone services. Bidders for Category A Circles, which
were distinguished by high levels of industrialization and the highest
volume of traffic,43 were required to have a net worth of not less than $30
million. Bidders for Category B Circles, which were less heavily used, and
hence less remunerative, were required to have a net worth of not less than
$20 million. By contrast, bidders for Category C Circles, which were the
least remunerative of the three, were required to have a net worth of not
less than $5 million. In all cases, the foreign partner in any bidding
consortium would be limited to 49% equity.

The MOC explicitly permitted all bidders, whether Indian or foreign,
to bid for as many circles as they chose. It stipulated, however, that each
private firm could join only one consortium for these purposes,4and
reserved the right to restrict the number of circles for which one bidder
secured franchises, to prevent a private monopoly.45 Bidders were merely
required have a net minimum worth equivalent to the requisite amount

41. Additionally, the GOI invited similar consortia of Indian and foreign telecommunications
companies to submit bids to build and operate cellular mobile networks in cities other than Bombay,
Delhi, Calcutta and Madras (for which such licenses had already been awarded).

42. Philip Eade, The Numbers Look Right, EUROMONEY. Mar., 1995, available in LEXIS.
43. Category A Circles included Delhi, Gujarat, Maharashtra [including Bombay], Andhra

Pradesh, Tamil Nadu & Karnataka.
44. P. Balakrishna, India Lays Down Private Franchise Laws, COMMi. INT,'L Feb., 1995,

available in LEXIS.
45. Shiraz Sidhva, Delhi Opens Tenders for Telecons. FIN. TNIES. Jan. 17, 1995. available

in LEXIS.

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COLUMBIA JOURNAL OF ASIAN LAW

stipulated for each Circle category. Additionally, they were required to
leave a deposit with the MOC that would be forfeit if they were awarded
the franchise, but proved unable to operate it.46

The tenders submitted by successful prospective private service
providers in rounds of competitive bidding would effectively constitute fee
payments for the issuance of licenses by the DOT. In return for the
franchise, private operators were required to assume two of the three
established sets of public corporate responsibilities historically incumbent
upon the DOT. First, in addition to providing universal access (rather than
service), they were expected to create and sustain profitable and
competitive operations by achieving the maximum possible efficiency,
imposing minimal costs on consumers, and increasing the range and
availability of services. Second, they were to assist in meeting the
traditional the social welfare obligations of the DOT by providing stable
employment to DOT employees when they leased or otherwise took over
the department's operations.

In addition to ensuring the transfer of these two obligations to the
DOT's private sector successors, licensing procedures were also intended
to fulfill another public purpose: they were to provide the federal
government with a revenue base predicated on fees collected during
competitive tenders and franchise renewals. In this way, they were to
protect the country's balance of payments profile.

The DOT's competition policy also merits some attention. Following
the recommendations of the ICICI report, the DOT designed its bidding
procedures to establish duopolies in each Circle: the winning private sector
provider would compete to provide basic services with DOT, which would
retain its presence throughout the country. No other provider would be
permitted to operate within the confines of the relevant Circle.47 However,
the department deviated from the Report's basic thrust in one very
important respect: while ICICI had clearly intended such an arrangement
to be transitional, the DOT gave no indication that the regime it envisioned
was similarly temporary. If anything, the term of validity of the exclusive
basic service licences it was to issue indicated the converse, for they were
fifteen-year franchises for exclusive operation that could subsequently be
renewed every ten years.

In a related development, the DOT further restricted competition by

46. India Sets Guidelines for Telephone Bids, REUTERS, Jan. 15, 1995, available in LEXIS.
47. Milan Ruzicka, India Telecom License Bids Go Sky-High; Speculation Grows That New

Delhi May Scrap Results, J. COM., Sept. 15, 1995, available in LEXIS.

[11:2



INDIA'S TELECOMMUNICATIONS POLICY

categorically ruling out the levy of market-based tariffs. In fact, private
operators would not be allowed to charge tariffs in excess of those charged
by DOT.4' The DOT did not, however, specify this price ceiling.
Moreover, it chose to ignore the ICICI Report and failed to define the
duration of the preliminary tariff regime, as well as the timetable for its
review and modification.

Finally, the DOT also segmented the basic services market in a
manner that had similarly adverse consequences for competition: while it
fully intended to allow private participation in each of the twenty Circles,
it limited bidding consortia to service provision in the local loop. The
lucrative long-distance service portion of the market, which entailed inter-
Circuit traffic, was to remain the monopoly of the DOT. Thus, even in the
context of the liberalized regime, fully three-quarters of all new lines
would continue to be installed by the DOT.4 9 Similarly, international
service was monopolized by VSNL.50

The harmful effects of this segmentation were immediately apparent
to all prospective private bidders. Typically, when these firms had
undertaken the expansion of basic service networks in other countries, they
had cross-subsidized the extension and upgrading of the local loop (as well
as universal service obligations) with revenues generated by their operation
of more lucrative long-distance and international services. Under the
regime established by the DOT, such a course of action was effectively
mooted. 5'

When the Chairman of the TC, D. K. Gupta, was made aware of
these objections, hejustified the proposed arrangement by saying, ""India's
needs in long-distance communication are less acute than for basic
services."52 Therefore, he said it was both acceptable and desirable that the
GOI selectively liberalize only those areas in which there was a level of
unmet demand that DOT could not satisfy. Conversely, where excess
demand was largely non-existent, the MOC's constituent departments and
public sector corporations could retain their monopolies. 3

The GOI's sole concession with regard to the long-distance and

48. Sidhva, supra note 45.
49. John Zarocostas, India Sets Goal to Double Phone Lines by 1997.J. CO.M.. Oct. 16. 1995,

available in LEXIS.
50. Stefan Wagstyl, India Lays Down Tight Teleconis Rules, FIN. TIMEs, Sept. 19. 1994.

available in LEXIS.
51. N.Vasuki Rao, India's Telecom Market WillBe Partially Opened.J.CO%.,Sept.21. 1994,

available in LEXIS.
52. Gordon Cramb, Survey ofIndia, FIN. TiIFs. Nov. 8, 1994. available in LEXIS.
53. Id.

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COLUMBIA JOURNAL OF ASIA N LAW

international service monopolies amounted to an equivocal statement that,
after a period of five years from the date of licensing, the DOT's monopoly
on long-distance service would be reviewed. It did not specify the agency
that would undertake the review, and heavily qualified the possibility of
liberalizing this area of operation: according to the Telecom Commission,
if it were determined that "the opening at the local and regional level [had]
done well for the economy, for subscribers and government, India might
open national traffic calls [(i.e., inter-Circle traffic)] [to competition.]"
(emphasis added.) 54 No such possibility was even broached with regard to
international traffic.

In evaluating bids for licenses, the DOT announced that it would
consider six criteria. First, it would consider the track record of the
company, relative to its competitors. Specifically, it would reject all
bidders who, by January 1, 1995, had not operated a telecommunications
network with at least 500,000 lines. This provision effectively forced all
Indian companies to seek foreign partners, since the former uniformly
lacked such expertise. Second, the DOT mentioned it would consider the
compatibility of the technology with the Indian context. Third, it said it
would evaluate usefulness of the technology offered by the private
provider. Fourth, it would look to see if and how national security aims
had been furthered. Fifth, the DOT said it would consider the bidding
company's relative ability to provide best service quality at the lowest cost.
Sixth, the DOT would also assess the commercial attractiveness of the
terms of the bid received, relative to all others. 6 Finally, the department
announced that certain of the six criteria were more important than others,
and that they would be given greater weight during the evaluation process.
It did not, however, specify what these criteria were, or how much
emphasis would be placed on them.

