Telecom Sector Regulation in India

An Institutional Perspective

Maruthi P. Tangirala

• Publisher: Routledge India
• Year: 2019
• ISBN:
  9780429534386
• Edition: 1
• Topic: Política y relaciones internacionales
• Subtopic: Política de comunicación pública

This book traces important legal and regulatory developments in the first two decades since the Telecom Regulatory Authority of India (TRAI) was established, along with its political and economic aspects. It narrates the story of the institutional progress of TRAI and its influence on the growth of India's telecom sector.

The telecom revolution was a game changer in post-liberalization India, a country today home to the second largest subscriber base in the world– more people have access to mobile phones than toilets. Its rapid, relentless growth has created new possibilities and challenges, including a robust regulatory policy. This book, the first comprehensive survey of TRAI's progress, examines the salient developments in regulation of the Indian telecom sector. It analyses, at the macro-institutional level, the norms and rules reconstituted over time; at the institutional level, the impact of important court judgments, relevant telecom case law (including the 2G judgment and Adjusted Gross Revenue-related cases), and the 'judicialization' of regulatory governance; and, at the micro-institutional level, the mechanisms of governance of TRAI and the way its functioning has affected the alignment of incentives in the regulatory space. It provides an overview of the regulatory framework and the context in which the telecom sector was deregulated, the structure of internal governance, and issues in telecom licensing and spectrum allotment.

The book combines academic rigour and empirical research with a practitioner's perspective of the unfolding events. It will interest students and researchers of economics, law, public policy, communications technology, and ICT policy and regulation, as well as telecom sector professionals, service providers, academic experts, policymakers, and think tanks.

Part I

Overview

1
Introduction

1.1 Background

The passage of about two decades, marked by rapid change in the business landscape and in administrative arrangements in the Indian telecommunications services sector, offers an opportunity to study significant aspects of the telecom sector’s regulatory governance¹ from an institutional perspective. Apart from such an in-period assessment, the way telecom regulation has evolved and become structured in India also encourages the reflexive aspiration to examine some foundational assumptions constituting the governance of the sector. The present book is thus shaped not merely by the efflux of time but more crucially by fundamental constitutional questions concerning regulation and governance in the telecom sector.

Deregulation of the telecom sector

The World Trade Organization (WTO)’s Basic Agreement on Telecommunications in 1997 is recognized as the “definitive moment” in the transition of the telecom sector to a competitive marketplace (Walden and Angel 2007: 4).² The conclusion of extended negotiations in WTO that began in May 1994 and ended in February 1997 resulted in commitments to liberalize the telecom sector by a large number of countries, and the markets represented by the commitments accounted for more than 91 per cent of global telecom revenues (Tuthill and Sherman 2008). The propensity to commit at the conclusion of the negotiations was seen as evidence of the crumbling of conventional wisdom about the natural monopoly features of telecom infrastructure and the new role of telecom regulation as managing the transition from monopoly to market over a long-term time horizon (Tuthill 1997), which was reflected in a set of principles covering topics such as competition safeguards, interconnection guarantees, transparent licensing processes, and the independence of national regulators (Tuthill and Sherman 2008). Almost in parallel and as if in preparation, the Indian attempts at moving away from monopoly production and provision of telecommunications services began in the early 1990s, were tentatively articulated in the National Telecom Policy 1994 (NTP 1994),³ attained critical mass with the enactment of the Telecom Regulatory Authority of India (TRAI) Act in 1997, and culminated in the formulation of the New Telecom Policy 1999 (NTP 1999), which managed to serve the prevailing policy consensus until executive overreach occasioned by inherent institutional imbalances led to a course correction.⁴ Early moves to redraw the Indian telecom regulatory landscape also paralleled recognition – at the level of other international forums, such as the International Telecommunications Union (ITU) – of the changing nature of the telecom environment, where the private sector was coming to be seen as playing the lead role. Also recognized was a corresponding need to enhance the ITU’s character as a partnership between the public and private sectors, making it the fundamental strategic premise of that organization (Codding 1995).

