The Shock of 1994
What followed in May 1994 was nothing short of a disruption—but a positive one that fundamentally changed the contours of India’s telecommunications system. This development ushered in technology without restrictions, allowed capacity to grow unhindered and offered more choices to consumers at lower costs.
The background of the developments in May 1994 was no less dramatic. The government was making preparations for a high-profile visit of its prime minister, P.V. Narasimha Rao, to the United States. The dates of Rao’s visit were fixed—he was to be in the US from 15 to 20 May and during this period he would be visiting New York, Houston, Boston and of course Washington, DC to address a joint session of the Congress. The economic reforms of 1991 had opened up many sectors of the economy for foreign investment, but there was no visible impact of that liberalization on the telecommunications sector. The US was getting more interested in the Indian economy and its large market. Telecommunications was one sector with huge potential and one that US giants like AT&T and Motorola were eyeing intently. It was made clear to the Department of Telecommunications (DoT) that Prime Minister Rao would like a new telecom policy to be readied just before he was to leave for the US. The objective was to enable him to share the details of the policy with the US industry so that it could review the new framework under which Indian as well as foreign companies could invest and operate without the restrictions that had bedevilled the Indian markets in the past.
Rao was travelling to the US along with his finance minister, Manmohan Singh, and a delegation consisting of top Indian industrialists. Those were the days when India was basking in the glory of its brave and bold reforms initiated in the background of an unprecedented economic crisis that had engulfed its economy in 1990–91. The Indian economy was of course out of that deep trouble and on its way to recovery, but there was also the urgent need to tell the world that the reforms that were used to rescue the country from a crisis were not one-off events. There was no better place than the US, the Mecca of free enterprise, from where such a message could be spread across the world. With Manmohan Singh by his side, Rao told American policymakers and investors that India’s economic reforms were irrevocable and then he quipped, pointing a finger at Singh: ‘He rescues me when I am in economic trouble, and I rescue him when he is in political trouble.’ That left nobody in doubt about how Rao allowed Singh to implement reforms to rescue the economy and when Singh’s proposals met with a political hurdle, Rao stepped in to bail his finance minister out.
The context of the National Telecom Policy of 1994 was thus set before global investors. The objective of the exercise was set in the backdrop of the government’s 1991 economic reforms that were aimed at improving India’s competitiveness in the global market and ensuring the rapid growth of exports, on the one hand, and attracting foreign direct investment and stimulating domestic investment, on the other. The highest priority to the development of telecom services was considered optimum so that their quality could be raised to levels prevailing in the developed world. Not without reason did the National Telecom Policy refer to the need to raise India’s telecom service standards. At that time, the telephone density in India was about 0.8 per hundred persons, well below the world average of ten telephones per hundred persons. Worse, it was lower than even countries like China, with 1.7; Malaysia with thirteen; and even Pakistan, with two telephones per one hundred persons. The challenge of India’s telecom policy got even more complicated as in spite of having eight million telephone lines, there was a waiting list of about 2.5 million applicants for a telephone connection. Rural India had a bigger challenge, with only 1.4 lakh out of 5.76 lakh villages covered by telephone services. The policy also made no compromise on the need to take care of the interest of consumers, recognizing that they were the victim of slow growth and poor quality of telecom services in the past many decades. It, therefore, laid down that a suitable arrangement must be made to protect and promote the interests of the consumers and ensure fair competition.
Thus, the National Telecom Policy set five broad objectives:
The focus of the Telecom Policy shall be telecommunication for all and telecommunication within the reach of all. This means ensuring the availability of telephone on demand as early as possible.
Another objective will be to achieve universal service covering all villages as early as possible. What is meant by the expression ‘universal service’ is the provision of access to all people for certain basic telecom services at affordable and reasonable prices.
The quality of telecom services should be of world standard. Removal of consumer complaints, dispute resolution and public interface will receive special attention. The objective will also be to provide the widest permissible range of services to meet the customer’s demand at reasonable prices.
Taking into account India’s size and development, it is necessary to ensure that India emerges as a major manufacturing base and a major exporter of telecom equipment.
The defence and security interests of the country will be protected.
The policy also set ambitious targets. It wanted that telephone service should be made available on demand by 1997—in just three years. By the same target year, all villages had to be covered by telephone service. In urban areas, it was expected that a public call office (PCO) should be provided for every 500 persons by 1997. And all value-added services available internationally should be introduced in India to raise the telecom services in India to international standards within the Eighth Five-Year Plan period that would end in 1997.