In spite of this important omission, the DOT set the deadline for all
basic service bids on March 31, 1995, and opened competitive bidding for
basic service licenses on January 17. 5' Then, one day before competitive
bidding was due to begin for both basic and value-added services, the
DOT, under orders from the Minister of Communications, Sukh Ram,
awarded a 10-year license to a consortium consisting of US West and BPL
India to operate integrated basic and value-added services in four
Secondary Switching Areas in the southern state of Tamil Nadu. In a vain

54. Zarocostas, supra note 49.
55. India Sets Guidelines for Telephone Bids, supra note 46.
56. MINISTRY OF COMMUNICATIONS, NATIONAL TELECOMMUNICATIONS POLICY (1994)

57. Sidhva, supra note 45.

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INDIA'S TELECOMMUNICATIONS POLICY

attempt to pre-empt the resulting outcry, the DOT justified the decision on
the grounds that it was a pilot project, not a full franchise. 53

Unremarkably, the award of the license was challenged in the Madras High
Court on the very next day.59 Additionally, the three main national labor
unions in the telecommunications sector used the occasion to challenge the
legality of the NTP in a number of High Courts in various states.'

The DOT continued to accept bids even while the litigation was
pending, and furthermore, attempted periodically to issue new regulations
pertaining to the tender process. The most notable of such issuances took
place on March 21, 1995, when the DOT announced a set of guidelines for
the tender process that it claimed were definitive and capable of governing
all subsequent phases of the liberalization process.

The most important of these "final regulations" consisted of a
restatement of the DOT's intention to establish an independent TRAI, and
a delineation of its composition, functions, powers, jurisdiction and
administrative procedures. According to the DOT, the body was to be
composed of between two and four Members who would serve either for
a term of five years, or up to the age of sixty-two, and would have the
status of Secretaries to the GOI.6' It would be chaired either by a serving
or retired Supreme Court Judge or Chief Judge of a state High Court, who
would also be appointed for a term of five years. All Members of the
TRAI, including the Chair, would be removable solely on the
recommendation of Supreme Court, on the basis of a specific inquiry it
conducted into the Member's alleged misconduct. Members would enjoy
salary and perquisite protection, since these would not be allowed to be
varied to their disadvantage after their appointment.

The TRAI was to be responsible for tariff regulation and setting of
access charges, technical compatibility and effective inter-connection
between different service providers, revenue sharing arrangements between
different service providers, and establishing and ensuring time frame for
making available local and DOT long distance circuits between service
providers. Additionally, it was to ensure operators' compliance with
license conditions, fix tariffs for telecom service and ensuring price

58. US West To Set Up India's First Private Telephone Service, AFX NEvs, Jan. 16. 1995,
available in LEXIS.

59. N. Vasuki Rao, Pilot US West Telecom Project Faces Challenge in India Court. J. CWM..
Feb. 28, 1995, available in LEXIS.

60. Dinesh Sharma, NationwideStrikeBoundto Delay Telecom Privatization Plan, BANGKOK
POST, available in LEXIS.

61. Secretaries to the GOI are the highest ranking civil servants in the Indian Administrative
Service (IAS).

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regulation, resolve disputes between service providers, and levy such
additional fees on service providers that it deemed necessary and that DOT
regulations authorized. Finally, the TRAI was to protect consumer and
national security interests, to the extent necessary.

The body was empowered to carry out these functions by recourse to
its four main powers. First, it was empowered to seek information on all
aspects of service provider's activities, and any other advice and inputs
from any source it deemed necessary. Second, it was authorized to seek
information, advice and inputs from any source it deems necessary. Third,
it was enabled to investigate suo motu any matter which in its opinion
constituted the public interest. Finally, it was permitted to inspect
facilities, books and records of operators/service providers.

The TRAI'sjurisdiction, according to this latest communication from
the DOT, extended to virtually all activities pertaining to the
telecommunications sector, except those matters falling within the
purviews of the Monopolies and Restrictive Trade Practices Act and
Consumer Protection Act. Moreover, within its jurisdiction, the TRAI was
to be the principal adjudicatory authority, and its orders and directions
were to be binding upon service providers, Government and all other
concerned persons. Subordinate civil courts, in particular, were to have no
competence over matters within its jurisdiction. Dissatisfied parties were
permitted, however, to appeal TRAI decisions in appellate High Courts, as
well as in the federal Supreme Court.

Finally, with regard to administrative procedure, the TRAI was
mandated to ensure accountability in the liberalization process partly
through the transparency of its own decision-making process. Hence, the
DOT stipulated that all parties who would potentially be affected by TRAI
decisions would be afforded adequate notice and opportunity for a hearing.
Moreover, it provided that all TRAI decisions would be recorded and
published in an Annual Report.

There was considerable enthusiasm for the specificity of the
information that the DOT had provided with regard to the TRAI's
functions, especially among prospective private bidders. However, they
soon became disillusioned with this latest disclosure, as the DOT took no
concrete steps to establish the regulatory body62 in spite of its frequent
allusions to the latter's normative role.

Equally seriously, the failure of the DOT to give the TRAI
institutional form left the former free to ignore its many conflicts of

62. Sharma, supra note 60.

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INDIA'S TELECOMMUNICATIONS POLICY

interest in the liberalization process. Allowed by default to persist in its
roles as regulator and service provider, the DOT thus continued to
announce and administer guidelines that purported to be definitive, but
were, at best, incoherent.

For instance, the DOT announced as part of its final package of
regulations that it would assume responsibility for setting basic service
tariffs for the first year of private operation, at appropriately "economical"
levels. These price levels, however, were universally considered to be low
even by the standards of developing Asia, and would have required at least
periodic upward revision to allow service providers eventually to profit
from their operations. The DOT refused, however, to guarantee that such
adjustment would be undertaken in the future. Indeed, it even refused to
rule out the possibility that these tariffs would be maintained in unrevised
form well beyond their initially specified duration of one year.63 The only
concession it was prepared to make was to provide for regular review of
the tariff by the TRAI, after the latter had been established. Given,
however, that the regulatory body had not been given institutional shape
at that time this regulation was announced, this provision was effectively
rendered moot. Consequently, private providers were forced to accept
artificially deflated initial tariff levels.64

Similarly, the DOT issued a regulation requiring foreign bidders to
"strike a balance in their coverage between urban and rural areas,"65 but
refrained from specifying both the dimensions and relative importance of
that balance. Hence, private operators were left without a sense of how
much weight the DOT would give to this criterion in evaluating license
bids.

