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Subject: AEJ 97 ChadhaK CTP Does liberalization lead to competition? (India)
From: Elliott Parker <[log in to unmask]>
Reply-To:AEJMC Conference Papers <[log in to unmask]>
Date:Sun, 14 Sep 1997 12:33:57 EDT

TEXT/PLAIN (8181 lines)

                      Does Liberalization Lead to Greater Competition?
                              The Case of Indian Telecommunications
                               Kalyani Chadha
                               Doctoral Student
                               University of Maryland
                               College Park
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Running head: Does Liberalization Lead to Greater Competition? The Case of
Indian                                Telecommunications
  Theorists have long asserted that liberalization or the removal of barriers to
market entry engenders the growth of competition. This paper examines the
tenability of this claim by tracing the impact of recent liberalizing policy
initiatives on India's telecom sector. Here it finds that despite such
initiatives, a purely competitive policy regime has failed to emerge due to
certain political and economic factors prevalent within the Indian context. And
drawing on the empirical evidence uncovered it suggests the need to re-examine
the asserted linkage between liberalization and competition.
             does liberalization lead to greater competition: the case of Indian
Does Liberalization Lead to Greater Competition: The Case of Indian
     While the last quarter of the twentieth century has witnessed varied
economic changes, ultimately the period may be best remembered for its decisive
shift towards wideranging economic decentralization and decontrol (Gayle &
Goodrich, 1990). For during this time, motivated variously by ideological
imperatives, considerations of economic efficiency or the need to succeed in the
global economy, states have increasingly embraced policies aimed at introducing
or expanding competition within various economic sectors. One such sector has
been that of telecommunications, which has witnessed numerous attempts to
introduce competitive forces that are believed to result both in greater
allocative efficiency as well as better service provision (Baughcum, 1986).
Moreover, such attempts have not been confined to the developed market economies
alone, but have emerged globally in a "bandwagon effect," with nations ranging
from those of Eastern Europe to Asia, all initiating reforms aimed at
dismantling longstanding telecom monopolies (Duch, 1991).
     In order to propel these reforms, governments have typically relied on
"liberalization," or the removal of barriers to market entry, arguing that this
measure results in the opening of industries to multiple players and thus
engenders the growth of full scale competition (Straubhaar, 1995). Yet, as
numerous public policy debates indicate, disjunctures frequently exist between
the original intent and the eventual outcomes of policy measures. Consequently,
it becomes necessary to investigate whether policy prescriptions do actually
accomplish their stated objectives and that is what this paper sets out to do
with regard to telecom liberalization policies. More specifically, it focuses on
the recent introduction of liberal policy
initiatives into India's telecommunications sector,[1] and sets out to examine
whether liberalization does in
fact lead to the creation of competition? with competition being defined as a
marketplace condition
characterized by the presence of multiple players providing similar products and
operating freely within a  given sector (Gomery, 1993; Bolter, McConnaughey &
Kelsey, 1990).
     Surveying the telecommunications policy literature, it would seem that this
question is almost
unequivocally answered in the affirmative. Indeed, in much of the literature
dealing with this issue, the causal connection between the introduction of
liberal policy initiatives and the emergence of competitive forces is considered
almost axiomatic, with many accounts viewing the two as synonymous with one
another. For instance, Duch (1991), sees the adoption of liberalization policies
as "maximizing efficiency gains by sweeping away artificial barriers to market
entry and resulting in the creation of wideranging competition involving
numerous firms supplying more or less identical products and services," (p.6).
Similarly, Petrazzini (1993; 1995), argues that typical liberalization measures
which entail the removal of governmental controls and allow multiple firms
unrestricted entry into the market engender the " opening up of
telecommunications industries to a range of competitive pressures," (p.110). And
finally in the same vein Snow emphasizes that it is the process of
liberalization which creates and reinforces competitive practices within
telecommunications (1986).
   In fact, many of authors contend that as a form of decontrol, liberalization
is far more likely to generate competition than other forms of economic
decentralization such as either privatization which involves the sale of state
owned enterprises to private operators, or deregulation which results in the
reduction of state controls over firms in the marketplace (Starr, 1990;
Biersteker, 1993). This, they argue, is because unlike liberalization, these
strategies tend to focus almost exclusively on the replacement of public control
of industries by private ownership, with the introduction of competition being
at best a secondary issue. As one scholar puts it:
       directed at limiting the state's intervention within the economy,
measures such as privatization and             deregulation frequently fail to
take into account the question of competition and often result
simply in the substitution of public monoplies by private ones. It is therefore
through measures of              liberalization which emphasize the removal of
barriers to the entry of multiple operators into an                 industry
that that a truly competitive environment can be created," (Petrazzini, 1996.