The nature of technology in telecom markets around the world altering the focus of telecom regulation is recognized in the literature (Tuthill 1997; Renda 2012). The transition from a market dominated by delivery of service through landline telephones to one where handheld wireless devices have become phones of first choice has coincided with the rise of the new regulatory architecture in India, with the architecture itself being shaped by the perceived requirement to attract private capital to both widen and deepen service coverage. Indian telecom sector regulation has evolved along its own unique ‘hybrid’ trajectory that simultaneously adapted elements from different regulatory theories and models, at times optimally and at other times sub-optimally. The story of this transition is punctuated by struggles over policy, much litigation, and a generous amount of self-congratulation among policy actors and other stakeholders about the correctness of policy strategies and the achievement of policy ‘targets’. The institutional interplay between the political and economic subsystems on the one hand and the telecom regulatory-administrative domain on the other – and the patterns that emerge from that interplay – is the focus of this book.

It bears noting that telecommunications services are characterized by features that tend to uniquely affect their regulation. The telecom services sector was seen throughout its history as a natural monopoly; in the early days of the development of telecom, most governments around the world viewed the newly emerging telecom services “primarily as government social services, not services to be supplied by private businesses in normal markets” (Melody 1997a: 11). Voice telecom (along with electricity) has been considered an industry closely bound up with the nation-state, and “the rise of big business, the welfare state, the mixed economy, and the affluent society of the post-war era are all mirrored in [its] development, consolidation, and governance” (Levi-Faur 1999: 176). Telephone services have been seen as public utility services that are required to deal reasonably with the public.

Telecom shares three important characteristics with other utility services: (1) economies of scale and scope, (2) asset specificity and non-redeployability (sunk costs), and (3) “a broad range of domestic users, usually overlapping the voting population of the country” (Levy and Spiller 1994: 203). It has traditionally been regarded as “a relatively straightforward public utility”, where “economies of scale, political and military sensitivities, and large externalities made telecommunications a typical public service believed to be a natural monopoly” (Wellenius and Stern 1994: 2). Public utility regulators “have a variety of different tasks which cannot be reduced to any single logic, economic or otherwise” (Prosser 1999: 199), but the importance of economic analysis is evident even within a broadly pluralist conception of telecom regulation. Telecom is suitable for application of the four principal components of economic regulation that in combination distinguish public utility from other sectors of the economy: “control of entry, price fixing, prescription of quality and conditions of service, and the imposition of an obligation to serve all applicants under reasonable conditions” (Kahn 1970: 3). The purely engineering orientation of telecom service provision came to be transformed as realization dawned in the 1960s and 1970s that the service could be harnessed as a powerful tool of economic and social development, given the rise of information “as a fundamental factor of production, alongside capital and labor” (ibid). The ITU’s Maitland Report, for instance, recognized that the existence of “an efficient telecommunications system confers direct and indirect benefits which entitle it to be regarded as a public good” (ITU 1984: 8). Walden and Angel list the important economic features of the telecom industry: (1) its multi-product nature; (2) the non-storability of its services; (3) stochastic (random) time-varying demands; (4) capacity constraints and sunk costs; (5) the existence of externalities between users; (6) natural monopoly elements; and (7) the complex vertical structure of the industry. The first five influence tariff-setting procedures, the last three constitute market failures, and the very last feature has implications for “the ease with which regulation is carried out” (2007: 31).