Additionally, with regard to the choice of appropriate technology by
service providers, the DOT announced what facially seemed to be both a
sensible and intelligible set of guidelines. Initially, it seemed to allow
private operators wide latitude in the choice of technology, as long as they
did not dump antiquated technology in India. Indeed, the department only
imposed two explicit restrictions on private operators' discretion in this
regard. First, the DOT emphasized the use of wireless and optical fiber in
the switching networks,66 and proscribed the use of copper wire in all but

63. Foreign Telecom Service Suppliers Welcome, MARKFr REP., Mar. 21, 1995, available in
LEXIS.

64. Mark Nicholson, Survey of Asia-Pacific Communications, FIN. TII.IES, May 9, 1995,
available in LEXIS.

65. Id.
66. In other words, from the service provider's central office to the customer's premises.

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the last five hundred meters of a connection. Second, it also required
private operators to conform to its preference for the GS standard
throughout the national network. 67

Within weeks of these announcements, however, the DOT issued
another set of regulations that effectively introduced severe restrictions on
the providers' free choice of operating technology: it barred private
operators from designing network expansions in such a way that they
would be conducive to the provision of multimedia services at some point
in the future.68 It justified this decision on the grounds that the prospective
providers of basic services-defined intuitively, it will be recalled, as voice
telephony-did not have to concern themselves with issues pertaining to
the transmission of multimedia; and that these would be addressed at a
later date by providers of value added services. The impact of this
decision, of course, effectively thwarted the plans of private operators to
build in potential for technological innovation in the local loops within
which they were to provide service.

In yet other instances, the DOT was guilty not so much of mis-
statements or substantive errors of policy design, but of omissions that had
equally negative impacts. Most notably, the DOT's so-called "definitive"
guidelines persisted in failing to provide information about the weights the
department would assign to each of the criteria used to evaluate private
bids. 69 Additionally, they gave no indication of permissible financing
arrangements, such as the Build-Operate-Transfer (BOT), or Build-
Operate-Lease (BOL) models, that private operators would be able to
consider in making competitive tenders.70

The volume and magnitude of such material mis-statements and
omissions suggests that something other than the simple inexperience of
dirigiste bureaucrats and politicians with economic and regulatory
liberalization was at work. Indeed, the DOT's piecemeal disclosures of
policy and procedure, the almost studied incoherence of its initiatives and,
above all, its repeated delays in establishing the TRAI, belie its efforts to
perpetuate its "capture" of the regulatory apparatus governing the
telecommunications sector. In this regard, the DOT's second decision of
March 21, 1995, in which it announced its decision to refrain from

67. India Telecom News, MARKET REP., Mar. 22, 1995, available in LEXIS/Nexis.
68. N.Vasuki Rao, Indian TelecomAgency, Private FirmsAvert Clash, J.COM., Aug. 2, 1996,

available in LEXIS/Nexis.
69. Mark Nicholson, Indian Summer for Telecoms, FIN. TIMES, Apr. 13, 1995. available in

LEXIS/Nexis.
70. Id.

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INDIA'S TELECOMMUNICATIONS POLICY

"corporatizing" its operations, provides arguably the most poignant
instance of such efforts.

This decision may be traced back to the outset of the liberalization
process, when a number of external consultants had urged the DOT to
divide itself into four regional units mandated to compete with private
sector telecommunications firms as independent public sector corporations.
These external advisers had argued that such a step, if taken in tandem with
the establishment of the TRAI, would have unequivocally signaled to
private telecom firms that the regional units of the DOT had been shorn of
their power as government departments; and would henceforth be forced
to compete for contracts with private operators on a level playing field!'

The Communications Minister, Sukh Ram, who took the decision to
not corporatize operations, defended it on the grounds that corporatization
would have imposed upon the DOT an "unsupportable financial burden"
of about US$ 3 billion. Additionally, he claimed that up to 80% of the
current revenues of the DOT would have to have been dedicated to the
provision of salaries and worker compensation benefits for employees of
the newly created corporate sub-units. Finally, he maintained that the sunk
costs of purchasing and installing new equipment would have required
similar magnitudes of financing. In Ram's view, the DOT could only have
financed these investments by recourse to commercial bank lending,
thereby incurring the unaffordable liability of high interest rate payments.
So onerous would the resulting repayment obligations have been that,
ultimately, the GOI would have had to have privatize the corporatized units
in the interest of fiscal health. This eventuality, he concluded, "was clearly
against the national interest, and needed no further elaboration.",7

His argument can quite easily be shown to be a concatenation of red
herrings. First, there is no reason to believe that the financial burden of
corporatization would have been any more onerous than that incurred to
finance MOC and DOT operations under the Nehruvian regime. The chief
difference between the two scenarios is that the latter allowed the DOT to
rely on central government budgetary support generated from the fiscal
deficit to finance its activities, whereas corporatization would have
obviated the possibility of such recourse.

Moreover, corporatization would have offered the DOT a chance to
raise revenues independently of its federal budgetary allocation. As
independent corporate entities, the regional divisions of the Department

71. Telecom Policy Leaves Questions, MARKEr REP.. Mar. 21. 1995. available in LEXIS.
72. Id.

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COLUMBIA JOURNAL OF ASIA N LA W

would have been able to leverage their combined asset base of over US$13
billion to issue a variety of bonds in both domestic and international capital
markets. In this way, the DOT could have entirely avoided the high
interest rates of commercial bank finance.73

Additionally, Ram's arguments about the prospect of high wage,
worker compensation and capital costs was not, in itself, an argument
against corporatization. Essentially, these issues represent a structural
problem that was of as much concern under the Nehruvian regulatory
regime, as it would have been under a corporatized operational framework.
Again, the only reason the DOT did not have to address the problem under
the unreformed regulatory framework is that it was able to rely on
budgetary outlays from the GOI to finance these expenses. Corporatization
would have merely required DOT to meet these costs for the first time in
its institutional history.

The comprehensively specious character of these objections to
corporatization, and the visceral quality of Minister Ram's refusal to even
discuss the merits and costs of privatization, thus suggest that the DOT and
its political masters were doing their utmost to retain control of a
regulatory regime that had conferred upon them extraordinary
advantages. 74 Essentially, they were deploying a strategy predicated on
obfuscation, delay and the sheer arbitrariness of a sovereign's fiat, to
minimize the liberalization of the sector to the maximum possible extent.
Given, however, that a certain amount of liberalization seemed inevitable
in light of the GOI's severely weakened fiscal resources, they sought to
employ these tactics to retain as many of their old privileges as they could
in the new environment. In this way, they could not only take advantage
of the windfall opportunities for corruption that inevitably manifested
themselves in an uncertain regulatory environment, but also endowed
themselves with structural advantages to allow them to compete more
effectively (if unfairly) against private competitors. The cornerstone of
this strategy, of course, was to attempt to continue for as long as possible
in their multiple roles as policy-maker, regulator, licensor, operator and
manufacturer of telecommunications hardware.

Viewed in this context, corporatization can be seen to have
demonstrably threatened this agenda, particularly if it were combined with
the establishment of the TRAI. Not only would it have physically

73. Id.
74. For example, because the DOT is a government department, it is exempted from all tax

obligations.

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INDIA'S TELECOMMUNICATIONS POLICY

disaggregated the DOT, but it would have also deprived it of budgetary
support and political power, and compelled it to become financially
independent of the GOI. In such an eventuality, the vested interests of
corrupt politicians and bureaucrats animating the DOT would have proven
singularly incapable of preserving their capture of the telecommunications
sector. Hence, they brought the full strength of their resources to bear
against this particular means of structural reform.

