How did a major institution governing service delivery in Indian telecommunications change within a plural setting?Footnote 1 Institutions of economic governance represent a set of formal rules based on principles of governance that provide incentives for certain kinds of behavior and disincentives for other kinds of behavior. These rules are backed by third-party monitoring and enforcement mechanisms. For example, one principle of economic governance embedded in institutional rules could suggest that government monopoly is good for efficient service delivery in telecommunications. Another technocratic view could provide a compelling logic for promoting regulated competition among a few players.Footnote 2 If institutions represent the rules of the game, which have certain principles embedded in them, then a movement from rules based on government monopoly to rules promoting competition would constitute institutional change.
This paper addresses certain key issues in institutional change. How does evolutionary change along a certain institutional path get redirected toward a new path? For example, rules facilitating further government sector expansion or enhanced economic liberalization would constitute movements along the same path, but a shift from government monopoly to regulated competition involving private players would constitute a movement in the direction of a new institutional path.Footnote 3 How are new ideas embedded within certain parts of the state, which are then successfully able to beat the status-quo bias? Are they driven by changes in material conditions, such as economic crises and technological change, that create problems for the sustenance of old ideas (North Reference North1990, chap. 9–10; North and Weingast Reference North and Weingast1989), or are they propelled by the powerful appeal of new ideas that suggest a different logic of appropriateness? (Blyth Reference Blyth2002). Are changes in material conditions, which could affect a change in institutional path, the result of exogenous shocks or an accumulation of endogenous processes or both? (Campbell Reference Campbell2004, 183–86).
Institutional change involving the birth and empowerment of a regulator resembles a process that is aptly called layering. Layering connotes the mechanism of adding new elements to an existing institution whose status changes gradually over time. Layering facilitates institutional change through the differential growth of the new institution, which is set up on the edges of the old one. A subordinate institution could rise to prominence as powerful actors defect to the new institution, undermining certain institutional aspects of the old one. In India, while the policy role of the Department of Telecommunications (DOT) within the Ministry of Communications remained intact, a level playing field for private service providers necessitated an independent regulator, which was supposed to protect private players from government predation in the initial stages. The DOT as policy maker, regulator, and service provider had a strong incentive to rig the rules of the game in favor of the government-owned telecommunications companies. Interbureaucratic struggles ensued, aided by interest articulation among private players, which led to the birth and consolidation of the Telecom Regulatory Authority of India and the Telecom Dispute Settlement Appellate Tribunal. This ensured that the DOT had to give up its regulatory powers over time, a process that contributed to a private-sector-aided telecommunications revolution in India. This story resembles another account of layering that was used by opponents of the public pension system in the United States to orchestrate the expansion of individual privatized retirement accounts (Hacker Reference Hacker, Streeck and Thelen2005; Schickler Reference Schickler2001; Streeck and Thelen Reference Streeck, Thelen, Streeck and Thelen2005, 22–24).Footnote 4
This paper argues that the evolution of interests as a result of economic crises and technological developments was central to an understanding of institutional change that favored the birth and consolidation of the Indian telecommunications regulator. India's fiscal crisis, which contributed handsomely to the balance of payments shock of 1991, aided by the Gulf War–driven price shock (Mukherji Reference Mukherji2007, chap. 5), was the major reason that influential parts of the government located within the Prime Minister's Office and the Ministry of Finance decided to promote private investment in telecommunications services, despite the displeasure of the DOT. This process was aided by technological developments in the relatively less capital-intensive area of GSM cellular telephony,Footnote 5 which helped undermine the power of the DOT. Despite the political and commercial interests favoring change, new ideas were embedded within amended laws through an evolutionary and intensely conflict-ridden process. It was not easy to undermine the DOT's monopoly power over telecommunications service provision in India.
The results of the institutional transformation to private investment have been quite remarkable. Indian telecommunications companies are now among the most efficient telecommunications service providers in the world. The number of staff required to service 1,000 direct exchange lines in India came down from more than seventy in 1990 to just five in 2003. Cell phone connections rose from 13 million subscriptions to 35 million subscriptions between 2002–3 and 2003–4. While the New Telecom Policy of 1999 set itself the aim of achieving a teledensity target of 7 telephone lines per 100 people by 2005, that target was reached in 2003 (DOT 2005, 97–102). India was consistently adding more than 5 million new subscribers per month, and its teledensity shot up by 58 percent, from 12.80 telephones per 100 people to 18.31 in fiscal year 2006–7 (TRAI 2007). The average revenue per user for an Indian GSM cell phone user was less than that of a Chinese user, even though Indian users spend more time talking. The Indian GSM cellular industry, which was also the growth area in Indian telecommunications, became more efficient than its Chinese counterpart (TRAI 2006, 5–7).
The Dynamics of Institutional Change
Accounts of institutional persistence favoring the status quo bias are quite common. It has been argued that national political and economic systems protect and promote “varieties of capitalism” despite globalization's much-professed homogenizing impact (Campbell Reference Campbell2004, chap. 5; Hall and Soskice Reference Hall and Soskice2001). Similarly, the welfare state in the United States, United Kingdom, Sweden, and Germany could not easily be squashed by the demands of globalizing capital because of a dense and concentrated network of beneficiaries (Pierson Reference Pierson1996).Footnote 6
Rational economic reasons for institutional persistence are proffered. The logic of increasing returns to scale protects welfare capitalism and “varieties of capitalism.” First, institutions often assume characteristics of public goods, such as nonexcludability and joint supply, that involve large setup costs that will not be borne by private players. Nonexcludability suggests that once an institutional benefit is provided to an individual, one cannot exclude other people from its use. Joint supply implies that consumption by one individual does not reduce the availability of the good for the rest of the population. Because an investor can neither exclude nor restrict the supply of regulation to noninvestors, such goods are likely to be produced by public authorities rather than by private players. And public authorities might find it too expensive to set up a regulatory institution. Indian telecommunications regulation, however, was impaired more by opposition within the government from the Department of Telecommunications until 1997 rather than by setup costs. The government of India did not accept a restructuring loan from the World Bank, which could have subsidized setup costs.Footnote 7
Second, there could be learning effects. People who learned to use QWERTY-style keyboard, for example, could not easily shift to more efficient keyboards despite the existence of such possibilities in the early days of the typewriter. Likewise, people who get used to implementing rules that promote government monopoly might not easily learn the new rules of the competition game.Footnote 8 Given India's technocratic ability, this, too, did not pose a problem. India's first regulatory team of Justice S. S. Sodhi and Ambassador B. K. Zutshi was both competent and farsighted. Their actions were hampered because of the limited powers enjoyed by them under the Telecom Regulatory Authority of India Act of 1997.