Developments in the Indian policy regime

The growth of the telecommunications services sector in India in the past two decades is considered an unprecedented success story. Although India adopted second generation digital technology fairly late, it has the second largest subscriber base in the world today (Sridhar and Prasad 2011) and almost one billion of the estimated world total of eight billion telephone subscriptions (TRAI 2015b). The primary policy objective of the early years (NTP 1994, 1999) of expanding telecommunications access has been fulfilled to a large extent in the sector, which has seen a transformation from government monopoly to competitive service provision and private sector ascendancy. The relevance of telephony growth to overall economic growth in developed and developing countries has been well documented (A. Hardy 1980; Saunders et al. 1983; Cronin et al. 1991; Röller and Waverman 2001; Sridhar and Sridhar 2004; Waverman et al. 2005; Chakraborty and Nandi 2011), as has the impact of the political economy and the institutional environment on the pace, sequence, and scope of telecommunication restructurings (J. P. Singh 1998, 2000), and considerable satisfaction has been expressed for the manner in which India has been able to accelerate telephony growth (Kathuria et al. 2009). The development impact of mobile telephony in India has also been documented and commented upon (Tangirala 2009). However, the Indian telecom sector has also witnessed considerable controversy and policy anxiety from time to time in the post- liberalization phase since the early 1990s. The formulation of NTP 1999 within five years of NTP 1994 is an example, as is the sudden switch to NTP 2012 in the wake of the adverse judicial attention the telecom sector received around the time the policy was conceived.⁵

Thus, the policy and regulatory regime for the sector has undergone significant changes in the past two decades. It is not often acknowledged that India was pushing for telecom reforms – albeit “halting and nepotistic” (J. P. Singh 1998: 55) – as early as the mid-1980s, when such reform initiatives were rare in the developing world (Petrazzini 1996). However, there was little progress, and the regime’s essential features remained the same well into the mid-1990s. The government was the monopoly provider of most telecom services and also played the role of policymaker and regulator in the earlier era. The enactment of the Telecom Regulatory Authority of India Act, 1997 (TRAI Act), which created TRAI as an independent regulatory authority (IRA), was a milestone. The Department of Telecommunications (DoT) continued to be the policymaker, retaining its role in licensing, spectrum provisioning, and standards setting. After some experience, several court cases, and based further on the prevailing policy vision, the TRAI Act was amended in 2000 to separate regulatory and adjudicatory functions by creating a Telecom Disputes Settlement and Appellate Tribunal (TDSAT) in addition to TRAI.⁶ TRAI has been an active regulator and policy advisor and has taken credit for the telecom ‘success story’ attributed to a three-way partnership between government, regulator, and the private sector (TRAI 2007d).

The success story has been somewhat attenuated recently with questions being raised in different forums about perceived favouritism and violation of rules in policy formulation and implementation at key moments during the past two decades. Regulatory experience in India has seen the evolution, resolution, and recalcitrance of disputes among key actors in the regulatory arena. These disputes have not been characterized by any degree of consistency of position of the disputants or by any particular clarity in the articulation of the underlying motivations. While some were amenable to legislative and executive resolution, quite a few others have had judicial denouement. It is acknowledged that the Indian judiciary has “adopted a fairly interventionist role in moulding telecom regulatory policy in India since the early 1990s” (Thiruvengadam and Joshi 2012: 2). The current and future implications of judicial intervention in telecom regulation on the relationships among the executive agencies concerned and other actors and the ‘orderly growth’ of the sector deserve closer attention.

1.2 Research framework

A more complex political, economic, and legal institutional matrix than is apparent at first sight undergirds regulation. In the specific context of the telecom sector, technological issues introduce an additional level of complexity that uniquely influences the way regulation is conducted. Different sets of actors – the state in its legislative, judicial, and executive roles; the IRA; the regulated entities that are market actors in the main; international bodies; policy networks; and the vast mass of consumers who overlap the voting population – exert influence at the level of the institutional environment (where the rules of the game are set) and the institutional governance (where the game is played). It is necessary to investigate both sets of activities to arrive at a comprehensive understanding of the structure and functioning of regulatory governance (the state of play).

The present work seeks to examine the Indian telecom regulatory case at three levels: (1) at the macro-institutional level, where it is proposed to study the norms and rules reconstituted over time and analyse whether such a reordering of the rules of the regulatory game has helped or harmed the achievement of stated regulatory objectives; (2) at the level of the institutional environment by taking up the impact of important court judgments; and (3) at the micro-institutional level by examining the mechanisms of governance of TRAI and the manner in which its functioning has affected the alignment of incentives in the regulatory space. The new institutional economics (NIE) framework represented in Table 1.1 may be seen as indicating the broad setting for the study.