In any event, the DOT was not so successful in this strategy of
obfuscation and delay that it was able to ride roughshod over the concerns
and suspicions of prospective private sector bidders. On 22 March, 1995,
the department's equivocation drew hundreds of detailed queries from
these parties, and forced it to postpone the deadline for the submission of
basic services tender offers from March 31 to April 28, while it addressed
these questions and misgivings. 5 Soon thereafter, the DOT found itself
under judicial scrutiny. The Kohima High Court, which had heard one of
the public interest suits against both the substance and mechanics of the
NTP, issued a stay order against the Policy while it heard plaintiffs'
arguments against the latter. The DOT appealed to the Supreme Court
against the order, and in the process, was forced to indefinitely postpone
the evaluations of bids received from private sector operators while its case
was pending

76

By May 9, 1995, it was increasingly apparent that the established
timetable for completion of the competitive bidding process and the
commencement of operations was wildly unrealistic. More importantly,
there was an increasing sense of fear in official circles, and particularly in
the DOT, that judicial intervention in the liberalization process would be
fatal to the department's efforts to safeguard its sectoral interests.V Hence,
it prompted the DOT finally to clarify a number of important issues.

First, on May 26, 1995, the DOT established a transparent procedure
to assign weights to the criteria used to evaluate private bids. It provided
that relative size of the license fees submitted by a bidder would be
accorded the greatest weight (72%), while network roll-out provisions
(10%), the extent to which a bidder was going to serve rural needs (15%)
and the use of indigenous equipment (3%) would all be given much lower

75. Mark Nicholson, India Extends Phone Deadline, FIN. TIMES. Mar. 22, 1995, at 7.
76. 1&
77. Mark Nicholson, Survey of Asia Pacific Teleconununications. FIN. TIMES. May 9. 1995,

at 30.

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COLUMBIA JOURNAL OF ASIAN LAW

emphasis.
78

Additionally, on May 29, 1995, the DOT clarified certain service
obligations that were incumbent on private operators, as well as
permissible financing strategies. For instance, it reiterated that it was
incumbent upon the latter to provide basic services throughout the Circle
for which they would be licensed. The department added, however, that
it would reduce by 40% the "access fees" they would have to pay to use
certain unleased portions of the DOT's network.79 Moreover, it agreed to
pay them for government use of their lines. 80 Finally, it specified that
private operators should plan on financing network expansions through
Build-Lease-Transfer financing arrangements, rather than Build-Operate-
Transfer (BOT) ones. These announcements, which were designed to have
a palliative effect on the increasingly impatient private sector, were largely
successful: by June 7, 1995, thirty-three consortia of Indian and foreign
telecom firms had placed bids for all twenty Circles.

But between June 20 and June 23, however, industrial action by the
three major telecommunications labor unions, which together had a
combined membership of 450,000 workers, briefly called the entire
liberalization into question. Protesting the GOI's efforts to involve private
sector and foreign participation in the provision of basic services, and
acutely afraid of the impact of such policies on employment
opportunities,81 they closed telephone exchanges throughout the country.
Additionally, they halted telex and telegraph services, and refused to carry
out emergency repairs in most of India's twenty-five states.82

In response, the GOI took an uncharacteristically firm stance. Noting
that the strike was illegal under the Essential Commodities Act, R. Takkar,
Telecommunications Secretary, said, "Any attempt to derail the process of
licensing private sector providers for basic telephone services will not be
allowed to proceed. '83 Accordingly, he placed army telecommunications
engineers on high alert, in case they had to be pressed into service to

78. John Fernandez, Telecoms Terms Revised, AUSTRALIAN FIN. REV., May 26, 1995,
available in LEXIS.

79. Sharma, supra note 60.
80. Shiraz Sidhva, India Moves to Simplify Telecoms Bidding: Ministry Agrees to Pay

Competitive Rates for Use of Private Operators' Networks, FIN. TIMES, May 29, 1995, at 4.
81. Pratap Chakravarty, Strike disrupts telecommunications across India, AGENCE FRANCE

PRESSE, June 19, 1995, available in LEXIS, News Library, Wires File.
82. Id. Telephone services in the major metropolitan centers, which are automated, were not

affected, however.

83. Id.

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INDIA'S TELECOMMUNICATIONS POLICY

prevent the disruption of emergency services?'
Concurrently, however, he attempted to placate the strikers. He

stated that the DOT had already had begun to retrain 172,000 DOT
employees for re-employment in the private sector by 1997. Also, he
observed that since the department would remain very much a basic
services provider, and its operations had been growing annually by 70%,
there was no threat to employment levels in the public sector.85 This
combination of carrot-and-stick tactics had its desired effect: on June 21,
the unions called off the strike, saying that they had been "greatly
reassured" by the MOC's understanding of their predicament. 6

The liberalization process thus resumed shortly thereafter, and by
June 23, 1995, the DOT had short-listed bids from 16 consortia consisting
of Indian telecommunications firms and their East Asian, Western
European, North American and Australian partners.37 The bidding was
formally closed on August 31, 1995, and the DOT's final decision on
license awards was expected in late September 1995.H

But when the department began to evaluate the submitted bids on
September 1, it became apparent that a small Indian company with annual
revenues of US$62 million, Himachal Futuristic Communications, Ltd.
(HFCL) had submitted bids for 9 of the twenty Circles that together totaled
overUS$27 billion. Even the combined net worth of its consortium (which
comprised Bezeq of Israel (26% equity stake) and Shinawatra of Thailand
(16% equity stake) amounted only to US$ 1.25 billion. All other bids were
one-half to one-third the size of the combined HFCL offers.8'

Morever, there were discrepancies between what the HFCL offers
entailed in terms of network expansion, and what the proven capacity of
the consortium indicated it was capable of. While its roll-out plan
effectively mandated it to install three million telephone lines a year, its
seemed able to lay only a maximum of about three to four hundred
thousand a year.90

It was in the context of the consternation engendered by these grave

84. Abhik Kumar Chanda, Indian Telecom Workers To Launch Strike Against Privatization.
AGENCE FRANCE PRESSE, June 18, 1995, available in LEXIS. News Library, Wires File.

85. Id.
86. Id.
87. A very large number of blue-chip foreign telecommunications companies submitted bids

in conjunction with Indian partners. Among them were AT&T, Sprint, NYNE.. US West. and Bell
South.

88. Telecom Licenses, MARKEr REP., June 26, 1995, available in LEXIS.
89. New Telecom Licenses, MARKEr REP., Sept. 11, 1995, available in LEXIS.
90. Id.