    While the theoretical literature thus seems to decisively underscore the
linkage between liberalization and competition, based on empirical evidence this
study takes a rather different position. Essentially, it argues that in the
Indian case, while the introduction of liberalization has resulted in ending the
state's long-standing monopoly and "opening" various segments of the telecom
sector to private investment, it has not led to the automatic growth of a
"purely" competitive environment, characterized by a multiplicity of firms,
providing similar products and possessing the freedom to enter and exit the
market at will. Instead, the study finds India's telecommunications sector is
currently marked by the presence of a complex continuum of economic conditions
characterized by varying degrees of competition. These include: pure competition
in the case of value-added services; monopolistic competition which although
involving several firms has only a few of them competing with differentiable
products in the case of certain segments of the equipment sector; a duopoly with
two operators within the realm of basic and mobile services and finally a
monopoly with a single service provider and effective barriers to entry in the
area of international and domestic long-distance services. [2]
   Further, it suggests that the emergence this continuum of competitive
conditions rather than a purely competitive framework, despite the introduction
of liberalizing policy initiatives, has occurred due to the existence of
powerful local dynamics which by design or default militate against the
introduction of such a policy regime in India. These dynamics, according to the
study are of two kinds, one economic and the other political. The economic
dynamic affecting the emergence of competition within the Indian
telecommunications system, is the nature of the country's market structure,
particularly its uneven demand patterns which render it unable to attract
multiple players into many open areas of the sector--a fact that naturally
limits the development of competitive pressures and forces. The political
dynamic that has restricted the emergence of a purely competitive regime is the
government's contradictory stance towards the liberalization of
telecommunications. For this contradictory stance, which has arisen out of the
government's electoral need to accomodate diverse groups opposed to the
introduction of a competitive regime, has frequently led it to take decisions
that inhibit the growth of competitive tendencies. And together, these dynamics,
the study argues have thus given rise to mixed outcomes with regard to
     In sum then, the paper thus emphasizes that the mere adoption of policy
measures is not sufficient in itself to generate particular outcomes, as many
theorists seem to imply. Instead, it emphasizes that policy outcomes are complex
developments, whose emergence and nature are influenced by a variety of
contextual forces. And it is these policy outcomes that the study sets out to
explore within India'a telecom sector. In this context, it first delineates the
new liberalization measures, examining their impact on different segments of the
telecom system, particularly in terms of the growth of competition and finally
analyzing the reasons underlying the trajectory of developments within the
sector as a whole.
                         India's Telecommunications Policy: Past and Present
The Initial Monopoly:
    From the mid 19th century when it was first established, to the early 1990s
the telecommunications system in the Indian subcontinent has been characterized
by total governmental control. In fact, both telegraphy which was introduced in
1857 and telephony which began in 1885, were established as state monopolies
under the Telegraph Act of 1885, with the British government citing the
maintainence of defense and security as the rationale for such control
(Headrick, 1988). This organizational structure persisted after independence in
1947, because the post colonial government argued that in view of the high fixed
capital costs involved in the establishment of a network, it was inefficient to
have more than one organization providing telecom services, since competition
would only result in different firms duplicating  high capital investments
without benefitting from economies of scale. In other words, it argued that
telecommunications constituted a natural monoply and should therefore be
controlled by a single operator.    Further, it asserted that since it was also
crucial to national development, this operator should be the state. Thus despite
a change in regime, the Indian telecom system remained a centrally controlled
monopoly, that for the first 40 years of India's statehood functioned as an
integral component of the country's expanding and even hegemonistic state sector
(Nandy, 1989). As one scholar put it, " the system was managed by the government
in New Delhi through circulars, directives, and fourteen volumes of rule books,"
(Mody, 1995).
Changing the Rules:
   This situation first began to change in 1987 when the government issued its
Telecom Mission Statement, a document that outlined the goals and strategies of
India's future telecommunications planning (Tandon, 1993). This document which
identified telecommunications development as a "national mission," called for:
the reorganization of the existing infrastructure into an efficient network that
could incorporate                  and serve the telematic needs of all major
sectors and users in the country, both at the present and in
     the future...(1987, p.1).
And to this end, the statement made two basic recommendations. First, it called
for the creation  of a new Department of Telecommunications (DOT), separate from
the postal system with which it had traditionally been joined. Second, it
established two new public sector corporations, one to provide services to the
metropolitan areas of Delhi and Bombay, and the other to manage international
communications, which were empowered to introduce new technologies, tap capital
markets and to create a more customer responsive management culture. While these
changes, particularly the separation of telecommunications operations from those
of the postal system, represented some initial steps towards the rationalization
of India's telecommunication system, it was however only in 1991 that a
substantive transformation of the system was initiated.
   This process occurred somewhat circuitously, arising primarily as a result of
the " opening" of India's economic system and its integration with the global
economy. For this development, which was impelled partly by the country's
acceptance of a structural adjustment program in return for loans from the IMF
and the World Bank and partly by internal efforts to improve the growth rate,
generated a national debate regarding telecommunications (Mody, 1995). This
debate emerged as the international lending agencies and Indian technocrats
decried the existing telecom system with its a teledensity of 0.89 lines per
hundred people and a waiting list of 2.4 million phones as woefully inadequate
and stated that its expansion was an essential pre-condition for functioning
within the global economy (Vittal, 1993). They argued that without developing an
efficient and widespread telecommunications system, India would be unable to
attract foreign direct investment, improve the volume of local business or
participate within the global economy and that since the state did not have the
capital resources to undertake this task, it was necessary to open the system to
market forces. As the Government of India's Economic Survey of 1993-1994 put it:
     The development of the telecommunications infrastructure is important not
only because of its role in          bringing the benefits of communication to
every corner of India, but also in serving the new policy            objectives
of improving the global competitiveness of the Indian economy and stimulating
both local          and foreign investment. However, since it is beyond the
capacity of government generated funding to          come up with adequate funds
for this task, there is no alternative but to decentralize the center and
allow private operators to bridge the resource gap (p.143).
   The specific mechanism through which this decontrol of the telecom sector was
sought to be undertaken was the new National Telecommunications Policy.
Articulated in mid 1994, this policy aimed to:
       to advance India into a world-class telecom service that would improve
its competitiveness in the               global market by the rapid expansion of
access to telephones through the provision of telephones on           demand,
the integration of the rural population through the extension of universal
service to all                  villages and the provision of the widest range
of services, particularly to business users at reasonable          prices (p1.).