Scholars have understood institutional change as being born out of the attractiveness of certain ideas that appeal to a logic of appropriateness. It has been argued that ideas are prior to interests and that there is no perfectly rational way to know whether alternative ideas are superior to the prevailing ones that govern institutions. Thus, if new ideas are adopted by policy makers, it is because these ideas are powerful enough to capture the imagination of policy makers. The appeal of particular ideas is vital for understanding ideational changes that bring about institutional change. Moreover, in times of an economic crisis, policy makers do not possess a rational way of knowing whether the new ideas will succeed. The power of ideas has been used to explain transformations in state–market relations in the West after the Cold War and in the 1980s (Blyth Reference Blyth2002, chap. 2; see also Sikkink Reference Sikkink1991).
In the Indian case, telecommunications liberalization began in the early 1980s, even before the balance of payments crisis of 1991 (Mukherji Reference Mukherji2004, 280–82). The first private cellular operators began business only in 1995. Indian telecommunications demonopolization was driven by a gradual process of internal conflict resolution. Political capital within the Prime Minister's Office and the Ministry of Finance, aided by private-sector interest articulation and technological developments, could only gradually move the institutions toward reform in opposition to the political weight of the DOT. This was a case of political actors favoring private investment in response to an evolving fiscal crisis, rather than any sudden appeal of a coherent set of alternative ideas, as Blyth's story would expect is to believe.
The Indian story looks similar to stories of institutional change throughout history that are based on the creation of new interests that come in conflict with old ones to spur institutional evolution. The Bank of England, which became the regulator of credit in England, was established despite the wishes of the British monarchy in the aftermath of the Glorious Revolution of 1688. The Bank and Parliament were able to check the unilateral powers of the British monarchy. Wealth holders in Britain represented in its Parliament became more willing to lend, and the monarchy was flush with credit. This may have aided the monarchy in financing its wars against its major rival, France. Institutional evolution, in this story, was ridden with political conflict, as evidenced by the Glorious Revolution. Parliament prevailed partly because the development of capitalism in Britain empowered the wealthy through their representation in Parliament. The fact that the British monarchy had no standing army may also have helped (North and Weingast Reference North and Weingast1989).
The social bases of power can explain the difference between U.S. and European capitalism. The United States developed large corporations with greater freedom for capital to pursue its interests because the social bases opposing the expansion of capital, such as a powerful church and aristocracy, were absent in the United States in the late nineteenth and early twentieth centuries. Europe, on the other hand, had a powerful aristocracy and church, which checked the excesses of capital and regulated the market to a greater extent (Perrow Reference Perrow2002).Footnote 9 Similarly, governing institutions may produce either stable or unstable institutions. The podesteria (1096–1194) that governed the clans in the medieval city-state of Genoa may have declined because it promoted the norm of revenge, which may have finally undermined the system. The Venetian magistracy (1032 onward), on the other hand, survived longer because it distributed wealth more equally among all the clans. This may have produced a stronger incentive for the clans to protect the system as a whole (Grief and Laitin Reference Grief and Laitin2004, 640–44).
Key elements of the story of regulatory evolution in India, described in the next section, are worth noting. First, the political costs associated with institutional change were more significant than the economic costs. Second, endogenous and exogenous changes in material conditions driven by the fiscal crisis and the Gulf War–driven price shock created interests within the Prime Minister's Office and Ministry of Finance that opposed the DOT's propensity to retain its monopoly. It was a change in material conditions that affected interests within the government. Over time, the private sector acquired a substantial voice. Third, the evolution of GSM cellular technology helped private players because the private sector had bet on this industry, whereas the government had ignored it. Last but not least, institutional change favoring regulation enhanced the relative power of private actors. Institutions stabilize power relations, and institutional change brings about changes in power relations.
This paper will trace a historical process that engendered regulation and private investment in Indian telecommunications. Tracing a historical process has advantages over analyzing snapshots of history. Slow-moving processes such as fiscal constraints and technological change make an impact that can only be captured in an incremental way. They create interests that get empowered over a period of time.Footnote 10 One needs to explain how interests are born and over time become substantially empowered to transact institutional change. The Indian story resembles a mechanism called layering, which involves creating a new institution—the regulator—along the edges of an old one and allowing it to grow differentially.
Initiating Competition: The National Telecom Policy (1994)
This section will demonstrate the conflict of interest between the Prime Minister's Office and the Ministry of Finance, on the one hand, and the Department of Telecommunications, on the other.Footnote 11 The Prime Minister's Office and the Ministry of Finance wanted to promote private investment in telecommunications services, faced with an unsustainable fiscal crisis from the mid-1980s. India's fiscal deficit shot up from 5.4 percent of gross domestic product (GDP) between 1975 and 1980 to 10 percent of GDP between 1985 and 1990. This fiscal crisis contributed substantially to the balance of payments crisis of 1991. That year, the exogenous shock caused by the Gulf War was of no greater import than the oil shocks of 1973 and 1979, yet when India's fiscal situation was more precarious, it resulted in a balance of payments crisis (Bhaduri and Nayyar Reference Bhaduri and Nayyar1996, chap. 2; Joshi and Little Reference Joshi and Little1994, chap. 12; Mukherji Reference Mukherji2007, chap. 5).
The Prime Minister's Office and the Ministry of Finance, therefore, wanted the state to withdraw from commercially viable sectors after 1991. Between 1991 and 1994, from the onset of the balance of payments crisis to the articulation of the National Telecom Policy, they could only push private initiative in areas that the DOT thought were not commercially viable. Moreover, the DOT did not permit the establishment of a regulator during this period. It was the policy maker, regulator, and service provider all in one. This loaded the regulatory game in favor of government monopoly.