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COLUMBIA JOURNAL OF ASIAN LAW

discrepancies that DOT publicly began to consider imposing limits (or
"caps") on the number of Circles for which a private operator might be
licensed to provide basic services. Specifically, Minister Ram intimated
that if a cap was in fact imposed, thereby leading to the inability of a
winning bidder to operate basic services in a given Circle, the second
highest bidder would be invited to match the former winner's bid. If it
would not do so, Ram hinted that DOT would pursue a fresh round of
public tenders.9'

The DOT imposed such caps on November 6, 1995, after two months
of rampant public speculation about the matter. It announced an upper
limit of three Circles for each consortium bidding for basic services
license. If any consortium's bid was selected to provide basic services in
more than three Circles at the end of the tender process, that group would
have to choose three of them. The remaining Circles would be offered to
the next highest bidder in each Circle, if the latter party agreed to match
the winner's offer. If, on account of this revised procedure, certain Circles
were left without basic service providers, a fresh round of competitive bids
would be solicited for them.92 In defense of this seemingly arbitrary
decision, the DOT maintained that it had always reserved the right to
restrict the number of Circles awarded to one operator, to prevent the
emergence of private monopolies; and that since HFCL had so
significantly outbid its competitors in nine Circles, such an eventuality was
virtually certain in the absence of preventive action by the government.93

Public reaction to the capping changed drastically over time.
Initially, HFCL's competitors believed that the imposition of caps would
have a hugely adverse impact on HFCL.9 4 It soon became apparent to
them, however, that the DOT's intervention had actually proved extremely
beneficial to the latter consortium. Given that its resources were
comparatively limited, HFCL could not possibly have succeeded in
providing basic services in all nine Circles. Moreover, even if it had
proven capable of doing so, its bid was so exorbitantly in excess of the
expected returns that it quickly would have found itself bankrupt.

The DOT's imposition of licensing caps thus helped the consortium

91. Id.
92. Kapil Saha & Jonathan M. Bensky, Telecom Service Plan, MARKET REP., November 6,

1995, available in LEXIS. With regard to cellular services, each bidder was allowed licenses for a
maximum of two Circles in the A and B categories. They were however, assured that there would
be no restriction on C category circles.

93. Id.
94. Id.

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INDIA'S TELECOMMUNICATIONS POLICY

in three ways. First, by giving up its rights to six of the nine Circles under
DOT orders, HFCL avoided forfeiting the US$51 million security deposit
it had submitted to the GOI in the course of bidding for nine Circles.
Second, it could cherry-pick the three most lucrative Circles of the nine it
had won operating rights to.95 Third, the DOT's action had effectively
prevented it from bankrupting itself. The magnitude of the benefits,
combined with partly corroborated speculation that HFCL had bribed Sukh
Ram to intervene on its behalf, predictably outraged other bidders.

But before the other consortia could organize a coherent protest
against this intervention, the DOT once again threw the entire
liberalization process into confusion on November 14, 1995, by rejecting
all bids for 10 of the 20 Circles. Using a previously unannounced criteria
of "reasonable levy" as the decisive factor in evaluating the bids, the DOT
maintained that the bids received in these Circles were "unreasonably
low, 96 and called for fresh bids for them to be submitted by January 1,
1996. Additionally, the Department stipulated that it would establish
"reserve prices" for licenses in each Circle below which private sector bids
could not fall. Significantly, the price floors were benchmarked to HFCL's
extravagant offer. Since none of the other private operators were willing
to pay such amounts for individual Circle licenses, they suspected that this
particular change in policy had been established to invite and camouflage
bribes to DOT and MOC officials. In other words, since no private service
provider was willing to pay the specified amount, they would have to
procure the licenses by directly paying those corrupt officials in charge of
licensing policy. The presence of an official reserve price would merely
make it easier for the two parties to concoct a set of bid figures for
purposes of public disclosure.97

By this time, the general disgust of private operators with the entire
liberalization process was plainly apparent, and many of them began to
consider abandoning or postponing their involvement in the Indian
telecommunications market. This widespread dissatisfaction in the
private sector with the progress of the liberalization was compounded
further on December 11, 1995, when Opposition parties and public
interest groups opposed to the central government's telecom policy filed
a public interest action against the implementation of the Policy, as it

95. Id.
96. N. Vasuki Rao, Telecom Firms Confused as India Rejects Some Bids, J. CoM., Nov. 14,

1995, at 3A.
97. Shiraz Sidhva, Rao Urged to Sack Telecons Minister, FIN. TiMEs. Dec. 11. 1995. at5.

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was currently constituted, in the Supreme Court. They objected, among
other things, to the government's failure to establish an independent
TRAI before inviting competitive bids from private sector
telecommunications firms.98 Additionally, they called for the removal of
Sukh Ram as Minister of Communications, on the grounds that his
manipulation of the bidding process-and particularly, his introduction of
license caps and the reserve price-had been designed to favor HFCL,
which was based in his home state of Himachal Pradesh. 99 Amicus briefs
also alleged that the Minister had received generous bribes in return for
such naked favoritism.

On December 19, 1996, the Supreme Court responded by issuing a
stay order forbidding the DOT to issue any basic service licenses before
January 9, 1996, while it considered the merits of the petition.'0° The
impact of this order on the bidding for 13 yet unlicenced Circles that was
scheduled by the DOT to begin on January 1, 1996, was disastrous.
Combined with steadily increasing press coverage of the irregularities that
had attended the liberalization process, it persuaded many major private
providers, such as AT&T and US West, who had been discouraged by the
insensibly high mandated reserve price, to abstain from the tender
process. I1 Thus, when the DOT finally tallied the received bids, they
amounted to a humiliating total of five. Eight Circles, therefore, were still
without franchised basic service providers.

In late January and early February, however, two events restored a
measure of confidence in the stalled reform process. On January 27, the
Rao Government submitted an ordinance establishing the TRAI as a
statutory body to the President of India, who signed it into law.,0 2 While
no formal measures were taken to actually set up the body,'0 3 this move
was widely perceived to be a sign of the government's resolve to forge
ahead with liberalization.

98. Id.
99. Sidhva, supra note 97. Cellular telephone service licenses, however, were issued at this

time to private consortia for five of the twenty Circles.
100. Shirish Nadkarni, India in Telecoms Tangle, S. CHINA MORNING POST, Dec. 19, 1995, at

6.
101. Rao, supra, note 96.
102. T.H. Chowdhary, India's Liberalization Hangs in the Balance, TELECOMMUNICATION

(INT'L EDITION), June, 1996, available in LEXIS.
103. A major problem was the fact that no senior member of thejudiciary was prepared to serve

on the TRAI. Most senior High Court judges and Supreme Court Justices considered the TRAI to
be hierarchically inferior to the federal appellate courts, since they were empowered to hear appeals
from TRAI decisions; and therefore, were unwilling to trade the prestige of a higher court for a
lower one.

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INDIA'S TELECOMMUNICATIONS POLICY

Then, on February 2, the Supreme Court affirmed the
constitutionality of the NTP. Writing for a threejudge bench, Chief Justice
A. M. Ahmadi dismissed the action filed by public interest groups and
opposition parties in 1995, which challenged the government's National
Telecom Policy as unconstitutional. The Court also upheld the validity of
the bidding procedures and the central government's power to grant
licenses.