And in order to achieve this objective, it proposed the  "liberalization," of
the telecommunications sector through the "elimination of the state's
long-standing monopoly and the opening of the sector to multiple private
operators on a competitive basis" (p.2). In adopting this policy, the government
would thus seem to have all but abandoned its traditional rationales for
monopolistic control, namely 1)  that telecommunications represented a natural
monopoly where it was economically inefficient to have more than one firm and 2)
that it was a sector integral to national infrastructural development, whose
control could not be left to market forces. Instead it has emphasized that not
only is private sector investment a vital source of finance for the expansion of
Indian telecommunications but that with recent technological advances, the costs
of establishing networks have been so reduced that the natural monopoly
arguements favoring single firm production have been rendered invalid. As a
report of the Telecom Working Group within the government run Industrial Credit
and Investment Corporation of India, put it:
         It is now the view of the government that liberalization or the
accelerated entry of multiple
         private operators within the equipment and service segments of the
telecom sector, through the                  increase in the levels of private
equity participation including that of multinational corporations,
         the establishment of open and transparent bidding procedures as  well
as the simplification of rules             and regulations...throughout the
sector is not only desirable but necessary (1995; p.2.3).
And this change in position has had a wide-ranging impact throughout the
telecommunications sector.
                        Tracing the Emergence of Competition: An Empirical
       One of the first areas to be affected by the introduction of liberalizing
policy measures within the   telecommunications sector has been that of
equipment. Indeed, whereas in the past, India's telecom equipment was
exclusively provided by the public sector organization Indian Telephone
Industries Ltd. or (ITI), this growing sector has now been opened to private
operators in areas ranging from customer premise and switching equipment to
mobile communication and transmission equipment. However, while barriers to
market entry have been removed, empirical evidence seems to indicate that the
extent of competition within the equipment sector varies considerably from
segment to segment. For instance, in the area of customer premise equipment[3]
in India, despite initial entry by multiple firms, after a brief shakeout
period, the segment now appears to be an oligopoly, dominated by a few firms
notably, Bharat Telecom, Tata Telecom, OKI, Ericsson and Fujitsu, who control
most of the market ("Equipment manufacturers," 1996; DoT Annual Statistical
Summary, 1996). Similarly, an oligopolistic pattern also seems to characterize
the large switching equipment segment[4], which is effectively controlled by six
large corporate combines made up of domestic firms acting in collaboration with
established multinational technology providers both from the US and other
countries. These include the link ups between Modi-Alcatel, Tata-AT&T and
Siemens India with Siemens Germany ("Equipment manufacturers," 1996).
     In the small switching segment however, the situation is somewhat
different. Here, liberalization has not only brought the government's
traditional monopoly to an end but has resulted in the entry of numerous firms
within the market. However, despite the proliferation of firms in this area,
only a few of them are in direct competition for particular categories of
products, and consequently the resultant pattern of competition is monopolistic
in nature. For instance, in the case of small switching equipment, GCEL,
Natelco, BPL Telecom, Technicom and UTL compete to provide most of the switches
for under 10,000 lines while AT&T, Hinditron, HTL Ltd., NEC, and ITI are the
principal providers of switches for upto 25,000 lines (DoT Annual Report, 1996).
Further, a monopolistically competitive situation has also been engendered by
liberalizing policy initiatives in the area of transmission equipment. For in
this area, even though both the wireline and wireless equipment segments are
characterized by the operation of multiple firms, only a handful of firms
effectively compete within the market for specific products such as jelly-filled
cables, optical fiber cables, microwave equipment and VSAT terminals ("Getting
connected," 1996).         While the small switching and transmission areas have
thus come to be characterized by monopolistic competition, the mobile
communication segment is marked by the emergence of oligopolistic trends, with
both the cellular and paging equipment segments being dominated by a handful of
large players. These include Nokia, Alcatel, Motorola, AT&T, Siemens and
Ericsson in the case of cellular equipment and Motorola, Casio, Phillips,
Glenayre Inc. and Nokia in the paging segment which together supply the
equipment for over 50 out of a total of 66 paging networks in the country ("
Market Reports", 1996).
  Thus while liberalization oriented initiatives have no doubt brought the
state's long-standing and traditional monopoly to an end, allowing the entry of
numerous private players into equipment manufacturing, the development of a
purely competitive situation within the segment has nevertheless remained
Basic Services:
     In addition to the equipment market, also affected by the introduction of
the new liberal policy initiatives, has been the area of local telephony or
basic services. Traditionally, a monopoly controlled and operated by the state
through the Department of Telecommunications (DOT), this area has recently been
opened up, with private players, both domestic and international, being allowed
to enter the sector to provide basic services in competition with each other as
well as the DOT (Guidelines for Induction of Private Sector into Basic Services,
1994). Under the present policy regime, which went into effect beginning August
1995, private firms are thus to be granted licenses to operate along with the
DoT in each of the twenty geographic "circles"  which correspond roughly to
state boundaries in India (National Telecom Policy, 1994). These licenses are to
be valid for a period of ten years. While with these steps the liberalization of
the basic services segement has been put into motion, the development of
wideranging competition however remains a questionable issue. Indeed, despite
interest by both local firms and global telecom giants such as AT&T, US West,
Bell Canada, British Telecom, and and Nippon Telephone and Telgraph all of whom
were anxious to enter this sector ( Purkayastha, 1996), its present condition
are less than fully or purely competitive as Table 1 indicates.