The Prime Minister's Office under Rajiv Gandhi (October 1984–December 1989) had played a stellar role in shifting policy attention to telecommunications in the 1980s, but it could neither privatize the government's business nor corporatize substantial portions of it (Desai Reference Desai2006, 43–45; Mukherji Reference Mukherji2004, 280–81; Petrazzini Reference Petrazzini1996, 40–41; Saha Reference Saha2004).Footnote 12 Faced with the prospect of an impending balance of payments crisis, the Prime Minister's Office, under the premiership of Chandra Shekhar (November 1990–June 1991), set up a high-level committee on the reorganization of the Telecom Department. The chairman of this committee, M. B. Athreya, a PhD in business from the Harvard Business School, had served the Indian Institute of Management in Calcutta (Kolkata) as professor. The Athreya Committee submitted its report in March 1991, a couple of months before India went to the International Monetary Fund in June. It formulated a design for the entry of private Indian corporations into the telecommunications business. The Athreya committee's recommendations, which had the support of the Prime Minister's Office and the Ministry of Finance under prime ministers Chandra Shekhar and Narasimha Rao (June 1991–May 1996), respectively, were fiercely opposed by the DOT.Footnote 13
The Athreya Committee stressed the need to separate policy-making, regulatory, and field-oriented roles in telecommunications. If the policy maker was also regulator, then the government could easily privilege government-owned service providers over private players.Footnote 14 Second, the committee suggested that value-added services such as cellular telephony be opened up first, followed by basic services such as local, domestic long-distance, and international long-distance services, in that order. Athreya also provided a blueprint for the privatization of government assets (Athreya Reference Athreya1996, 16–21).
The DOT under Minister Sukh Ram and Secretary H. P. Wagle fiercely opposed the recommendations of the committee, aided by the provisions of the Indian Telegraph Act of 1885, which gave it enormous powers. It successfully opposed all outside interference, which included the World Bank. The only concession made by the DOT was its acquiescence to the idea of allowing private investment in value-added services such as electronic and voice mail, data, audio and video text messages, videoconferencing, radio paging, and cellular mobile services (Desai Reference Desai1996, 45–47, 71). The DOT failed to predict the commercial potential of cellular mobile telephony at this time.
The DOT began the process of licensing telecommunications services to private players in the absence of a regulator, even though it was aware of the consequences of such an institutional design. Quite apart from the Athreya recommendations, it commissioned the Industrial Credit and Investment Cooperation of India (ICICI) to recommend a design for the institution of the Indian regulator in 1993. The study's findings could not be implemented before the first cellular licenses were awarded in 1995 (Desai 1996, 51). The DOT was unwilling to give up absolute licensing powers under the Indian Telegraph Act.
Given the slow progress made by the DOT, the Prime Minister's Office acted as soon as Secretary Wagle retired from the DOT. N. Vittal, a secretary in the Department of Electronics directly under the prime minister, was appointed secretary of the DOT in 1993. This was a landmark appointment because the DOT and the Department of Electronics had enjoyed adversarial relations in the past, and Vittal's appointment had been resisted by the DOT top brass. The Prime Minister's Office wanted Vittal to reform the DOT from within. Minister Sukh Ram opposed the blueprint of the new telecom policy prepared by Vittal after wide-ranging consultations. The minister acquiesced to a new policy under pressure from Prime Minister Narasimha Rao, on the eve of a prime ministerial visit to the United States in December 1993.
The National Telecom Policy (NTP) of 1994 permitted private investment in basic telecommunications services. This was a minor concession because basic services in the government sector were cross-subsidized by domestic and international long-distance services. This privilege would not be available to private players. Second, the NTP did not mention the need for a regulator, which had been a part of the Athreya recommendations of March 1991, as well as the ICICI study of January 1994 commissioned by the DOT. Third, corporatization of the DOT as a service provider was unacceptable to the department. Vittal was transferred from his position as telecom secretary in less than a year's time. The inspiration behind the NTP of 1994 would not be present at the time of its implementation (Vittal Reference Vittal2004, 5–8).Footnote 15
This section has demonstrated the conflict of interest between the Prime Minister's Office and the DOT in the aftermath of the balance of payments crisis of 1991. Empowered by the Indian Telegraph Act of 1885, the DOT seemed to be winning the game of trying to keep its monopoly powers, aided by a colonial legislation. The next section will describe how the idea of privatization did not fit the legal design, thereby calling for change.
The Birth of a Regulator
This section will demonstrate that the design of private investment envisioned by the NTP of 1994 would not fit the old institutional design, in which the DOT played the combined role of policy maker, regulator, and service provider. The absolute powers of the DOT under the Indian Telegraph Act of 1885 created uncertain and often tenuous property rights for private investors. The irreconcilability of the new institutional idea of promoting private investment and the absence of a regulator was pointed out by the Supreme Court and found support within the Indian Parliament. Given the tremendous political and legal powers of the DOT, a regulator—the Telecom Regulatory Authority of India (TRAI)—was born with limited powers to check the predatory propensities of the DOT. The interest of private investors was sustained largely by the commercial viability of GSM cellular mobile technology in urban areas. This is the area in which almost all of the private investment occurred.
The DOT made extensive use of its powers under the Indian Telegraph Act to secure advantages for government-owned service providers. First, opening up basic services for private investment before liberalizing long-distance service was a disadvantage for private players because the DOT had used domestic and international long-distance services to subsidize its local operations. This opportunity for cross-subsidizing local calls would not be available to private players.
Second, the DOT defined bidding rules in a manner that gave the highest weight in the bid (72 percent) to the size of the bid rather than operational capability. This was a perverse incentive to make unreasonably large bids in order to obtain licenses. The bid was a tax on the private service provider that the DOT did not have to pay (BICP 1998, 5–7). The higher the size of the bid, the easier it would be for the DOT to compete with the private operator. The bidding rules had the desired effect: The early stages of the bidding process witnessed unreasonable financial pledges for securing licenses. According to a reliable estimate, cellular operators bid 200 billion rupees over a period of twenty years, or 20 billion rupees a year. Considering the DOT's waiting list of 2.5 million clients in 1998, one could reasonably assume a market of 2.5 million cell phone users in India in the mid-1990s. If mobile operators were working for a market of 2.5 million clients, this would amount to an annual license fee per client of 8,000 rupees, whereas the DOT was charging 3,600 rupees per client, and the cellular operators were allowed to charge only 1,872 rupees per year. Private operators were being lured into an unreasonable business model by the DOT, which had all the makings of an investment crisis (Desai Reference Desai2006, 47–48).