The DOT and Sukh Ram lost no time in proclaiming that the decision
exonerated their actions, and issued two letters of intent to two private
operators that had applied for basic service licenses in five states."° Also,
the department resumed its evaluation of the bids submitted during the
second round of bidding, and prepared to hold a third round of bidding in
nine of the twenty Circles.'0 5

In response, private operators took favorable public notice of the
developments, but aggressively lobbied the central government for
sweeping changes in the tariff structure of India's basic telephone services,
even before the formal inauguration of TRAI. Specifically, they requested
that private operators be allowed to develop a new framework for the
monthly rental of DOT infrastructure to reduce their expected losses in the
initial years of operation in the relatively unprofitable basic services
sector.1

0 6

The DOT ignored these efforts, and in June, took action that again
suggested the endemic arbitrariness of the reform process, as well as the
continuing fact of its regulatory capture by vested interests in government:
without warning, it announced new regulations that placed the entire cost
of interconnection with its own network on private operators. Over the
course of a fiscal year, these outlays were estimated to amount to about
$30 per line per annum (approximately 8% of the estimated annual revenue
of each line,) or a total burden of US$420 million on each operator. When
combined with the license fees that would have to be paid as a threshold
requirement, the new interconnect charges would effectively transfer 33%
to 40% of the private operators' revenues back to the DOT, their direct
competitor. 0 7

104. Indian Court Gives Approval to Teleconunmication Privatization. AGENCEFRAr;CE
PRESSE, Feb. 19, 1996, available in LEXIS/Nexis.

105. Government to Hold Third Round of Tendering for Telephone, REuTEES TE-.TuNE, Feb.
20, 1996, available in LEXIS.

106. India Urged to Change Telephone TariffStructure, XINHUA NEWS AGENcY. Apr. 5, 1996,
available in LEXIS.

107. Rao, supra note 96.

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Private service providers reacted angrily to this new requirement, and
threatened to take legal action against DOT. In response, the DOT
postponed the deadline for signing the interconnection and license
agreements by six weeks.10 8

Then, in a separate development, the Central Bureau of Investigation
(CBI), the apex federal criminal law enforcement agency, recovered $1
million in cash during a raid on two of Sukh Ram's New Delhi houses.
The minister, who was in London for medical treatment, was immediately
removed from his post and suspended from the ruling Congress (I) party.'t9
On the same day, the Bureau filed a criminal case against Ram."o

Desperate to limit damage to the public credibility of the reform
process, the GOI announced on April 24 that it would review the US$3
billion worth of pending phone licenses bids. Also, it undertook to conduct
a thorough investigation of the bidding process thus far,"' although it took
great pains to stress that not all awarded licenses were at risk, however.
For instance, it insisted that the cellular licenses granted to operators in the
four largest urban centers of Delhi, Bombay, Madras and Calcutta, which
had been issued a few years ago, would not be reassessed. Moreover,
operators who had successfully bid for cellular licenses in the 20 Circles,
already paid their license fees and were preparing to commence work in
December 1996, would similarly be exempted from review.'z Yet again,
however, sectoral liberalization was effectively stalled.

On September 9, 1996, the DOT attempted to respond to investor
discontent by reducing by 30% its announced interconnection charges.
Additionally, it abolished the license registration fee for basic services
providers." 3 A month and a half later, five consortia signed letters of
intent for five of the unfranchised Circles after lengthy discussions with the
DOT. The firms continued to lobby for further reductions in
interconnection charges, however, and persuaded the DOT to extend the
deadline for the final payment of license fees from December 1, 1996 to
December 31, 1996. 14

108. Id.
109. Indian Lawmaker Wants Phone Licenses Suspended. REUTERS, Aug. 21, 1996, available

in LEXIS.
110. Id.
111. Harbaksh Singh Nanda, India to Review All Phone Licenses, BC CYCLE, Aug. 24, 1996,

available in LEXIS. Sukh Ram was arrested on his return to India.
112. Ali Baba and the Mobile Phones, ECONOMIST, Aug. 24, 1996, available in LEXIS.
113. XINHUA NEWS AGENCY, Sept. 9, 1996, available in LEXIS.
114. D. Ravi Kanth, India Leaves Telecom Alliances Dangling, ASIA TIMES, Nov. 18, 1996,

available in LEXIS.

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Another outstanding complaint harbored by these firms, however,
pertained to the DOT's refusal to permit them to carry cellular traffic to
their subscribers on intra-Circle voice telephony networks without paying
premium interconnect charges for use of public sector switching facilities.
Although the department had specified in the initial tender document that
they would be able to do so, it now maintained that cellular operator could
only accede to each of the Circles through the DOT network.'" 5 Seeking
to exert pressure on DOT to alter this policy, the nine consortia that
currently held letters of intent for basic services'" 6 in 13 Circles threatened
to withhold delivery of license fee payments and also filed a civil suit in
the Delhi High Court.

The DOT retaliated by threatening to withhold permission for
individual members of the joint venture consortia to change business
partners." 7 Additionally, it announced that if license payments were not
promptly made, it would encash the security deposits entrusted to it by the
bidding parties.

After further negotiations, the two sides arrived at a compromise on
January 8, 1997. On its part, the DOT offered significantly easier financial
terms to private operators. First, it agreed to cut interconnect charges by
a further 13%. Additionally, it permitted private operators to assign their
licenses to private financial institutions as collateral to raise funds."18

Finally, the DOT agreed to appoint an independent arbitrator to resolve
disputes with private operators until the establishment of the TRAL'.'t

Soon thereafter, a number of disgruntled private operators, such as British
Telecom and Bell Canada International, returned to the basic services
market.' 20

On January 17, the federal Cabinet took the initiative from the DOT,

115. Telecom Sector Reforms Top Gokak's Agenda, REUTERS TEXTtUNE. Nov. 23. 1996,
available in LEXIS.

116. At this point in time, many major international telecommunications firms, such as British
Telecom, DeutscheTelekom, SingaporeTelecom, FranceTelecom.Teclekom Malaysia. and US West
had temporarily pulled out of the basic services bidding process.

117. M. Ahmed, DOTThrear to Block Partner Change If FeesAre Not Paid, Bus. STANDARD.
Nov. 30, 1996, available in LEXIS.

118. Port Rates Cut For Basic Telecom Services, BUS. STANDARD, Jan. 8. 1997. available in
LEXIS.

119. D. Ravi Kanth, Telecom Cuts Pave Way For Selloff, ASIA TIMES. Jan. 9, 1997, available
in LEXIS.

120. D. Ravi Kanth, British Telecom Returns the Call, ASIATImES, Jain. 14, 1997, available n
LEXIS.

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and approved a blueprint for the establishment of the TRAI. 12' Half a
month later, it announced a series of tax incentives for the sector that
effectively allowed basic service providers access to the same financial
advantages enjoyed by investors in other areas of infrastructure
development. 2 2 Chief among these were the grant of a general tax holiday
for up to five years, as well as the drastic reduction in duties for capital
equipment imports. Additionally, external borrowing limits for
telecommunications companies were relaxed and increased to well over 50
per cent of project cost, from 35 per cent.' 23

These concessions were very well received by private operators, and
lent considerable impetus to their reviving interest in the basic services
subsector. Hence, when the DOT announced a third round of tenders on
February 20, and also removed the license caps imposed by Sukh Ram,
many foreign telecom operators publicly expressed their confidence in the
liberalization process.' 24

The strongest indication that the reform process had finally been
placed on sounder footing came two months later, however, when
Parliament cleared the TRAI Bill on April 24, and gave the body
institutional shape. 25 Although there was some apprehension that the
TRAI would not function independently of the DOT, these fears were
allayed when, on 26 April, the body issued its first judgment in a matter
directed to its attention by the Delhi High Court.