                                     Table 1
      Telecom Circles             DoT in All Circles         Basic
Services-Private Operators
      1.  Andhra Pradesh                                  Tata-Bell Canada
      2.  Assam                                              No bidder
      3.  Bihar                                               Usha
      4.  Gujarat                                             Reliance
      5.  Haryana                                            HFCL
      6.  Himachal Pradesh                                No bidder
      7.  Jammu & Kashmir                               No bidder
      8.  Karnataka                                          Hughes-Ispat
      9.  Kerala                                              No bidder
      10. Madhya Pradesh                                 No bidder
      11. Maharashtra                                      Hughes-Ispat
      12. North East States                                No bidder
      13. Orissa                                              HFCL
      14. Punjab                                             Essar
      15. Rajasthan                                         Telelink-Shyam
      16. Tamil Nadu                                       RPG
      17. Uttar Pradesh (E)                                No bidder
      18. Uttar Pradesh (W)                               HFCL
      19. West Bengal                                      No bidder
      20. Andaman & Nicobar                            No bidder
     Indeed, the table reveals that out of a total of twenty basic service
"circles," eleven are characterized by the emergence of a duopolistic
structure[5], with a single private operator competing against the DOT, while
the remaining nine less lucrative "circles", having failed to attract private
players, effectively remain monopolies with the DOT being the sole service
provider in these areas ("Basic services update," 1996). In other words, India's
basic services sector is thus defined by two types of marketplace conditions,
neither of which approximate those of full scale competition.
Domestic and International Long-distance services:
    A sector that has essentially remained unaffected by the new
telecommunications policy has been that of long-distance services, both domestic
and international. Indeed, even though the policy calls for a removal of
barriers that impede entry into this area and the opening these services to
multiple players, these services continue to be tightly held state monopolies.
Controlled by the government through the Department of Telecommunications and
the Videsh Sanchar Nigam Limited (VSNL), a public sector organization, which
provide domestic and international long-distance services respectively, this
segment of has not seen any private investment due to the state's failure to
initiate bidding procedures (Nicoll,1996). Moreover, the government has
indicated that it is unlikely that bids for these services will be invited until
the year 2000 (DoT Annual Report, 1995). And as a result, despite the
articulation of a liberal policy, the absence of competition that currently
characterizes this segment is likely to prevail atleast in the near future.
Mobile Communication Services: Cellular Telephony and Radio Paging:
 Unlike other areas of the telecommunications sector which are characterized by
the presence of the government or the public sector in one form or another,
under the new policy regime mobile communication services have been defined as
the exclusive preserve of  private players (National Telecommunications Policy
Statement, 1994). In fact, the government has stated that though it had
initially considered establishing its own mobile network, it has now decided
that cellular telephony and radio paging can be most efficiently developed if
they are provided on competitive basis by multiple firms operating freely within
the sector. And in order to facilitate this process, two years ago the
government invited bids from the private sector to install, operate and maintain
cellular and paging networks in both urban areas as well in rural areas where
wire and satellite links are either unfeasible or expensive (DoT Annual Report,
   However, despite this "opening" of the mobile communication segment to
multiple operators, the emergence of purely competitive provisioning has
remained elusive. For example, in the case of radio paging, while a large number
of companies have established paging networks throughout the country and several
more are in the process of doing so, there are important variations in the types
of services that they offer and in each category of services it is a small
number of firms that dominate. In the case of standard one-way paging it is
companies such as Microwave Communications, Hutchison Max, DSS Paging Services,
RPG Paging Services and Modi Telecommunications that control the market,
particularly in the metropolitan areas as (Paging update, 1996). On the other
hand two way paging services that enable remote tracking of vehicles and people
and are typically used by large businesses are mostly provided by Motorola, an
Israeli-American venture called Nexus Telecommunications Systems, MobileComm
which is a subsidiary of Bell South and the locally based Eider
Telecommunications (personal communication, P. Purkayastha, 1996). Thus, the
pattern of competition that has developed in this area is essentially
monopolistic in nature.
   In the area of cellular telephony, the situation is however significantly
less competitive. Indeed, in this case, as Table 2 indicates, a duopolistic
structure seems to have emerged with no more than two licensed firms competing
within the same geographic unit or "circle," (Barman, 1995). Moreover, as Table
2 also indicates, some less lucrative circles have only attracted a single
operator and in these areas a monopolistic condition appears to prevail, while
yet others have failed to elicit any bidders at all (Cellular services update,
1996). Thus despite liberalization, purely competitive conditions clearly do not
seem to have emerged within the sector of mobile communications.
                                                      Table 2
Value-Added Services:
    The segment of value-added services, like mobile communication, has been
left completely open to a multiplicity of private players under the terms of the
new liberalization oriented telecom policy. In fact, under the new policy, the
government has not only issued licenses, on a "non-exclusive basis" to a large
number of firms providing services such as voice-mail, electronic mail, video
and audio text services, data transmission as well as video-conferencing
services, but the license fees charged have also been significantly lower than
those in the case of cellular and basic service licenses (Telecom Working Group
Report, 1995). Moreover, the start up costs for such services have also been
kept comparatively low
due to governmental efforts to provide low-cost infrastructure to the providers
of value-added services, typically in the form of reasonably priced leased lines
and equipment. Motivated chiefly by the Indian government's urgent need to
expand the country's business communications network which is deemed critical to
economic success in the global arena, these efforts have thus meant that the
provision of value-added services can be undertaken without incurring large
capital expenditures.[6]  And coupled with the licensing policy, they have made
entry and exit within this segment extremely easy. Consequently, there has been
an exponential growth in the number or firms offering value-added services--
making this segment the only one within India's telecom system, where
liberalization has actually engendered the creation of perfectly competitive
                               Dynamics Underlying the Trajectory of Telecom
      From this delineation of recent developments within the various segments
that comprise  the Indian
telecommunications system, it is evident that despite the introduction of a new
policy of liberalization, the Indian telecom system has not witnessed the growth
of a truly competitive environment. Indeed, aside from the area represented by
value-added services, which manifests the presence of "multiple sellers offering
similar goods and services and operating freely within the market," that
characterize competition, other segments are characterized by far more limited
types of competition. This situation which is clearly contrary to theoretical
expectations, has been produced by a combination of dynamics, both of which
serve to constrain the development of competitive forces.