We recognize with Black (1997) that, apart from the micro-economic foundations of game theory and transaction costs, the NIE approach is based on the behavioural theory of bounded, not classical, rationality and the idea that an individual’s actions are necessarily structured by institutions. It is also true that NIE views preference formation as exogenous, as being outside the institutional context, in contrast to non-economic new institutionalisms that consider institutions as shaping “not just the actions of individuals and organizations, but their preferences as well” (ibid: 64). We also agree with Black that it would be analytically more sophisticated to move beyond the dichotomy of rational versus contextual actor by positing an ‘institutionally rational’ actor who acts strategically in pursuit of endogenously formed interests such that, while providing choice on ways forward, institutions provide socially validated standards – that is, the social context in which individual action can be explained. Thus, our conception of new institutionalism seeks to “explain characteristics of social outcomes on the basis not only of agent preferences and optimizing behavior, but also on the basis of institutional features” (Shepsle 1989: 135), and to examine ex ante selection of rules (institutional selection) as well as their ex post robustness (institutional maintenance), and, in addition, sees institutions as providing “exterior normative constraints on actions [and] also shap[ing] interior cognition” (Black 1997: 68). In so doing, it recognizes that students of equilibrium institutions, such as economic historians, must “delicately straddle the boundary between micro and macro” (Shepsle 1989: 145).

Table 1.1 NIE framework

Level		Frequency (years)	Purpose
L1	Embeddedness: informal institutions, customs, traditions, norms, religion	10^2 to 10^3	Often non-calculative: spontaneous
L2	Institutional environment: formal rules of the game – esp. property (polity, judiciary, bureaucracy)	10 to 10^2	Get the institutional environment right; first order economizing
L3	Governance: play of the game – esp. contract (aligning governance structures with transactions)	1 to 10	Get the governance structures right; second order economizing
L4	Resource allocation and employment (prices and quantities; incentive alignment)	Continuous	Get the marginal conditions right; third order economizing
L1: social theory; L2: economics of property rights/positive political theory; L3: transaction cost economics; L4: neoclassical economics/agency theory

Source: Williamson 2000.

1.3 Regulatory theory

The polysemic nature of regulation leads to the difficulty in precisely defining the term. Conceptions of regulation range from the broader view that sees it as encompassing all forms of social control to its narrow construal as a specific set of commands or a binding set of rules administered by a specially constituted body, usually by the state through a public agency. The concept of a regulatory state that relies on law-backed specialized agencies with technical expertise that are insulated from quotidian political pressures to effectuate economic decisions has gained ground, as has the argument that regulation arises from the inadequacy of standard contract law to administer special contracts that may require hybrid institutional forms combining aspects of executive, legislative, and judicial functions.

A. Market failure and regulation

Any attempt to arrive at a definition – even a working definition – of regulation must straightaway confront the question of whether regulation is at all ‘possible’ in the first place. In the economic realm, state intervention is primarily justified on the grounds of market failure. The ability of the state to regulate has been questioned on the basis of the state’s propensity to fail on a variety of grounds based on pluralist, elitist, public choice, institutionalist, and poststructuralist grounds. There is now some consensus across the ideological spectrum that the state continues to have a legitimate role in regulation, albeit in a ‘decentred’ way. The decentred perspective consists of a mélange of approaches, provides an alternative diagnosis for ‘failures’ of state-centred action, and requires us to “reconsider not only how the state might act in order to pursue its goals, but how we should understand ‘regulation’ itself” (Black 2002b: 4).

Welfare economics postulates that, under certain assumptions, “the equilibrium conditions which characterize a system of competitive markets will exactly correspond to the requirements of Paretian efficiency” (Bator 1958: 351). Such a general equilibrium will hold only if all markets are perfectly competitive, which of course is impossible in practice, leading to what has been termed ‘market failure’. This failure could be of many kinds: (1) monopoly, natural monopoly, and abuse of dominance or market power; (2) externalities or spi...