To be sure, even before the framing of the 1994 policy, the Rao government had decided to liberalize the sector. Telecommunications was one of the sectors thrown open in 1991 for investment by the private sector and foreign investment too was allowed with some caps in a few areas. Thus, in July 1992, the private sector was allowed to enter the following eight areas of telecommunication services: electronic mail, voice mail, data services, audio text services, video text services, video conferencing, radio paging and cellular mobile services. Barring radio paging and cellular mobile services, operation of all other services was allowed on a non-exclusive basis and subject to the grant of a licence. A non-exclusive licence implied that operators under such an arrangement would not enjoy any monopoly in that area and other operators too would be allowed to obtain similar licences and provide those services. The 1994 policy mandated that the same policy would be continued. For radio paging and cellular mobile services, the new policy outlined that licences would be issued based on a set of criteria and through a system of tendering. A tendering system was favoured because it would allow applicants to bid for these licences and competition among bidders would help the government not only earn more fees, but also facilitate the offer of more efficient and cost-effective services to customers.
The conditions that applicants would have to fulfil before taking part in the tendering process included the track record of the company in question, compatibility of the technology, usefulness of the technology being offered for future development, protection of national security interests, ability to provide the best quality of service to consumers at the most competitive rates, and attractiveness of the commercial terms offered by the private parties. For basic services also, the 1994 policy allowed the entry of private players. It argued that companies registered in India will be allowed to set up and expand the telecom network to provide basic telephone services so that they could add to the efforts of the DoT in this area. The social obligation of maintaining a balance in the coverage between urban and rural areas was imposed on new players who wished to provide basic telephone services. Agreed tariff and other terms applicable to providers of value-added services were also enforced for entrants in this area. Revenue-sharing arrangements too were introduced, but not immediately. That happened much later in 1999.
Some crucial elements in the National Telecom Policy 1994 distinguished it. The policy projected that achieving the target of giving
telephones on demand by 1997 would require releasing about 10 million connections during the Eighth Plan period compared to the earlier goal of only 7.5 million. The policy recognized that releasing the extra 2.5 million connections would require an additional investment of Rs 11,750 crore, assuming the unit cost is estimated at Rs 47,000 per line. The policy also projected an additional requirement of Rs 4000 crore for helping the telecom industry meet its target of providing additional rural connections. This raised the total additional investment requirement to Rs 15,750 crore.
An impending shortage of resources loomed large, and that is what prompted the policy to move for the next big change. It was estimated that the Eighth Plan was already suffering from a resources deficit to the tune of about Rs 7500 crore. The total additional requirement of investments was thus estimated at over Rs 23,000 crore. Finding additional resources of this order was beyond the government’s capacity. Where would the government get these resources from? With the government’s Budget constraints being what they were, the policy underlined the need for private investments to fill the gap. This meant the policy must allow the association of the private sector in the telecommunications sector in a big way. A new policy recommending the entry of the private sector to help the government overcome its resources gap was unheard of in India till then. The Telecom Policy 1994 in that sense marked a new phase in India’s economic reforms.
The second aspect of the policy was its emphasis on technology. Recognizing that telecommunications is a vital infrastructure, the policy also noted that the sector was highly technology-intensive and, therefore, required close monitoring and administration from that perspective. The policy also recommended that its administration should be such that the ‘inflow of technology is made easy and India does not lag behind in getting the full advantage of the emerging new technologies’.3 While there was emphasis also on developing indigenous technology, the policy noted that since telecommunications had a strategic aspect, affecting national and public interests, a suitable funding mechanism should be developed that encouraged indigenous research and development so that Indian telecom companies could use indigenous technology to meet domestic demand and at the same time compete globally.
CHAPTER 19
THE FALLOUT AFTER 1994
How disruptive was the National Telecom Policy of 1994? In one stroke, it had broken the government monopoly in providing telecom services and even in manufacturing of telecom equipment. There was also progressive deregulation of the sector. It heralded the entry of the private sector in telecommunications, an area that was long considered an exclusive preserve of the public sector. And the DoT, which used to be the policymaker, operator and even regulator, had to gradually cede its regulatory functions to a newly set-up regulator under a new piece of legislation. Its role as an operator was also extinguished by 2000 as a newly created public-sector undertaking under its administrative control was set to take complete charge of its functions as an operator. There were, however, frequent allegations that the DoT continued to favour the state-owned telephone service providers in many ways. But, for all practical purposes, it was reduced to being just a policymaker.
The government had been seeking private-sector participation in the telecommunications sector even before the National Telecom Policy of 1994 was finalized. Initially, it sought applications from the private sector value-added services such as paging and cellular mobile telephone services. Later, after the policy, it invited private-sector participation for fixed telephone services as well. A competitive bidding process in 1992 resulted in the award of cellular mobile service operators’ licences to eight players in four metropolitan cities. In the same process, fourteen more players in eighteen state circles were awarded mobile service operators’ licences by 1995–96. In addition, licences were granted also to six fixed telephone service operators in six state circles and to paging operators in twenty-seven cities and eighteen state circles.
The response from the private sector to the opening up of the telecom sector was encouraging and it looked like the government had introduced a major reform in a sector that touched the people and the economy to bring about a qualitative improvement in the people’s ease of living and in the industry’s ease of doing business. The ultimate goal of reforms, after all, was to improve the quality of living and doing business.