The Economic Dynamic:
   The first of these dynamics which is economic in nature, is the character of
the Indian market, particularly its highly skewed and uneven demand patterns
which affect either the willingness or the ability of multiple firms to enter
it, and in doing so restrict the development of competition within it. Affecting
both the service and the equipment segments of the telecom sector, these uneven
demand patterns are manifest at different levels. One such level in the Indian
context is that of geographic locale. Indeed, despite the widespread perception
that as the world's sixth largest economy in terms of purchasing power[7], India
collectively constitutes a vast and expanding market for telecom services, in
reality, effective demand within the country is overwhelmingly concentrated
within its urban-industrial areas that not only account for over 70 percent of
its total economic output but generate more than 80 percent of the total
telephone traffic and revenues (Report of Telecom Working Group, 1995). As a
result there exist considerable variations in effective demand between
predominatly urban areas and those of a more rural nature-- a fact, that has
been clearly acknowledged in the government's classification of circles as being
A, B or C category, and its fixing of license fees according to market size (DoT
Annual Report, 1995).
   Such variations seriously constrain the development of competition within
telecom services, because firms are unwilling to invest in unprofitable areas,
and instead prefer to enter only those areas where a substantial degree of
effective demand exists and where revenue generation is consequently more
certain.[8] This is amply illustrated in the case of both basic and cellular
services. Here, we find that while category A circles represented by states such
as Andhra Pradesh, Delhi, Gujarat, Karnataka, Maharashtra and Tamil Nadu have
received bids for the provision of both cellular and basic services from at
least one private firm, (in itself an unsatisfactory situation from the point of
view of competition)- many category B and C circles have been unable to do even
that. For example, type B circles such as those of Madhya Pradesh, Kerala, East
Uttar Pradesh and West Bengal and type C circles such as those of Assam, Andaman
and Nicobar Islands have failed to attract any investors despite three separate
attempts by the government to invite
tenders (Barman & Singh, 1996). Similarly, with regard to cellular services,
many of these B and C category areas have either attracted no bidders at all as
in Jammu and Kashmir and Andaman and Nicobar Islands or have elicited bids from
only one firm as in Assam and West Bengal ("DoT to," 1996).
    In other words, there are thus numerous areas in India which have failed to
attract multiple sellers for the provision of either basic or cellular services
and in some cases both. And while this absence of competition would be
problematic in almost any context, in the case of a country like India where per
capita telephone penetration is extremely low, the implications are even more
serious. Indeed, these emergent developments mean that firstly, the expansion of
the telecom network on a scale that would ensure the provision of telephone on
demand by 1997 in the urban areas and public telephones in 600,000 unconnected
villages, (as envisaged by the new telecommunications policy), is unlikely to
occur at the desired pace. And secondly, and perhaps more importantly, consumers
(including those in the cities) in the B and C type circles will either not have
access to certain types of services or will have to rely on a single, monopoly
operator over whose prices and quality of service they have little control.
    While the development of competition within telecommunication services has
been inhibited by uneveness in effective demand at the regional level, the
emergence of a competitive regime within the equipment sector has also been
limited by uneveness in demand patterns. In this context, the basic problem is
the concentration of demand among a few large buyers within the Indian market,
whose considerable control over operating conditions often makes it difficult
for many interested firms to enter the market. This is clearly demonstrated in
the case of customer premise and large switching equipment where the tendering,
pricing and payment procedures followed by the major buyers, namely the
Department of Telecommunications and MTNL, the service operator for Delhi and
Bombay, have made it all but impossible for small or medium sized firms to
compete in this segment ("Equipment manufacturers," 1996). This is because the
long turn-around time involved in the order placing and payment making
operations of of these government controlled organizations requires suppliers to
be able to hold high inventories as well as have considerable working
capital--and since small to medium firms rarely possess these attributes, this
area has become the oligopolistic preserve of a few large firms. Similarly, in
the mobile communication segment, the operating conditions engendered by the
cellular and paging operators, particularly their insistence that equipment
conform to certain highly sophisticated technical standards has meant that the
market is dominated by only a handful of large firms who have the capability to
produce such equipment (" Market Reports", 1996).
The Political Dynamic:
    While economic variables thus play a critical role in limiting market entry
by multiple sellers and in doing so affect the emergence of competition, they
are not the only variables to affect the process. Indeed, in the Indian context,
the development of pure competition within the telecom sector has been
simultaneously inhibited by a political dynamic. This dynamic has been the
Indian government's deeply contradictory stance towards liberalization which has
frequently led it to take decisions that militate against the development of
competitive forces. This contradictory stance has largely been produced by the
country's system of competitive elections which constrains political incumbents
to accomodate the view points of diverse groups including those opposing their
policies, for electoral reasons. In this case, the specific groups sought to be
accomodated by the government include the rank and file of the ruling Congress
party, the left-wing opposition parties and most importantly the bureaucrats and
unionized labor of the DoT.
