Cell Phone Nation: How Mobile Phones Have Revolutionized Business, Politics and Ordinary Life in India (11 page)

In the midst of its financial crisis and the need for World Bank and IMF support, the Narasimha Rao government began to open the economy to private interests and even foreign investment. It called for bids from private companies to provide mobile phone services—but not landline services—in the four big cities, Mumbai, Delhi, Kolkata and Chennai (or Bombay, Delhi, Calcutta and Madras, as they then were). Two companies were to be licensed in each city; they were required to have a foreign minority partner with telecom experience; and bids were to be evaluated largely on the basis of the share of revenue the company undertook to pass on to the government.
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According to one account, the telecom ministry’s officials, fighting a public-sector rearguard, ‘regarded mobile telephone service as a value-added’ that would simply route more business through their monopoly landlines.
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In any case, this first attempt to bring competition into telephony got bogged down in the courts when unsuccessful bidders challenged the bidding process; licences were issued for these limited big-city services only at the end of 1994.
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In May 1994, when India still
had fewer than 9 million phones and the courts were puzzling over challenges resulting from the first changes in telecom policy, the government issued a National Telecom Policy (NTP-94). Critics claimed it ‘clearly reflected the dominance’ of the government servants in the telecom ministry.
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The National Telecom Policy of 1994 emphasised the need to provide phones on demand (not after a two-year waiting period) and to put a phone in every village. But it pleaded that the cost ‘clearly … is beyond the capacity of Government funding’. Thus, almost regretfully, ‘the private sector would be needed in a big way’.
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NTP-94 allowed Indian businesses, in partnership with experienced foreign telecom companies, to bid for the right to provide services in twenty-one geographical circles largely corresponding to India’s states.
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(See
Map 2, p. xxxiv
). The new entrants were to be allowed to offer ‘basic telephone services’—landlines and other services previously provided solely by the government telephone department.

For those involved with the Athreya Committee, this was lukewarm reform. It did not break up the various functions of the Ministry of Communications. As things stood, the ministry determined policy (it laid down the rules), acted as the arbiter over policy (it interpreted and enforced the rules) and ran the telephone system (it installed telephones in homes and businesses). The Athreya Committee advocated creation of both an independent regulator and a separate corporation to take over what had been the government monopoly on the installation of phones. Such an entity, the unions feared, might be ripe to be sold off to private shareholders. The Athreya Committee also called for the opening of all telecom services to private enterprise and competition. Over the next ten years, much of this came to pass, but changes were, in Athreya’s words, ‘opposed, diluted and emasculated from within the Department of Telecommunications’.
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Once the Indian government decided
in 1994 to open some of telephone services to private-enterprise providers, it had to decide on what basis to allocate Radio Frequency spectrum—how to choose the lucky winners. Elsewhere in the world, two methods had been followed: auctions and ‘beauty contests’. In an auction, governments make known the amount of spectrum on offer and the requirements that successful bidders must fulfil. In theory, companies making the highest bids are awarded use of the spectrum for a fixed period. In a ‘beauty contest’, aspirants submit proposals explaining their capacity to meet various criteria of service and payment, and an ‘expert committee’ selects the winners.
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In 1994, the government of India, and its Communications Minister, Sukh Ram (b. 1924), decided to auction licences to private companies that would be allowed to provide some, but not all, forms of telephone service.

‘The auction process’, one analyst concluded, ‘was a mess’.
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Critics sympathetic to the old central-planning regime branded the government as cash-strapped, beholden to foreign agencies and ‘mainly interested in raising revenue by auctioning the licence rather than in expanding services’.
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They predicted—gloriously wrongly—‘in a country where people do not regard the telephone as a necessity, the expansion of the network will slow down considerably with higher tariffs’, which were likely to result from private providers having to pay government large licence fees derived from a small base of users.
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They were right about fees: high fees limited subscriber enthusiasm; but they were wrong about people’s desire to have a phone, if the price was right.

The messiness of the auction process, which began in 1995, had two dimensions. The first arose from the very high amounts that bidders pledged for licences. The Department of Communications, which was still rule-maker, rule-interpreter
and
provider of phones, put stringent conditions on what a private operator could do with the spectrum it was allocated—and what it had to pay to connect its clients to the government-controlled telephone system. The government system was still the biggest; it still owned nearly all the landlines; and it was still the only system to cover, in its own dilapidated way, the entire country.