The dispute at issue concerned the DOT's refusal to permit private
operators to carry cellular traffic on the intra-Circle voice telephony
networks. It will be recalled that the latter had filed a civil suit in the Delhi
High Court to protest this ruling in November 1996. This litigation had
been pending even as the DOT and the private consortia attempted in early
1997 to salvage the reform process. When the suit finally came up for
review on March 4, the institutional establishment of the TRAI was
virtually complete, and only required final Parliamentary clearance.
Aware that the sectoral regulator would be able to review the case in a very
short time, the High Court Bench directed the suit to the TRAI for its
consideration.

121. D. Ravi Kanth, Another Hurdle Gone for Telecom Operators, ASIA TIMES, Jan. 17, 1997,
available in LEXIS.

122. The Center for Monitoring the Indian Economy, Telecommunications, (Apr., 1996)
<chttp:/ www.indiaserver.com>.

123. Lisa Vaughan, Import Curbs Delay for India, FIN. TIMES, Jan. 31, 1997, at 5.
124. Government to Hold Third Round ofTendering for Telephone Services, REIrER TEXTLINE,

Feb. 20, 1996, available in LEXIS.
125. Vandana Gombar, Indian Telecom Sector Gets New Regulator, ASIA PULSE, Apr. 24, 1997.

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After reviewing the case, the TRAI held for the private operator
plaintiffs and quashed the DOT order at issue. In a strongly worded
opinion, it directed the DOT to permit private operators to connect cellular
traffic to their local loop customers of basic services, without paying
premium interconnect charges for use of public sector switching facilities.
Additionally, it ruled that, as per the terms of the original tender document,
all future tariff revisions by the DOT would have to be undertaken only
after private operators were given an opportunity for a public hearing in
which they would be able to put their views on the record. All final
changes would also have to be approved by the TRAIY'2 6

Predictably, private sector reaction to this decision was ecstatic. By
ruling against the DOT, the TRAI had simultaneously proven that the
terms of tender offers could be enforced, and that it was not a creature of
the DOT. Hence, while it was not necessarily a guarantee against the
occurrence of procedural and substantive irregularities in the liberalization
process, it had proven that it could provide remedies to such eventualities.
Hence, while numerous other problems pertaining to the adequacy of
systemic provisions for competition and innovation remained unaddressed,
a measure of procedural regularity was been introduced into the trajectory
of reform. This factor, combined with increasing public and judicial
scrutiny, as well as the growing stake of the domestic private sector in the
liberalization of basic services, has probably made the reform process
irreversible.

III. ASSESSMENT OF INSTITUTIONAL AND POLICY REFORM INITIATIVES

The Indian experience with the liberalization of basic
telecommunications services offers important lessons in regulatory policy
for developing countries. Chiefly, it exemplifies an attempt at systemic
reform that was so haphazardly conceived and implemented that it should
not be replicated elsewhere in the developing world. By extension, it
offers significant opportunities to infer how a more effective liberalization
process might have been conceived and implemented.

The fundamental mistake committed by the GOI in designing and
executing its reform of the sector was to ignore the central fact of its
regulatory capture by vested interests in the DOT. Quite simply, it could
not afford to overlook the fact that the DOT and MOC had so effectively

126. TRAI Quashes DOT Order on Fixed to Cellular Tariff Hike, EcONO.MIcTIMEs, Apr. 26,
1997.

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entrenched themselves in the sector that they would prove natural
impediments to reforms that sought to alter the status quo. By giving them
primary responsibility for designing and executing sectoral liberalization,
the GOI compounded its mistake, and effectively legitimated the DOT's
enduring conflict of interest: for the greater part of the process, the DOT
had official sanction to simultaneously function as service provider,
regulator, licensing authority, adjudicatory authority and hardware
manufacturer.

Therefore, as a threshold matter, the TRAI should have been
established before regulatory and institutional changes were even seriously
debated or given form in official circles. Its neutral oversight of policy
formulation and implementation would have eroded the plenary authority
of the DOT and MOC to craft policies favorable to their interests, and
thereby infused into the process a very welcome sense of regularity and
fairness. Additionally, the TRAI's availability as an adjudicatory authority
would have provided another very necessary check on the DOT and MOC.
In the process, much of the corruption and procedural discrepancies that
discouraged private sector participation on various occasions could have
been eliminated. Finally, the presence of the TRAI would have
considerably weakened the rhetorical power of arguments against
liberalization that were predicated on considerations of national security.
A powerful independent regulator that was nevertheless affiliated to the
GOI could credibly have claimed that its oversight was sufficient to
safeguard the country's vital interests.

To be sure, it is encouraging that this problem has been addressed
and largely rectified, albeit belatedly. But a number of other consequential
problems with the NTP's provisions for the liberalization of basic services
remain unaddressed.

First, the NTP's treatment of basic services does not adequately
encourage innovation. The importance of salutary technological change
in a sector such as telecommunications cannot, of course, be overstated.
Innovation, more than anything else, will ensure the increasing utility and
sophistication of basic services.

The NTP's conception of "basic" and "value-added" services
discourages innovation, however. It meticulously specifies the content of
"value-added" services, but refrains from all definition of "basic" services,
and furthermore, predicates sectoral regulation on these categories. In the
process, it effectively freezes the ability of the regulatory regime to
organically evolve new conceptions of value-added services over time.
Moreover, it permanently fixes the definition of basic services at the
DOT's current conception of the category, namely, voice telephony.

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INDIA'S TELECOMMUNICATIONS POLICY

In deploying these two concepts, the NTP should have pursued the
more obvious strategy of specifying the content of basic services, and
leaving value-added services as a minimally defined, organically evolving,
residual category. In this way, it would have provided a functional
definition of that range of services that could legitimately be considered
essential at the present time, and thereby provided for its expansion over
time. Similarly, the definition of value-added services in residual terms
would have recognized that as conceptions of basic service changed and
expanded beyond voice telephony, so too would definitions of their value-
added counterparts. A regulatory policy that recognized this essential
mutability of these basic categories would thus have been consummately
conscious and encouraging of the importance of technological innovation.

Second, the DOT's construction of the NTP also inadequately aligns
the economic goals of service providers (both public and private) with the
public interest imperative of establishing optimally competitive, cost-
effective regulatory arrangements that encourage innovation.

For instance, in providing for the financing of network improvement
and expansion, the DOT's two-fold insistence on high license fees and
rigid tariff rates impedes private providers from expanding and upgrading
basic services to the maximum possible extent. In large part, the deterrent
quality of this policy derives from the DOT's lack of attention to the role
of sunk and marginal costs in the effective provision of basic services.

It is well established that the biggest impediment to the extension of
basic services are the prohibitively high sunk costs of physically
constructing or extending the existing network. Once the infrastructure is
in place, however, the marginal costs of extending service to new
customers is minimal.