   Underlying the accomodation of these groups, who oppose telecom
liberalization for reasons ranging from ideology in the case of the left
parties, to pragmatism in the case of the Congress rank and file who fear an
electoral backlash from highly organized public sector workforce and fear of
retrenchment in the case of DoT employees, is the fact that they are critical to
the government's political stability and therefore
cannot be disregarded in the policy process. For instance, the Congress rank and
file constitutes the basis
of the party's grass roots organization where the majority of the Indian
electorate is concentrated and is central to all electioneering efforts.
Similarly the left wing parties comprise a potential legislative ally against
the rising BJP a Hindu nationalist party, while public sector workers represent
a vote bank of considerable dimensions. And it is in balancing these groups
which thus constitute a powerful source of pressure, that the government's
position towards liberalization has become conflicted, leading it to take
actions and decisions that restrict the emergence of a purely competitive regime
within the telecom sector.
   Among such decisions for example, is the one taken by the government to delay
the opening of India's national and international long distance services to
private operators at least until the year 2006. Taken under pressure from the
DoT bureaucracy which fears that the opening of this lucrative and high growth
segment will result in the loss of high end corporate users to more efficient
and technologically sophisticated private networks, this decision entails a
continuation of monopolistic state control at least for the time being  within a
large and important segment of the telecom sector and thus clearly limits the
development of competitive forces within it (Nadkarni, 1995).
    Another problematic governmental action from the point of view of
encouraging competition, has been the criteria that it has utilized for the
granting of basic and cellular service licenses--namely the size of the licence
levy. Thus, while initial policy documents revealed few stipulations regarding
the granting of entry to private operators, in a subsequent decision the
government has identified licence fees as the principal yardstick by which bids
by such operators are to be evaluated. In addition, it also pegged reserve
price, (or the least acceptable levy for a given circle), on which bidding is
based at extremely high levels (D.K. Sanghal, personal communication, 1996).
Consequently thus, it is only firms that are willing to pay the highest levies
that are likely to obtain the right to provide services, with the licence in
fact being awarded to the highest bidder and to any other bidders who are
willing to match the highest bid (DoT Annual Report, 1995).
   Therefore, in order to bid successfully, firms not only have to possess
considerable financial resources, but more importantly, have to be prepared to
accept extremely heavy upfront costs due to licence fees alone. This imposition
of licence levies which amount to as much as $21 billion in the case of basic
services as a whole and $150 million per city in the case of cellular services,
have had serious implications for the emergence of competition within these
crucial segments of the telecom sector (Nicoll, 1996). In part, this is due to
the fact that under the present conditions the only firms that can enter the
market are those that either have access to huge internal funds or at any rate
have the ability to raise them in the capital market. And as a result, the
market is effectively restricted to the largest players.
Indeed, this is clearly illustrated in the case of both basic and cellular
services where successful bidders are large multinational conglomerates
operating in collaboration with local companies. For example, in the case of
basic services, the successful bids are those by HFCL, which is a combine of
India's Himachal Futuristic Communications, withIsrael's Bezeq Communications
and Thailand's giant Shinwatra Company, India's Tata Company and Bell-Canada,
Essar and Bell-Atlantic, Reliance and the US based Nynex, as well as the local
RPG group withNTT of Japan. Similarly, in the case of cellular services, the
winning bids include those of local companies with international corporations,
such as BPL with US-West, Reliance with Nynex and Birla with AT&T ("Market
Reports," 1996).
  Moreover, in the long term the imposition of high licence levies may continue
to further hinder the development of competition because after making these huge
outlays, it is not clear whether multiple sellers will in fact be able to
survive within the uncertain Indian market. For instance, in the case of basic
services it is entirely possible that as a result of the huge costs involved
many private operators will find themselves unable to price their services
attractively and thus establish broad based competition to the DoT. And
similarly, in the context of cellular services it is also possible that many
firms, particularly those that have already overextended themselves in matching
the levy bids of larger players may find it difficult to operate. Hence, rather
than fostering the opening of the service sector to the greatest number of
players, by its decision regarding licence fees, the government would instead
seem to have limited the growth of competition not only at present but even with
regard to the future.
   Yet another decision that negatively impacts the growth of competitive forces
is the recent imposition
of limits or "caps" as they are termed, on the number of geographic circles
within which operators can undertake the provision of services. Introduced
rather unexpectedly, this decision which stipulates that licences will be
granted to firms for a maximum of four circles in the case of cellular services,
and three circles in the case of basic services, has been justified on the
grounds that it provides a way to prevent the development of monopolistic
conditions within the telecom sector. ( Clarifications to Tender Evaluation
Committee Report, 1995).  However, in reality, capping does not seem to be
conducive to the emergence of competition. This is because by preventing
operators from entering any  more than three areas, this measure in effect
restricts the emergence of multiple operators who are crucial to the development
of competitive pressures within the telecom services market. Indeed, this is
evident in the case of basic services in India, where capping restrictions have
contributed to a reduction in the number of players, with the result that there
are few operators even in the most profitable A category circles.