Third, the DOT made use of its exclusive licensing powers to diverge from the terms of the bidding process. The DOT awarded no cellular license in nine circles because it considered the bids to be too small, even though the criterion of a minimum reserve price was not mentioned at the time of bidding. As a result, there were no takers in eight of the nine circles for which a minimum reserve price had been announced.
Fourth, the DOT tried to kill the GSM cellular business by setting high interconnection rates for cellular service providers. Because the DOT constituted almost all of India's telecommunications network at this time, cellular service providers needed to connect more often with the DOT's network than the DOT did with the cellular operators' networks. This was a source of network power for the DOT. Cellular service providers were also dismayed by the DOT's administrative order of September 1996, which advised that cellular operators would be charged on a “receiving party pays” basis. For calls originating in the DOT network and received by a cellular subscriber, the receiving party using a cell phone paid 1.40 rupees per minute. The cellular provider, on the other hand, could not charge the DOT for calls that originated in the cellular network and were terminated in the DOT network. Predatory pricing of interconnection was the DOT's way of making it tough for private cellular providers to survive in the telecommunications market (Desai Reference Desai2006, 48).
Finally, political patronage increased the uncertainty associated with the bidding process. The most scandalous case was that of Himachal Futuristic Corporation Limited, which bid 8.5 billion rupees for cell phone licenses in nine telecom circles when it had a turnover of just 2 billion rupees. After the bidding process was completed, the Tender Evaluation Committee decided to place a cap of three circles for all companies but allowed Himachal to choose its three circles, rather than award the three in which it had made the highest bids. Moreover, rather than reward the six remaining licenses according to the ranking of the bids, fresh bids were invited in January 1996. The privileged treatment of Himachal led to charges of corruption against Communications Minister Sukh Ram. This case was challenged in the courts. The DOT escaped penalty by virtue of a clause that stated the DOT held the right to restrict a company to a certain number of service areas. Sukh Ram had to resign as communications minister in August 1996 after the Central Bureau of Investigation caught him on corruption charges not directly related to the licensing process. Parliament was charged with the corruption issue for two weeks in December 1996.Footnote 16
Faced with an investment crisis and courts pointing the finger at the DOT's predation, Prime Minister Narasimha Rao's Congress government submitted an ordinance establishing the TRAI on January 27, 1996. On February 2, Justice A. M. Ahmadi of the Supreme Court affirmed the constitutionality of the NTP of 1999 (Swaminathan Reference Swaminathan1997, 422–23). Thereafter, in the case of Delhi Science Forum v. the Union of India (1996), the Supreme Court ruled that a regulator was necessary to create an even playing field for private investors. The court opined that the existing legal framework was inconsistent with the spirit of the NTP of 1994:
The existence of a Telecom Regulatory Authority with appropriate powers is essential for introduction of plurality in the Telecom Sector. The National Telecom Policy is a historic departure from the practice followed during the past century. Since the private sector will have to contribute more to the development of the network than DOT/MTNL in the next few years, the role of an independent Telecom Regulatory Authority with appropriate powers is essential for introduction of plurality in the Telecom Sector. (Supreme Court of India, February 19, 1996, para. 25)
The regulator became essential because there was no institution charged with securing the property rights of private investors. Parliament was rocked with debates over the propriety of the tendering and licensing process. The Rajya Sabha (Upper House) blocked the TRAI bill after it was passed by the Lok Sabha (Lower House). The bill passed by the Lok Sabha in 1995 would have brought the regulator directly under the director general of telegraphs. The TRAI was born with the help of a presidential ordinance issued in 1996, which lapsed after six months. Presidential ordinances lapsed three times. Somnath Chatterjee, as head of Parliament's standing committee on telecommunications, played a constructive role.Footnote 17 Parliament finally passed the TRAI bill in February 1997.
Even though the 1997 Telecom Regulatory Authority of India Act established a regulator, it was vested with few powers to check the predatory propensities of the DOT. First, the TRAI could resolve disputes between service providers but not between the licensor (DOT) and a service provider. It had jurisdiction over the DOT as a service provider but not as a licensor. Second, the TRAI did not have the power to issue or cancel licenses—the Indian Telegraph Act gave this exclusive right to the DOT. This was a serious disability for the TRAI, as other regulators, such as the Federal Communications Commission in the United States and the Oftel (now the Ofcom) in the United Kingdom were vested with licensing powers.Footnote 18
An institution that lacked teeth was endowed with able technocratic leadership. The first chairman, Justice S. S. Sodhi, was a former chief justice of the Punjab High Court. Ambassador B. K. Zutshi, the first vice chair, had been India's chief negotiator to the World Trade Organization. Ambassador Zutshi provided the much-needed technocratic expertise given his experience as a senior public servant and negotiator for India. The regulators were respected for their integrity and enjoyed the trust of investors.Footnote 19
This section has highlighted problems that arose from the mismatch between regulatory ideas promoting private investment and a legal structure designed to empower the state monopoly. Private investment needed an independent regulator. The regulator was born after the Supreme Court clearly highlighted this problem. Political will within the Prime Minister's Office and the Indian Parliament was important. However, the Telecom Regulatory Authority of India was born with an infirm mandate, which would necessitate further regulatory evolution. The process of institutional layering—allowing a new institution to develop on the edges of an old one and then to grow differentially—began. Advances in GSM cellular mobile technology kept investor interest alive despite the monopoly promoting the predatory powers of the DOT.
Regulatory Consolidation (1997–2000)
This section will further describe the process of layering—that is, allowing nascent institutions to grow differentially as a mechanism of promoting institutional change. The Indian regulator (TRAI) with an infirm mandate lacked the powers required to secure the property rights of private investors. At this critical juncture, the Prime Minister's Office under Atal Bihari Vajpayee (March 1998–May 2004), with the support of the Ministry of Finance and interest articulation by the private sector, creatively devised institutional mechanisms that secured property rights and empowered the regulatory system. The institution of the regulator was consolidated and a new Telecom Dispute Settlement Appellate Tribunal (TDSAT) was established as a special court of law.