Given this well-known principle, it is curious that the DOT persists
in levying sizeable license fees. By imposing these charges on private
Circle licenses, the DOT effectively increases the sunk costs of service
provider. The only way for the latter to then maintain its profit level is to
increase prices. But given the fairly rigid tariff regime that is currently in
place, private operators of basic services cannot charge amounts in excess
of the government specified price ceiling. Hence, they are not even free
to pass on their increased operating costs to consumers. Constrained on
both fronts, private operators will thus only invest in network upgrading
and expansion to the extent that their returns on investment generate an
acceptable level of profit. Ultimately, then, this policy enables the
dedication of only a portion of the available capital for investment in
network coverage and quality.

There are two possible solutions to this problem. On the one hand,

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COLUMBIA JOURNAL OF ASIAN LA W

the DOT can maintain its levy of license fees and remove the tariff ceiling,
thereby permitting private operators to pass on the extra costs to consumers
and dedicate optimal levels of direct investment to network improvement.
This course of action, however, involves a price increase in services that
both the GOI and the NTP have determined essential. Hence, it is quite
arguably contrary to the public interest, and eviscerates a
telecommunications policy concerned with such issues of social equity as
universal access. Therefore, it is not an ideal way to resolve the
predicament.

On the other hand, the DOT can either abolish or markedly reduce
the license fees to the point that they are no more than de minimis charges.
In such an eventuality, the private operators would not be free to raise
tariffs (given that these would still be subject to a government-imposed
ceiling.) But they would be able to invest money in the procurement and
installation of more sophisticated technology capable of reducing their
sunk costs, such as wireless switches. Additionally, they would also be
free to invest in research and development efforts to devise more cost
effective transmission and other equipment. In this way, private operators
would be encouraged to both upgrade the technology used in its geographic
area of operations, as well as to foster innovation.

The main objection to this latter course of action is likely to be
framed in terms of a key objective of the NTP, namely, that it was partly
formulated to increase the GOI's revenue base and thereby improve its
balance of payments profile. Arguably, the NTP should not be concerned
with such a goal. However, if it must do so, it must be asked whether this
aim is best realized by levying license charges. Alternative measures, such
as a modest tax on the use (not provision) of value-added services, would
serve equally well as a means to consolidate the GOI's revenues. First,
they would increase neither sunk nor marginal costs, and have none of the
deleterious social and economic impacts that high tariffs and sub-optimal
levels of investment would entail. Second, they would not impose costs on
the use of vital basic services and thus inhibit their use by poor consumers.
The costs of the tax would fall upon value-added services, and most
probably, on relatively affluent individuals and businesses.

A third outstanding problem with the NTP is that its implementation
by the DOT has not introduced optimal levels of competition in the basic
services arena. Therefore, as an attempt to deregulate either the
telecommunications sector as a whole, or basic service provision in
particular, it has been considerably less than a complete success.

To be sure, the NTP did admit competition into the local loop in that
it established duopolies in each of the Circles. Moreover, it is also

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INDIA'S TELECOMMUNICATIONS POLICY

relatively well-established that a duopoly-based regime can be an
important and useful step in facilitating the transition from dirigisme to full
competition. 27 But there is little indication that the arrangements
established by the DOT are transitional in nature. For its part, the DOT
recognized no clear timetable for the progressive introduction of other
basic service providers into each Circle. Moreover, it does not bode well
for competition that each successful bidder was licensed to exclusively
operate its basic service franchise for a fifteen year period, with the
possibility of ten-year extensions.

Additionally, the DOT's competition policy is hamstrung in yet
another respect: it has preserved the monopolies of the DOT and VSNL in
long-distance and international operations. Indeed, the department's
interpretation of the NTP virtually disallowed the dilution of these
monopoly stakes, and enabled them to continue indefinitely.

These limitations have had important and adverse consequences for
the provision of basic services, most notably with regard to the ability of
private operators to cross-subsidize less profitable, but vital, operations,
(for instance, to provide universal access to basic services,) with revenues
derived from more profitable undertakings (such as long-distance and
international carriage). Given that private bidders are restricted to a
limited revenue base derived from local loop earnings, their capacity to
finance basic services provisionfronm ongoing operations was inherently
limited.

This need not have been the case. First, there was simply no
justification--on economic, social or other grounds-for the DOT and
VSNL to retain monopoly control over long-distance and international
service. Second, the introduction of competition into the two latter
categories of service provision could have been instrumental in designing
a qualitatively superior regulatory regime for basic services.

Such a regime would have established a temporary and transitional
duopoly (consisting of a private operator and the DOT) in each of the
Circles, in which successful private bidders would have been licensed to
provide a limited number of explicitly defined basic services (e.g., voice
telephony). Also, it would have provided clear guidelines on the
progressive introduction of other private operators into the local loop after
a reasonable period of years, and opened long-distance and international
service provision to private sector and foreign participation.

Additionally, each Circle would have been drawn in such a way that

127. ICICI, supra note 40, at 35.

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it included both profitable and unprofitable areas of operation. A suitable
ratio of profitable to unprofitable areas for each Circle would have been
defined by stipulating that profits derived from operations in the former be
totally offset by losses in the latter, assuming that the operator was using
some relatively unsophisticated baseline technology (e.g., copper wireline
transmission networks). In this way, the policy would have ensured that
even if the private service provider relies on an (acceptable but) relatively
rudimentary technology, it would have been assured ex ante of breaking
even in undertaking local loop basic service operations.

To earn a profit on its operations, the private provider would have to
do two things. First, it would have to compete in the long-distance and
international service markets on the basis of the basis of price and service
quality. Second, it would have to introduce more cost-effective
technologies-financed perhaps by its long-distance and international
operations-into the local loop. In this way, it would be able to minimize
its sunk costs and better offset the marginal costs of extending basic
services to new consumers throughout its "command area." Thus, the
private operator would increase its profit margins and derive a tangible
economic benefit from its local loop undertakings, while promoting the
objective of universal access to basic services.

IV. CONCLUSION

The establishment of the TRAI and the renewed interest of private
sector operators in basic services are encouraging signs of the vitality of
the liberalization process. But as this brief discussion of the government's
approach to such issues as competition and technological innovation
reveals, its efforts to reform the old Nehruvian regime of regulation are
clearly far from complete.

That so much still remains to be accomplished three years after the
announcement of the NTP attests to the fact that, in addition to being
poorly designed and intermittently bent to the wishes of vested interests,
the Policy is also the product of a collective official mind that is
fundamentally ambivalent about the free market. In spite of an aggressive,
ongoing and largely successful deregulation of the wider economy, the
GOI and the Indian political establishment have not yet convinced
themselves that market forces are an unqualified benison. Hence, even as
the GOI fitfully moves towards a more genuinely competitive
telecommunications sector, particularly in the area of basic services, there
is ample evidence that it will struggle to preserve certain aspects of the old
regulatory and economic arrangements, such as the social welfare

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functions of the public sector.
But while an unequivocally Neoliberal scheme of

telecommunications regulation may be a very long time in coming to India,
the trajectory of reform precipitated by the GOI's efforts to implement the
NTP in the arena of basic services demonstrates that progress of a sort is
being made. Marred though it has been by haphazard design and erratic
execution, the process has subjected overweening government regulation
of the sub-sector to the scrutiny of the courts and popular opinion, and
given the private sector real stakes in its continuation. Hence, although its
implementation thus far has been tortuous, the NTP has probably made the
further liberalization of the telecommunications sector both inevitable and
irreversible.