   However,  the most recent governmental action to undermine competition is the
Interconnect Agreement released by the DoT. This document which outlines the
terms under which private operators are to function, firstly requires all
operators, whether cellular or basic, to interface with the DoT network
every time they go out of the circle for which they are licensed. In other
words, every time a call is placed outside a  given "circle," the operator has
no option but to route it through the expensive DoT network, even if it has a
licence in a contiguous " circle". Secondly, the agreement prevents
 private operators from offering any multi-media services and finally it
obligates operators to share their roll-out and network expansion plans with DoT
atleast 18 months in advance (Interconnect Agreement, 1996). These varied
provisions serve to inhibit the development of a competitve regime in one way or
another. For instance, the clauses barring the provision of multi-media services
make survival difficult for firms counting on revenues from such services to
make their basic or cellular service projects economically viable. Similarly,
other measures such as those entailing the use of the DoT network and the
sharing of information with this government department (which is also a
competitor), impose both real and opportunity costs that make market entry
unfeasible for all but the most financially well endowed firms, thereby reducing
the number of operators within the market.
                       Liberalization and Competition: Re-examining Linkages
   From this exposition, it is thus evident that motivated by a deeply
contradictory attitude towards telecom
liberalization, the Indian government has taken several decisions that counter
the development of competition. And the operation of this political dynamic,
coupled with that of an economic variable which has a similar impact, has led to
the emergence of a telecom regime that is not purely competitive, despite the
introduction a policy of liberalization. In other words, this study finds
contrary to assertions made by theorists (Duch, 1991; Nicolaides, 1989) within
the Indian telecommunications sector atleast, liberalization seems to have
failed to engender the creation of full scale or pure competition. In other
words, it thus reveals the existence of a considerable disjuncture between
policy intent and policy outcomes. And in doing so it firstly brings into
question the specific assumptions that are made between the introduction of
liberalizing policy measures and the emergence of competition and raises the
issue of whether
additional pro-competitive regulation is required in order to create a truly
competitive environment
(Vickers & Yarrow, 1988). Further, and perhaps more importantly, it also brings
into question more general assumptions that are made regarding the existence of
causal linkages between the adoption of specific policy prescriptions and the
actual fulfillment of particular policy objectives and instead underscores the
need to re-examine the relationship between them--so that the connections
between the two are not viewed as necessary and automatic but contextual and
Barman, A. (1995, December 12). Telecom licences: Crossed wires. Economic Times,
p 6.
Barman, A. & Singh, H. (1996, November 15). Reserve prices for telecom rebids by
week end. Economic Times, p. 9.
Basic services update. (1996, May-June). Communications Today. Special issue on
state of Indian telecommunications, pp. 25-33.
Baughcum, A. (1986). Deregulation, divestiture and competition in U.S.
telecommunications: Lessons for other countries. In M.S. Snow (ed.), Marketplace
for communications. New York: Longman.
Bolter, W., McConnaughey, J.W., & Kelsey, F. J. (1990). Telecommunications
policy for the 1990s and beyond. New York: M.E. Sharpe, Inc.
Cellular Update. (1996, May-June 1996). Communications Today. Special issue on
state of Indian telecommunications, pp. 40-45.
DoT to invite bids for next round. (1996, August 3). Times of India, p1.
Duch, R. (1991). Privatizing the economy: Telecommunications policy in
comparative perspective. Ann Arbor, MI: University of Michigan Press.
Equipment manufacturers in India: Surveying the players.  (1996, June 15).
Economic Times, p.6.
Gayle, D.J. & Goodrich, J.N. (1990). Introduction. In D.J. Gayle & J. N.
Goodrich (eds.), Privatization and deregulation in global perspective. New York:
Quorum Books.
Headrick, D. R. (1988). The tentacles of progress: Technology transfer in the
age of imperialism 1880-1940. New York: Oxford University Press.
India's huge potential market. (1996, January 20). India Today, pp. 35-36.
Market Reports. (1995, November 6). Business Times, p 7.
Market Reports. (1996, October 4). Business Times, p.5.
Mody. B. (1995). Telecommunications privatization in the periphery: Adjusting
the private-public balance in India. International Review of Comparative Public
Policy, 5.
Nadkarni, S. (1995, December 19). India in telecoms tangle. Economic Times, p 4.
Nandy, A. (1989). The political culture of the Indian state. Daedalus 118(4),
pp. 1-26.
Nicoll, A. (1996, November, 19). Mixed signals on competition. Financial Times,
Paging update. (1996, May-June). Communications Today. Special issue on state of
Indian telecommunications, pp. 35-39.
Petrazzini, B. A. (1995). The political economy of telecommunications reform in
developing countries. Westport, CT: Praeger.
Purkayastha, P. (1996, February 17). Induction of private sector in basic
telecom services. Economic and Political Weekly, pp. 413-419.
Snow, M.S. (1986). Introduction. In M.S. Snow (ed.). Marketplace for
communications. New Yrok: Longman.
Straubhaar. J.D. (1995). From PTTs to privatization: Liberalization and
privatization in Eastern Europe and the Third World. In B. Mody, J.M. Bauer &
J.D. Straubhaar (eds.), Telecommunications politics: Ownership and control of
the information highway in developing countries. Mahweh, NJ: Lawrence Erlbaum.
Tandon, P. (1993, March). The challenge of the 21st century. Seminar, pp. 22-25.
Vickers, J., & Yarrow, G. (1986). Privatization: An Economic Analysis.
Vittal, N. (1993, March). India's telecommunications: The case for change.
Seminar, pp.34-36.
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Clarifications to Tender Evaluation Committee Report, 1995.
DoT Annual Report 1995. Department of Telecommunications, New Delhi, India.
DoT Annual Report, 1996. Department of Telecommunications, New Delhi, India.
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Delhi, India.