The DOT realized the commercial potential of the GSM cellular business after the bidding process ended in 1996. Most of the private investment occurred in this area. In November 1997, MTNL—the government-owned service provider in the metropolitan cities of Bombay (Mumbai) and Delhi—announced its intention to enter the cellular service market after raising US$358.74 million from global depository receipts. MTNL was looking for tie-ups with one of twenty global companies, which could take up 49 percent.
The Cellular Operators Association of India, representing the cellular mobile operators, was opposed to this decision. It argued that MTNL was working like a corporation; therefore, it was inappropriate to treat it the same as the government. MTNL should pay a license fee to even the operative conditions with private investors, the association argued. The private operators Bharti Cellular and Sterling Cellular challenged the DOT's decision to allow MTNL into the market without seeking the recommendation of the TRAI.
The TRAI ruled in favor of private cellular operators. The two-member bench of the TRAI opined that even though the DOT was the licensing authority, it was necessary for the DOT to request TRAI's recommendation before allowing MTNL into the cellular services market. The regulator was concerned that the licensing powers of the DOT were being used to reduce the commercial value of the cellular licenses that had been offered to private players in 1996. The cellular license, after all, was a property right that was granted to some operators after a bidding process.
This regulatory confusion was resolved by the Delhi High Court in response to an appeal made by the DOT after receiving the adverse judgment from the TRAI.Footnote 20 Justice Usha Mehra of the Delhi High Court read the letter of the law and found it tough to reconcile TRAI's actions with its mandate. She opined,
For the reasons stated above, it can safely be concluded that the Authority fell in error in concluding that the power of the Government to grant or amend the license is subject to the recommendations of the TRAI or that these recommendations are mandatory in nature. (Delhi High Court, July 23, 1998, 51)
Granting licensing power to the TRAI, the court argued, would make the DOT's power under the Indian Telegraph Act redundant. The TRAI's role was limited to advice about the need for a new service provider and directions to service providers. The TRAI did not have the power to take up disputes between the DOT and private service providers (Delhi High Court, July 23, 1998, esp. 40–51). On appeal, the division bench of the Delhi High Court upheld the decision, rendering the TRAI's role in relation to licensing process redundant.
This decision would hurt private investors who had gambled on the GSM mobile sector. The story of unreasonable bids resulting from peculiar licensing conditions has been described earlier. Moreover, these private investors in the telecom sector were heavily dependent on government financial institutions such as the ICICI. It was in the interest of the government-owned financial institutions to ensure the profitability of the telecommunications sector. The DOT commissioned two independent financial assessments of the sector. One was commissioned from the Industrial Credit and Investment Corporation of India Limited (April 1998), and another from the Bureau of Costs and Prices (BICP) of the government of India (November 1998). The ICICI study found that operators in India were not operating below world standards by putting their earnings before interest, depreciation, and amortization. The looming industrial sickness was attributable in large measure to the substantial license fee commitments (ICICI 1998). These unreasonable commitments would lead investors to conclude that telecom liberalization had failed in India. The BICP study concurred with the ICICI study, and it stressed in addition the substantial costs involved with getting business operations started in India's telecommunications sector (BICP 1998). Thus, the entry of MTNL into the market without paying a license fee would further aggravate the financial plight of the cellular industry.
The Prime Minister's Office became deeply interested in modernizing telecommunications and promoting India's information technology exports when Atal Bihari Vajpayee assumed office for the second time (March 1998–May 2004). The Prime Minister's Office evolved a model of interministerial coordination through the formation of the National Task Force on Information Technology. The task force, which was formed in March 1998 soon after Vajpayee assumed office,Footnote 21 paved the way for ending the DOT's monopoly over India's long-distance carrier, VSNL, and over Internet service provision.Footnote 22
In addition to the Prime Minister's Office's resolve, the Delhi High Court judgment created an unprecedented unanimity among investors. The Cellular Operators Association of India, the Association of Basic Telecom Operators, the Federation of Indian Chambers of Commerce and Industry, and the Confederation of Indian Industry all worked overtime to change the regulatory regime. The Central Vigilance Commissioner, N. Vittal, who had been the author of the National Telecom Policy of 1994 as telecom secretary, in a memo to the Federation of Indian Chambers of Commerce and Industry, advised the industry that the Federation of Indian Chambers of Commerce and Industry and the Ministry of Finance would support the institutional changes that they desired. The Confederation of Indian Industry's National Committee on Communications stressed the need for the DOT to consider the views of the TRAI both before granting licenses and in settling licensor-licensee disputes. The regulator should also be able to deliver interim relief in a situation of dire financial stress.Footnote 23
The resolve of the Prime Minister's Office, aided by interest articulation within industry, yielded the high-powered Group on Telecommunications (GOT) in early 1999. The committee was modeled after the National IT Task Force and worked with remarkable speed. The deputy chairman of the Planning Commission and Foreign Minister Jaswant Singh chaired the group. It also included other senior representatives from the Prime Minister's Office, the Planning Commission, the Ministry of Finance, the Law Ministry, the DOT, the National Informatics Centre, the National Institute of Advanced Studies (Bangalore), and the Department of Space. The GOT signaled an inclination within the Prime Minister's Office to give a voice to the pro-competition elements within the government after giving due consideration to the concerns of the DOT.Footnote 24 It is to the credit of the GOT that the blueprint for the New Telecom Policy was ready within a couple of months by March 1999.
The NTP of 1999 was born despite the displeasure of Communications Minister Jagmohan, who was single-mindedly averse to the bailout package. Under these circumstances, the communications minister had to resign and the prime minister took direct charge of the Ministry of Communications.
