The Politics of Telecommunications Regulation: State–Industry Alliance Favouring Foreign Investment in India

Abstract

This paper explores the political economy of three significant policy decisions of the Congress–United Progressive Alliance government between November 2005 and February 2006. These decisions improved the regulatory incentives for the smaller and efficient firms in the Indian GSM industry, which were heavily dependent on foreign investment for their expansion. India's telecommunications sector became more attractive to foreign investors as a result of these regulatory changes. This was a notable departure from the past when government policy had favoured large domestic investors using CDMA technology who were not dependent on foreign capital. A globalisation friendly policy change occurred after a Centre-Left United Progressive Alliance coalition came to power. The paper argues that these decisions, which promoted both competition and foreign investment, occurred due to the increased sensitivity of the Department of Telecommunications towards the needs of the relatively smaller GSM service providers, driven by considerations of efficiency. They were not driven by a crisis of private investment, foreign pressure, or stealth. The shift occurred in normal times when the Department of Telecommunications under a persistent ministerial stewardship took on a regulator, which was less interested in engineering this shift. This globalisation-friendly strategy depended to a large extent on the particular industrial sub-sector that the ruling party or coalition supported for spreading telecommunications in India.

Acknowledgements

The author is grateful to Francine Frankel, T V Ramachandran, Sunila Kale and two anonymous reviewers for suggestions. The paper benefited from the assistance provided by Anjali Hans, Saurabh Puri and Indu Rayadurgam. The author thanks the Centre for the Advanced Study of India for commissioning the paper, the Jawaharlal Nehru University for research leave, and the Institute of South Asian Studies – National University of Singapore, for providing the infrastructure for this research. The errors, as usual, rest with the author.

Notes

1. The Global System for Mobile (GSM) technology competes with the Code Division Multiple Access Technology (CDMA) in various markets around the globe. GSM is the European standard whereas CDMA was developed in the US.

2. Local calls and rentals in India have been subsidised by long distance calls. The access deficit charge (ADC) is the deficit arising from below cost rentals and tariffs, which were cross-subsidised by national and international long distance calls in India.

3. India's GDP grew by 9.4 per cent in 2006–2007, which was an 18 year record, and, the GDP growth for that year was second only to China's.

4. The centre-left United Progressive Alliance (UPA) coalition led by the Congress Party and supported by Left parties such as the Communist Party of India (Marxist) came to power in May 2004. The earlier National Democratic Alliance (NDA) coalition was led by the Hindu nationalist Bharatiya Janata Party (BJP) from March 1998 to May 2004.

5. Companies like Bharti and Hutchison had found a way of increasing their net FDI to a level greater than 60 per cent even when the formal FDI limit in India was 51 per cent. For details about how this could be done, see fn. 22.

6. Discussions with Rohit Sah, Portfolio Manager – Oppenheimer Funds (New York, May 2004).

7. Interview with Nripendra Misra, Chairman, TRAI in New Delhi, 13 April 2007. Mr Misra, an officer of the Indian Administrative Service (1967 batch) was Secretary, Department of Telecommunications until March 2007.

8. Business Line (New Delhi), FDI commitments in telecom, IT at Rupees 80,000 crores (2 March 2007). Personal interviews in New Delhi with T.V. Ramachandran (Director General, Cellular Operators Association of India), 7 April 2007 and with Mr N. Basu (Communist Party of India – Marxist), 4 April 2007.

9. The USOF is another tax, which provides resources for spreading telecommunications in rural areas. The ADC tax, on the other hand, was to subsidise the below cost rentals and local calls of telecommunications service providers.

10. The COAI reported that BSNL's accumulated profit between 1991–1992 and 2001–2002 was Rupees 534.5 billion and the profit for 2001–2002 was Rupees 63 billion. This was the sign of a healthy company and not one that needed subsidy.

11. A letter from T.V. Ramachandran (Director General, Cellular Operators Association of India) to Pradeep Baijal (Chairman, TRAI), COAI Response to TRAI Consultation Paper No. 2003/1on IUC Issues (New Delhi, 6 June 2003) suggested these issues. COAI shared this letter with the author.

12. This view is based on a short memo circulated by COAI in the aftermath of the TRAI Consultation Paper of 23 June 2004: Issues Related to ADC. The COAI shared this memo with the author.

13. The arbitrage opportunity arose because the per minute ADC charge increased with distance. An operator had the incentive of reporting an international call as a local call so that it would need to pay the lower ADC due for a local call, compared with what would be due for an international long distance call. This phenomenon was a matter of concern in the TRAI Consultation Paper, 23 June 2004. An alternative revenue share approach, which would mean a tax on gross revenue, could be one way to terminate this incentive.

14. These views were expressed in a press note issued by COAI in January 2005: TRAI Announces Revised ADC Regime. I am grateful to COAI for sharing this and other documents. These views were shared in a personal interview with T.V. Ramachandran, Director General, Cellular Operators Association of India (New Delhi, 30 December 2005).

15. The COAI shared a policy note titled: Input Note on ADC Related Issues, which could be attributed to the period under discussion.

16. The TRAI has initiated the accounting separation exercise, which would help to calculate the precise access deficit charge (New Delhi, TRAI Notification, 27 March 2006).

17. In addition to the COAI's comments on the draft recommendations referenced below (COAI, 2004), the COAI also shared its responses with the TRAI's Preliminary Consultation Paper on Unified Licensing dated 15 November 2003 and the consultation paper on the same subject dated 13 March 2004. These arguments have been incorporated in the text.

18. These views are based on a letter written by T.V. Ramachandran, Director General, COAI to Dayanidhi Maran, Minister of Communications and Information Technology titled: TRAI's Final Recommendations on Unified Licensing (New Delhi, 11 February 2005). This view was supported by N. Misra in a personal interview in New Delhi in April 2007. Misra was secretary, Department of Telecommunications at the time when the FDI limit was hiked.

19. In February 2005, news reports suggest that Finance Minister Chidambaram worked closely with other Ministries and the Left Parties to get the Cabinet to approve an increase in FDI limit from 49 to 74 per cent (Financial Times Information, 3 February 2005a).

20. Although the Tata position at this time is not well known, Ratan Tata as head of the Tata Group of Industries has voiced concern that the Press Note, 3 November 2005 needed all telecommunications companies to have Indian CEOs after the FDI limit was raised to 74 per cent.

21. Proportionate foreign investment in Indian promoters and investment companies was a unique way of raising FDI beyond the 51 per cent level. To give one example, if an Indian telecommunications company could raise 49 per cent FDI from foreign sources, then it could raise the remaining 51 per cent from other companies with 49 per cent FDI. In this way, the FDI in companies like Bharti and Hutch had crossed the 51 per cent limit. After the Press Note, this proportionate foreign investment in Indian companies would be counted as FDI rather than domestic investment.

22. This view was confirmed in separate interviews in New Delhi in April 2007 with T.V. Ramachandran (Director General, COAI) and with N. Misra (Chairman, TRAI).