But the reforms in the telecom sector were hugely disruptive as well in a variety of ways. The positive disruption was evident in the rapid increase in the availability of telephone services, following the release of the National Telecom Policy 1994 and its implementation. Of course, the rise in the number of telephone subscribers was rapid only after seven-eight years after the release of the policy, but that causal connection cannot be ignored. There were good reasons why the private sector’s initiative took off after some years. While the private sector came in aggressively post 1992, the pace of activity in the DoT and the state-owned Mahanagar Telephone Nigam Limited (MTNL) also saw a sudden pickup.
The number of telephone lines, as a result of the rollout of new lines by the DoT and MTNL, went up by 11 per cent to 5.1 million in 1991 and jumped by another 15 per cent to 5.8 million in 1992. In 1993, the increase was even more at 17 per cent, with a total number of lines estimated at 6.6 million. The rapid rise was maintained in 1994, when the Telecom Policy was announced, and the total number of telephone lines then went up by 18 per cent to 8 million. The following two years saw an annual addition to these lines by 22 per cent each and the total capacity was estimated at 9.8 million in 1995 and 11.98 million in 1996. The waiting list kept rising till 1993, when the number of applicants increased to 2.8 million, compared to 1.9 million in 1991. But, thanks to the public-sector initiative, the waiting list started coming down from 1994, when it fell to 2.5 million and it further declined to 2.1 million in 1995.
Thus, when the cellular mobile service operators launched their services in four metros of India in August 1995, they faced a substantially different market reality from what they had estimated when the bidding process for licences began just three years previously. The number of customers that could be easily tapped (approximately those who were waiting for a phone) declined dramatically from 2.8 million in 1993 to 2.1 million in 1995 and a more crucial change was witnessed in the wait period for getting a connection—it was down from thirty-five months in 1993 to fifteen months in 1995. The throwing open of the telecom market had thus caused different kinds of disruption. For consumers, it was a gala time as their long wait for telephone lines was coming to an end. For public-sector operators of telephone services, it was an opportunity to ramp up their capacity to corner as large a share of the market as possible. And for the cellular mobile service operators, the latest kid on the block, the market suddenly did not look as attractive and waiting to be grabbed as it appeared when they bid for the licences.
The disruption for the new cellular mobile service operators had an even more serious implication. As argued by Ashok V. Desai,1 Chief Consultant with the Union ministry of finance from 1991 to 1993, cellular operators at that time had bid a total licence fee of about Rs 20,000 crore for a period of about ten years, which amounted to Rs 2000 crore a year. Assuming that the operators were hoping to acquire the entire number of waiting telephone customers, estimated at over 2.5 million, the annual licence fee would be Rs 8000 a year per customer. As it turned out, this estimate was way out of line as they were paying much more than what they had budgeted for. Even as late as by 31 March 1999, the total customer base of these cellular mobile service operators did not cross 1.187 million. In other words, the licence fee per customer actually was as high as Rs 16,849. Their finances came under increased pressure as the government imposed a rental ceiling of Rs 1872 a year on the new mobile service providers. This was discriminatory as the DoT was charging an annual rental fee of Rs 3600 from its urban fixed-line subscribers. The calculations may look simplistic and may not include many other costs or revenues. But the financial pressure the new regime imposed
on cellular mobile service operators was too obvious to be missed.
This led to yet another disruptive effect on the telecommunications market in India. With rental revenues capped well below the costs they incurred on obtaining the licences, the cellular mobile service operators realized that the only way they could become viable and remain profitable was to fix the tariff at the highest level permitted by the government. Thus, in the initial days, the tariffs for mobile calls used to be as high as Rs 16.80 a minute in peak hours, in addition to monthly rentals, an activation fee and a security deposit. These tariffs came down a little over the next couple of years. The cellular mobile phone tariffs were such that the caller as well as the receiver would have to pay for either making or receiving a call. This triggered a response from customers that was uniquely Indian. The idea of a ‘missed call’ arose from the cellular mobile phone operator’s inordinately high tariffs compared to those prevailing for fixed telephone lines, which used to range between 80 paise and one rupee a minute. The ‘missed call’ was a ploy by which a customer avoided incurring any costs on making a call and yet a missed call was a signal to a mobile subscriber that either he or she should call back, or use a fixed-telephone line to connect. With gradually falling tariffs over the years, the relevance of the missed call went down but many old-timers continue to use this facility to communicate through signals instead of just talking.
Problems for cellular mobile service operators got more complicated with the one-sided norms the government introduced for interconnection charges. Instead of enforcing a uniform practice for levying charges for different service providers to connect calls with each other, the DoT imposed a regime that hurt the financial interest of cellular mobile service providers. The department had begun consultations with the service providers in 1995 but failed to make any progress.
The Rise of Goliath Page 27