Important opposition leaders supported the new initiative. Congress Party leader Pranab Mukherjee, the Communist Party of India's Somnath Chatterjee, and the Samajwadi Party's former communications minister, B. P. Verma, all supported the new regime. Chatterjee asserted that this move was essential to ensure that Indian capital would not get swept away by private capital in this sector.Footnote 25
The Group of Ministers on Telecommunications was set up in November and December 1999. This interministerial group, which had the blessing of Prime Minister Vajpayee, implemented the provisions of the NTP of 1999 with remarkable speed. The TRAI Act was amended and a Telecom Dispute Settlement Appellate Tribunal was set up in 2000. The Department of Telecom Services within the DOT was corporatized into Bharat Sanchar Nigam Limited in 2000. This implied that entire service function of the DOT was now separated from the ministry. India's long-distance carrier, VSNL, was privatized, with a majority of the shares being sold to the Tata Group of Industries in 2002.Footnote 26
The New Telecom Policy (NTP) of March 1999 shifted the balance of power in favor of the TRAI. The problem of unreasonable bids was acknowledged, and the new license regime was changed to one that included a reduced license fee plus a revenue-sharing commitment. Private operators were bailed out of financial hardship through a migration package that cost the government US$857 million.Footnote 27 Private investors were happy with the results produced by the GOT.Footnote 28
The regulatory institutions were allowed to grow. First, the DOT would need to consult the regulator on the number and timing of new licenses; the TRAI Act was amended in 2000 to allow for this provision. Second, the DOT was allowed to become the third operator in all circles. Third, the DOT's view that the TRAI could not adjudicate disputes between the licensor and service providers was respected, but a new institution was created to deal with these issues. The Telecom Dispute Settlement Appellate Tribunal was set up as a special court in January 2000 to deal with legal disputes between the licensor and service providers, as well as conflicts among service providers. It was set up with a retired judge of the Supreme Court at its helm, and was to function at the level of a high court. The only court of appeal higher than the TDSAT would be the Supreme Court of India.Footnote 29
This section, like the previous one, has demonstrated that a glaring mismatch between regulatory design and intention could not be sustained. The regulator had to grow in relation to the DOT, if the property rights of private investors were to be secured and a financial crisis averted. The mismatch was pointed out by the judiciary. The Prime Minister's Office, aided by interest articulation in the private sector, played a critical role in adjusting the regulatory system by empowering the TRAI and creating the TDSAT. Layering as an approach to institutional evolution involved not only the differential growth of TRAI but also the establishment of a specialized court, the TDSAT. The process of layering ensured that institutional change remained an incremental process in which new institutions evolved slowly and differentially with respect to old institutions without undermining existing institutions in a radical manner.
Regulatory Performance: Averting the WLL Crisis
The legal developments described in the two previous sections did not necessarily check the propensity of the DOT to impose its will on the regulator. The TRAI's legal empowerment now needed to be backed with independent-minded personnel manning the regulatory institution. A potential crisis for the GSM cellular industry was engineered by the DOT when it pushed the regulator to introduce a new technology license with a lower financial commitment, benefiting one major business house and hurting the interests of the cellular operators in the GSM mobile sector. A crisis was averted when the concerned corporation was penalized after a change in the regulatory leadership. Measures taken by the TRAI under the chairmanship of Pradeep Baijal engendered the telecommunications revolution in India by unleashing the forces of competition.
The NTP of 1999 allowed the use of Qualcomm's code division multiple access (CDMA) technology with a “wireless in local loop with limited mobility” (WLLM) facility in January 2001.Footnote 30 The WLLM facility was introduced as a fixed rather than a cellular service, with a lower license fee commitment than cellular services,Footnote 31 but with expensive rural service obligations. It was justified on the grounds that a combination of limited mobility and expensive rural obligations would secure the commercial prospects of the competing GSM cellular players and promote rural teledensity. Moreover, the GSM cellular players had been aided by the migration package in 1999. The notable beneficiary of the WLLM policy was Reliance Infocomm (with licenses in seventeen circles). The WLLM controversy unraveled when it was established that Reliance Infocomm was in violation of the license conditions.
Period 1: DOT Averse to Introducing WLLM as a Fixed Service (March 1999–August 2000)
There is evidence to suggest that DOT was, on average, averse to the idea of allowing the CDMA/WLL technology with limited mobility service as a fixed service until August 2000. The NTP of March 1999 maintained a clear distinction between fixed services and cellular services but allowed the use of WLL with limited mobility for fixed providers. The DOT was aware of the problems that could arise if fixed license holders were permitted the limited roaming facility. It appears that both the DOT and the cellular providers had a similar interpretation of the NTP of 1999 until August 2000. This interpretation suggested that wireless technology could be allowed as a fixed service because it was cheaper to install. But this wireless service would not be permitted any mobility.
A number of DOT decisions lend weight to this point of view. In August 1998, the DOT rejected a commercial code suggested by Bharati Telenet that mentioned it would use WLL services with limited mobility. A commercial code of Tata Teleservices was approved in January 1999 after clearly stating that it would not be allowed to use mobile handsets. The DOT responded to the TRAI's letters dated June 9, 1999, and August 27, 1999, and clarified that fixed providers were not allowed mobile services per the licenses granted to them (letter dated September 17, 1999). In March 2000, Shyam Telelink's commercial code, which involved wireless handsets without mobility, was approved by the DOT. Similarly, in August 2000, Essar Comvision's commercial code for operations in Punjab was approved on the condition that WLL technology could be permitted without the use of mobile handsets. While the DOT resisted WLL with mobility, the fixed service providers interpreted the NTP of 1999 as favoring the use of WLL with limited mobility.
In late August 1999, MTNL sought the regulator's approval for tariff for its Cellular Mobile Telephone Services using CDMA technology under its cell phone license. The CDMA technology, as we noted earlier, is also the standard for the WLL technology with limited mobility. The TRAI rejected this suggestion on the ground that cellular service providers could only use the mandated GSM technology.
The DOT changed its mind about allowing CDMA technology for cellular mobile telephony in September 1999. It made licenses for cellular operators technology neutral, which meant that both the GSM and the CDMA technology could be used for cellular operations. MTNL then informed the TRAI that technological neutrality allowed it to use CDMA technology for cellular services. On September 17, 2000, the DOT clarified that fixed providers could not provide mobile services, as mentioned earlier.
Evidence suggests that the DOT was averse to the use of WLL technology with limited mobility for fixed providers until August 2000. Efforts by MTNL to use the CDMA technology either as a WLLM fixed service or as a technology for its cellular operations were largely unsuccessful. Competitive bidding for fixed providers was announced with a nominal entry fee and no mention of WLLM in August 2000.