Interconnect Agreement. Department of Telecommunications, New Delhi, India.
New Telecommunications Policy Statement, 1994. Department of Telecommunications,
New Delhi, India.
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                 Does Liberalization Lead to the Growth of Competition:
                      Analyzing the Case of Indian Telecommunications
 The first of these dynamics, which is economic, is the nature of the Indian
market, particularly its highly skewed demand patterns which not only affect its
ability to attract multiple players but in doing so, restrict the development of
competition within it. Affecting both the service and the equipment segments of
the telecom sector, these skewed demand patterns are manifest at different
levels in the Indian context. One such level is geographic. Indeed, despite the
popular perception that India with its 250 million strong middle class and a
steady annual GNP growth of 5.4 percent, constitutes a vast and expanding market
for telecommunications services, in reality, the country is characterized by
considerable regional variations in demand. And although this situation is not
unprecedented given that few countries have a uniform blend of residential and
business users distributed evenly across their territories, in India the
variations are so significant that the government has had to classify the twenty
telecom circles into which the country is divided, as A, B or C type on the
basis of existing demand and revenue earning potential.
 ability to attract multiple players and in doing so, restrict the
as a whole constitutes
a vast and expanding market, in reality, demand in the country
is characterized by very significant regional variations. In fact,
this has been recognized by the government which has classified
the twenty one
Thus under the present plan,
the telecom policy process in India has been influenced  by powerful local
factors which by design or default militate
against the introduction of competition, and
implementation of this policy has been mediated by various local factors that by
default or design militate against the
introduction of competition and
 local factors which by design or default militate
against the introduction of competition, have influenced the
 policy process in India and have
 and have
And in order to propel these reforms
governments have typically relied on
And it
undertakes this task empirically by analyzing the recent
introduction of liberalization into India's telecommunications sector.
Thus under the present plan,
the telecom policy process in India has been influenced  by powerful local
factors which by design or default militate
against the introduction of competition, and
implementation of this policy has been mediated by various local factors that by
default or design militate against the
introduction of competition and
 local factors which by design or default militate
against the introduction of competition, have influenced the
 policy process in India and have
 and have
And in order to propel these reforms
governments have typically relied on
And it
undertakes this task empirically by analyzing the recent
introduction of liberalization into India's telecommunications sector.
                       Does Liberalization Lead to the Creation of Competition:
                           Analyzing The Case of Indian Telecommunications
                                             Kalyani Chadha
Thus under the present plan,
implementation of this policy has been mediated by various local factors that by
default or design militate against the
introduction of competition and
 local factors which by design or default militate
against the introduction of competition, have influenced the
 policy process in India and have
 and have
Thus under the present plan,
the telecom policy process in India has been influenced  by powerful local
factors which by design or default militate
against the introduction of competition, and
implementation of this policy has been mediated by various local factors that by
default or design militate against the
introduction of competition and
 local factors which by design or default militate
against the introduction of competition, have influenced the
 policy process in India and have
 and have
And in order to propel these reforms
governments have typically relied on
And it
undertakes this task empirically by analyzing the recent
introduction of liberalization into India's telecommunications sector.
Thus under the present plan,
the telecom policy process in India has been influenced  by powerful local
factors which by design or default militate
against the introduction of competition, and
implementation of this policy has been mediated by various local factors that by
default or design militate against the
introduction of competition and
 local factors which by design or default militate
against the introduction of competition, have influenced the
 policy process in India and have
 and have
And in order to propel these reforms
governments have typically relied on
And it
undertakes this task empirically by analyzing the recent
introduction of liberalization into India's telecommunications sector.
Dear Ms. Pohoryles,
 Rachel Davis was a student in your class JOUR 330 in Spring 1996 but there is
no grade posted for this course within the system and the Records Office is
unable to locate the original grades.
the telecom policy process in India has been influenced  by powerful local
factors which by design or default militate
against the introduction of competition, and
implementation of this policy has been mediated by various local factors that by
default or design militate against the
introduction of competition and
 local factors which by design or default militate
against the introduction of competition, have influenced the
 policy process in India and have
 and have
And in order to propel these reforms
governments have typically relied on
And it
undertakes this task empirically by analyzing the recent
introduction of liberalization into India's telecommunications sector.
      The term telecommunications here refers specifically to basic and
long-distance telephone services,                    mobile communication such
as cellular and paging services and value added services such as e-mail or
voice mail services. The term does not include broadcast or multimedia sectors
which are legally separated          from telecom services in India.
[2]       The definitions of the different forms of market-place conditions are
based on those
        articulated in Gomery (1988; 1993) and Scherer & Ross (1990).
      The term customer premise equipment refers to telephone hand sets,
facsimile machines and private
       automatic branch exchanges or PBXs.
      Switching equipment establishes links between users of the network.
      While it can be argued that a number of firms operate in the basic and
cellular services sector as a             whole, firms can only provide services
in the geographic circle for which they are licenced and since
      there are no more than two operators competing in any circle, the emergent
structure is more                    appropriately categorized as duopolistic.
      This is in sharp contrast to the case of telephony, where basic and
cellular service operators have had         to undertake considerable initial
expenditure by either establishing an independent network or using
the existing DoT network at great expense.
      The economy has been characterized as the sixth largest in terms of
purchasing power                 because about 20 percent of its total
population of 880 million have an annual income of
       over $1000.
       The term effective demand refers to demand that is backed by the ability
and has been used here to            characterize the nature of demand that
exists in urban, industrial areas as opposed to
        rural areas in the Indian context, where demand exists but little
ability to pay.

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