The conditions imposed on new private operators had the ‘effect of ensuring their unviability’.
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They were permitted to charge their subscribers no more than Rs 156 a month, yet to meet their licence payments to government and build infrastructure for an effective network, they would have had to charge probably eight times as much. Moreover, if customers in the government network called a telephone in the private-operator network, the receiving party, not the caller, was charged.
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To try to cover the gap, the new companies charged the highest permissible rate for each call a subscriber made—a deterrent to users and new customers. ‘The conditions of their licence ensured that their revenue would fall short of their costs’,
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Desai asserted. People who used a cell phone in the 1990s recalled that those were the days when calls cost Rs 16 a minute, and the telephone, mobile or otherwise, was still a luxury.
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The second messy aspect
of telecommunications policy in the 1990s lay in litigation and corruption. The murky processes by which the earliest licences were issued to provide services like email and paging were challenged in the courts. The auction of 1995 produced ‘excessive and unrealistic bids’ by ‘small and inconsequential companies’.
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One such company, Himachal Futuristic Communications Ltd (HFCL), based in the state of Himachal Pradesh, submitted the highest bid in nine of the 21 circles. The Minister of Communications, Sukh Ram, happened too to be from the state of Himachal Pradesh. The company had an annual turnover of Rs 2 billion, but its winning bids entailed promises of more than Rs 8.5 billion. In effect, it had more slices of birthday cake than it was able to eat. When it was clear that its bids were beyond its capacity, instead of throwing them out as the mischievous distractions of a frivolous bidder, the communications ministry, acting in its role as referee, declared that no bidder would be allowed to hold more than three licences. It gave HFCL the privilege of choosing the three licences it most fancied—in effect, getting to keep the slices of cake with the thickest icing.
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HFCL soon sold 30 per cent of its holding to one of India’s big business groups.
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Such deals exemplified the charges levelled by liberal economists at the controlled economy of post-1947 India: ministers defended their ministries because they and their supporters profited from them. The Communications Minister, Sukh Ram remained a force in the politics of his home state of Himachal Pradesh for fifteen years after he and the Congress government lost power in 1996. He danced nimbly in and out of the Congress Party, flirted with Bharatiya Janata Party (BJP) governments and ran his own influential state party for a time. He long avoided going to prison, though the Central Bureau of Investigation (CBI) raided his houses, seized ‘disproportionate assets’ and charged him with corruption in 1996, and he was convicted and sentenced to three years imprisonment in 2002 and again in 2009.
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In January 2012, approaching 88, he was at last jailed.
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As Minister he had, it was alleged, ‘a modus vivendi with DoT [Department of Telecommunications], which earned him considerable money’.
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In 2007, he cheerily took credit for the benefits that cheap cell phones had brought the country. ‘When I took over 40 lakh [4 million] people were on the … waiting list [for a phone] with the waiting stretching from one to 10 years’. Under his guidance the wait ended and multi-national companies were invited ‘to introduce the latest technology’.
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Analysts not connected to the ministry reached different conclusions: Sukh Ram had resisted the National Telecom Policy of 1994 which was forced on him by the Prime Minister Narasimha Rao; a minister ‘would not have wished to reduce the power or influence’ of his department.
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Indeed, the department fought a delaying action that staved off the creation of an independent regulator until after the general elections of 1996. The Telecom Regulatory Authority of India (TRAI) came into being in 1997 under an act of parliament that took more than a year to pass.
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Act II: Sidelining the referee

In liberal economies, the theory
is that independent regulators are created to take the field as referees ensuring that rules are obeyed and the public interest is served when rival teams of private enterprises compete. Until 1997, the Department of Telecommunications (DoT) not only owned the ball (the wires and the phones) and wrote the rule book (e.g., the 850 pages of
Swamy’s Telephone Rules
), but blew the whistle as well (decided whether grievances had merit and action needed to be taken). The creation of TRAI was intended to take away the whistle; but the DoT still wrote the rules. And the DoT had recourse to the courts—a government department successfully challenging a government-created regulator—to get its interpretations enforced when they were at odds with the regulator’s recommendations and directives.
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Decisions of the courts in cases brought by the DoT ‘reduced the role of the regulator to that of a tariff setter’ in the words of the first TRAI chairman.
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The referee was shunted to the sidelines.

In the three years between May
1996 and May 1999, India had three general elections, five governments and six Ministers of Communications.
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At the same time, the defects of the first attempts to have private companies provide telecom services became apparent. Phones spread steadily but not spectacularly, and the government found it difficult to extract promised fees from the companies. The number of phones more than trebled in seven years—from about 5 million phones for all of India in 1991 to close to 18 million by 1998. Previously, it had taken twenty years to treble phone availability: from one million to three million between 1968 and 1987.
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Most of the expansion in the 1990s was of landline telephones, rolled out with somewhat greater urgency by the Department of Telecommunication, now feeling pressure from its private, though hobbled, competitors. The revenue from the new mobile licensees disappointed governments, and by 1998 the private telecom companies were crying poverty, near-bankruptcy and inability to pay their dues.

The new regulator, TRAI, concluded that the cries were justified. The companies had bid too high in 1995 to succeed in a game in which the deck was stacked against them. The regulator attempted to curtail some of the advantages that the DoT enjoyed. It allowed private companies to raise their monthly rental charges from Rs 156 to Rs 600, which in turn allowed them to lower the price of calls. For the first time TRAI also gave them a share of the revenue from long-distance and overseas calls which up till then had gone entirely to the DoT, even if the call originated from the phone of another company.
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Such measures, however, were not enough to make the companies profitable. According to one interpretation, their collapse was precisely what the DoT wanted. It would have ‘happily cashed the bank guarantees’ that the private companies had deposited, seen them go out of business and ‘restored its own monopolies’.
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Politically, however, now that India was on the ‘liberalization’ road, no government could afford to turn back for fear of scaring off keenly wooed foreign investment.