Period 2: Introducing WLLM (September 2000–January 2001)
The haste with which WLLM was introduced between September 2000 and January 2001 was quite remarkable. The DOT was the guiding force behind the introduction of WLLM services by fixed providers. Support for these moves came from the Association of Basic Telecom Operators, the Associated Chambers of Commerce and Industry, and the Confederation of Indian Industry. These industry organizations represented the interests of the fixed service providers. The Cellular Operators Association of India, representing the cellular mobile industry, opposed the introduction of WLLM, without much success.
On October 3, 2000, a senior DOT official prepared a detailed note allowing the use of WLLM. The DOT justified this move on the grounds that WLLM would help faster rollout of telecommunications services and would help bridge the rural–urban divide. On October 10, the DOT requested that the TRAI reconsider WLLM and related issues, such as the scope of service area, basis of assigning frequency, and amount of entry fee.
The regulator was surprised by this turnaround in the DOT's view and requested fresh consultations, as WLLM had not been a part of its earlier considerations. In a letter to Shyamal Ghosh, the telecom secretary, the chairman of TRAI, M. S. Verma, expressed concern that there might not be adequate safeguards to ensure that WLLM would remain a service within the short-distance charging area, as defined by the DOT. He worried that it could be tough to maintain the distinction between WLLM and cellular services.Footnote 32
How could the chairman of TRAI allow the regulator to furnish recommendations for WLLM in January 2001 when he was not convinced about the propriety of this move in October 2000? (TRAI 2001). The regulator had failed to take an independent position on the WLLM issue. This was a very different situation from the one that prevailed when the TRAI under Justice S. S. Sodhi had opposed MTNL's entry into the cellular business. In 1998, the regulator did not have advisory powers but was able to take a position independent of the DOT. Verma's TRAI, on the other hand, had been endowed with advisory powers in 2000, but it had failed to express its independent opinion.
The regulator conducted hasty consultations without seeking participation from the cellular industry, which was the aggrieved party in this case. On November 11, 2000, within a month of the DOT's request to the TRAI, the regulator issued a consultation paper. On January 8, 2001, the TRAI recommended that fixed providers be allowed to offer limited mobility services under restricted conditions. It recommended that roaming services, the use of mobile switching centers, and several value-added services would not be allowed for fixed providers. These would be the exclusive preserve of cellular operators. Empowered by the regulator's recommendations, the DOT issued orders that gave fixed operators the right to offer WLLM on January 25, 2001.Footnote 33
Adjudicating Conflicts of Interest between Fixed and GSM Cellular Operators
The GSM cellular operators appealed to the legal system for protection of what they considered their legitimate property rights. The Cellular Operators Association of India appealed to the Telecom Dispute Settlement and Appellate Tribunal on January 22, 2001. The TDSAT gave a judgment in favor of fixed operators in March 2002. The Cellular Operators Association of India then appealed to the Supreme Court. The Supreme Court bench, headed by Chief Justice G. B. Pattanaik, maintained that the TDSAT had not offered an opinion on the issues on which its opinion had been sought. The TRAI needed to express an opinion on whether WLLM was a new service according to the NTP of 1999, whether WLLM was within policy or constituted policy change, and whether conditions attached by the TRAI and its recommendations dated August 1, 2001, had been satisfied. The case was sent back to the TDSAT (Supreme Court of India, December 17, 2002).
The majority opinion of the TDSAT delivered by two former government servants, R. U. S. Prasad and P. R. Dasgupta, upheld the DOT's position, which sought to secure the rights of WLLM operators. They argued that WLLM had always been a part of policy, as the NTP of 1999 allowed it. Second, they stressed that policy needed to keep pace with technology in order to uphold public interest. Wireless technology was essential for faster rollout obligations and for serving rural areas. Third, they maintained that it would be possible to respect the distinction between cellular services and fixed services with WLLM. Fourth, it was maintained that cellular operators had benefited from migration to a revenue share regime. Therefore, they need not be averse to a policy change that would be favorable to fixed operators (TDSAT 2003b).
In his minority opinion, Justice D. P. Wadhwa, the chairman of the TDSAT, argued against the introduction of the WLLM service. He argued that a realistic interpretation of the NTP of 1999 could not be taken to mean that WLLM was available to fixed operators free of cost. The NTP of 1999 had treated fixed operators as being separate from cellular operators. Second, he worried that extraneous considerations benefiting a sector or a business house were involved in this decision. Third, he found that the rural dividend was only a pretext. Tata Teleservices had provided only 1,314 of the 9,635 village public telephones that had been promised. Reliance Infocomm had installed only 502 of the 8635 telephones that it was committed to provide. Fourth, the short-distance charging area was a notional concept without an objective geographic delimitation criterion, and therefore would be impossible to monitor. Finally, Justice Wadhwa opined that there had been no sudden march of technology that necessitated hasty radical changes in the approach of the DOT and the regulator between September 1999 and January 2001 (TDSAT 2003a).Footnote 34
The cellular operators went back to the Supreme Court in October 2003 after receiving an unfavorable majority opinion from the TDSAT in August. They withdrew the case from the Supreme Court in January 2004. According to one view, the cellular operators withdrew the case because the government acknowledged the mistakes of previous policy. Further aggression on the part of the Cellular Operators Association of India could result in policy changes, which could adversely affect the cellular providers.Footnote 35
Resolving the WLL Crisis
The TRAI's Recommendations on Unified Licensing were a salutary move (TRAI 2003). These recommendations of the TRAI under the new chairman, Pradeep Baijal, led to an out-of-court settlement that satisfied the cellular operators. They increased competition in the sector and sowed the seeds of India's telecommunications revolution.
Reliance Infocomm was penalized for not adhering to the regulator's guidelines. It was using WLLM as a roaming facility. It did not pay any respect to the distinction between cellular operations and WLLM operations. It was also using mobile switching centers (TRAI 2001). The use of mobile switching centers would make it tough to restrict mobility, as desired by the WLLM methodology.
Under Chairman Baijal, the TRAI propagated the virtues of a universal license, given the impossibility of maintaining the distinction between WLLM and cellular services. Consultations in September 2003 led to a cellular-versus-WLLM provider conflict, with the latter desiring a unified license and the former opposing it. The TRAI opined that WLLM had introduced competition, which had doubled the subscriber base between March and September 2003. Such growth rates would help India catch up with China's mobile explosion. Therefore, the TRAI proposed that unified licensing should include all services covering all areas and using any technology within six months. The fixed WLLM providers desiring migration to a unified license would pay the difference between the entry fee paid by the fourth cellular operator and the entry fee paid for a fixed WLLM license (TRAI 2003).
The TRAI recommended that Reliance Infocomm should pay 10.96 billion rupees for migration to a unified license (combining cellular and fixed features) and 4.85 billion rupees as penalty for using a WLLM license like a cellular license. The cellular operators withdrew their case from the Supreme Court, even though many cellular players opined that Reliance should have been penalized to a greater extent (TRAI 2003, 23–24).
The resolution of the WLL crisis demonstrated that the people who run institutions are as important as the principles that the institutions seek to uphold. The independence displayed by Justice S. S. Sodhi—the first regulator—was not protected by the legal mandate of the TRAI. Despite the enhanced regulatory powers of the TRAI under the chairmanship of M. S. Verma and a separate dispute settlement mechanism, the DOT's view prevailed, even though it was known to the regulator and the chair of the TDSAT that the WLLM policy would adversely affect GSM cellular operators. The resolution of the WLL crisis occurred under Pradeep Baijal, whose legal mandate as chair of the TRAI was no different from that of M. S. Verma. This resolution boosted investor confidence and gave birth to India's telecom revolution.Footnote 36 Regulated competition was born. The regulator now needed to shift the focus of attention from government predation to curbing the monopolistic propensities of the private sector. It also needed to worry about the spread rural telephony.
Conclusion
The evolution of the Indian telecommunications regulator along with a dispute settlement mechanism lends support to theories of institutional change premised on the evolution of interests as a source of institutional change. The process was aided by a legal system that was quick to point out the mismatch between regulatory institutions and intention. There could be no private investment without secure private property rights enforced by third parties. The process of regulatory evolution was driven by a diversity of interests located primarily within the Prime Minister's Office, the Ministry of Finance, the Department of Telecommunications within the Ministry of Communications, and private-sector lobbies. The DOT, empowered by the Indian Telegraph Act of 1885, had tremendous legal powers to protect its monopoly and thwart competition.
Curbing the monopoly powers of the DOT involved a process of evolutionary change described as layering. This involves an incremental process of giving the birth to a new institution along the edges of the old one and allowing it to grow differentially. In this case, the regulator (TRAI) was born with an infirm mandate in 1997 because privatization without a regulator could not secure the property rights of investors. The same institution was empowered to a greater extent in 2000, and a new dispute settlement mechanism was established, as a regulatory set up without appropriate legal powers to curb the monopolistic propensities of the DOT could not secure the property rights of investors.
The regulatory evolution discussed in this essay involved resolving conflicts of interest between 1991 and 2000. It was not driven by the powerful and sudden appeal of a new idea or the logic of appropriateness in times of economic crisis. The Prime Minister's Office and the Ministry of Finance were interested in promoting private investment in commercially viable areas because of the deterioration in India's fiscal situation after the mid-1980s. The need for investment became more pressing when this fiscal crisis converted into a balance of payments crisis as a result of a minor exogenous shock in 1991. These efforts were resisted by the DOT, which wanted to preserve its telecommunications monopoly. Regulatory evolution, therefore, involved resolving conflicts of interest between the Prime Minister's Office and Ministry of Finance, on the one hand, and the DOT, on the other. As the private sector evolved, its involvement with government financial institutions and fierce lobbying made an impact on the Ministry of Finance, the Prime Minister's Office and the DOT. The process involved political costs such as the resignation of two communications ministers—Sukh Ram and Jagmohan. During times of financial crisis in the telecommunications sector, the Prime Minister's Office took direct charge of the DOT. The political costs of setting up regulatory institutions were more formidable than the economic costs.
Regulatory evolution was necessary but not sufficient for securing property rights. An empowered regulator and a specialized court together could not secure the property rights of GSM cellular operators during the WLLM crisis. But the same institution under another regulator not only resolved the crisis but also sowed the seeds of the telecom revolution in India. Three significant lessons can be learned from the WLLM crisis. First, an empowered regulatory institution needed people who could express themselves freely with respect to the DOT. Second, in addition to taming the government's predatory propensities, the regulator needed to curb the monopolistic urges of the private sector. Third, the WLL incident exposed the political economy of a telecom boom in urban areas and inattention to unprofitable rural commitments. The regulator failed to make Reliance Infocomm pay a penalty for the nonfulfillment of rural commitments. Rural service commitments were the major reason why the cheap WLLM licenses had been offered in the first place.
The impact of slow-moving processes such as fiscal crises and technological development on the evolution of interests and institutions is best captured by studying evolving processes as mechanisms rather than by analyzing snapshots of history. India's fiscal crisis evolved from the mid-1980s, and the balance of payments crisis occurred in 1991. But the regulator was born in 1997. It was further empowered and a special court was set up in 2000. The process of regulatory evolution involved increasing the coherence between policy intention—the promotion of private investment by securing property rights—and the design of the regulatory institution. Each crisis of investment in the telecommunications sector required regulatory empowerment. When regulatory powers was consolidated in 2000, a crisis was averted by the regulator, and the seeds of India's telecommunications boom were sown after 2003.
Acknowledgments
The author thanks Jack Snyder, Francine Frankel, T. V. Ramachandran, Alan Heston, Robert Jervis, Edward Mansfield, Gyanesh Kudaisiya, John Huber, Vikram Chand, Partha N. Mukherji, John E. Gent, Devesh Kapur, Virat Bhatia, Arun Thiruvengadam, Douglas Verney, and Anjali Mukherji for suggestions. I am grateful to Tan Tai Yong for encouragement. The anonymous referees played a stellar role. This research was aided by support from the Saltzman Institute of War and Peace at Columbia University, the Centre for Political Studies at Jawaharlal Nehru University, and the Institute of South Asian Studies at the National University of Singapore. Comments made during presentations at the Centre for the Advanced Study of India at the University of Pennsylvania, and at the South Asian Studies Programme of the National University of Singapore are gratefully acknowledged. Ajoy Lywait ably assisted with the research. The shortcomings, as usual, rest with the author.
