BSE P10 M35 e-Text

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BUSINESS ECONOMICS

PAPER NO. 10: ECONOMICS OF SERVICES MODULE NO. 35: THE EVOLUTION OF THE SECTORAL REGULATIONS SINCE THE LIBERALIZATION OF TELECOMMUNICATION MARKET IN 1998 IN INDIA

Subject BUSINESS ECONOMICS

Paper No and Title 10: Economics of Services

Module No and Title 35: The Evolution of the Sectoral Regulations since the Liberalization of Telecommunication Market in 1998 in India

Module Tag BSE_P10_M35

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TABLE OF CONTENTS 1. Learning Outcomes 2. Introduction 3. Regulations of Telecommunication market before 1998

3.1 National Telecom Policy 1994 3.2 Establishment of TRAI (Telecom Regulatory Authority of India)

4. Sectoral Regulations since the Liberalization of Telecommunication Market 4.1 New Telecom Policy 1999

5. Developments in telecom sector after 2000 5.1 Universal Service Obligation 5.2 Universal Access Regime 5.3 Interconnection Usage Charges Regime 5.4 Internet Service Providers 5.5 Broadband Policy 2004 5.6 Foreign Direct Investment 5.7 Mobile Number Portability 5.8 Spectrum Management 5.9 National Telecom Policy (NTP) 2012

6. Summary 7. References

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1. Learning Outcomes

After going through this module you will be able to:

• Learn about Regulations of telecommunication market before 1998 • Learn about Developments in sectoral regulations since the liberalization of

telecommunication market till NTP 2012

2. Introduction

For any country’s socio-economic development, telecommunication services are recognized as important tool. It acts as a major support service for all other industries rapid growth and modernization. Through significant policy reforms Indian telecommunication services has transformed totally from its earlier stage. The NTP (National Telecom Policy) 1994 and NTP 1999 was the main driving force for the development of telecom sector. During the past decade several sectoral reforms were introduced for growth of this sector. As a result of these reforms Indian telecom industry emerged as one of the best performing industry in recent years.

3. Regulations of Telecommunication market before 1998

In 1980’s telecom services were fully under the control of Department of Post and Telegraph. The telecom industry was entirely in government ownership. In 1984 private sector players were allowed to step-in, in manufacturing of telecommunication equipment. In the same year of 1984, as part of reforms government set up Center for Development of telematics (C-Dot). C-Dot was an autonomous body created to carry out R&D activity in telecom sector. In 1985 Department of Post and Telegraph was separated and two separate departments were set up as Department of Post and Department ofTelecommunication (DoT). Dot was a wholly-owned government operator for whole telecom services in India. DoT was responsible for planning, installing, managing, engineering, maintenance and management of telecom services in India. Further in 1986 government set up two new public sector undertakings known as MTNL (Mahanagar Telephone Nigam Limited) and VSNL (Videsh Sanchar Nigam Limited). MTNL was set up to operate and look after telephone services in two metro cities namely Delhi and Mumbai. VSNL’s main aim was to operate, develop, maintain and accelerate growth of international telecom services in India. DoT continued to provide and look after telecom services in rest of India other than Delhi and Mumbai. Till this time telephone was not a necessity it was a luxury service affordable only by few citizens in society. In 1989 Telecom Commission was set up as an executive body in order to assist DoT in policy regulation. In 1991 India adopted new economic policy. New economic policy objectives were unattainable without world class quality telecom services. This gave thrust to reforms in telecom sector resulting liberalization in the sector. Government allowed private sector participation in Value added services such as paging and cellular services. In 1994 Government adopted National Telecom Policy 1994 (NTP 1994).

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3.1National Telecom Policy 1994 NTP 1994 was announced in 1994. Main aim of this policy was to achieve rapid growth in exports by improving India’s competitiveness in the global market. NTP 1994 recognized the fact that private investors should be allowed to bridge the resource gap in services. Main highlighting points of this policy were:

• To ensure that telephone is accessible to all i.e. availability of telephone on demand, • To provide world class telecom services, • To provide universal availability of basic telecom services to all villages at reasonable

and affordable prices, • To ensure that India arises as major exporter and major manufacturer of telecom

equipment. • To attract FDI and motivate domestic investors to invest in telecom sector. • It also announced series of specific targets which were to be achieved by the end of 1997. • Participation of private sector was allowed in a phased manner. In the beginning private

sector was allowed only in value added services, later on they were allowed to participate in fixed telephone services also.

3.2 Establishment of TRAI (Telecom Regulatory Authority of India)

With the entry of private participant in telecom sector, a need was felt for an independent regulator. On 20 February 1997 Telecom Regulatory Authority of India was established by an act of parliament known as Telecom Regulatory Authority of India Act, 1997. TRAI was aimed to regulate telecom services, fixation and revision of tariffs for telecom services. Earlier these powers were with central government. Main objective of TRAI was to create fair and transparent policy environment, which will ultimate give rise to fair competition. The functions allotted to the TRAI included:

a) To protect the interest of consumer of telecom sector. b) To settle dispute among service providers, if any. c) To recommend the terms and conditions of license to a service provider d) To render advice to the Central government on matters relating to the development of

telecommunication technology e) To recommend the need and timing for entry of new service provider in the market.

TRAI has issued large number of directives, orders and regulations from time to time to deal with specific issues. This has helped in the evolution of telecom sector. At one point of time Indian telecom sector was fully owned by government but now it was very competitive with existence of multiple private operators.

Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) was established in the year 2000, after making an amendment in TRAI Act. TDSAT took over all the adjudicatory and disputes functions from TRAI. TDSAT can adjudicate any dispute between: 1

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a) between a licensor and a licensee, b) between two or more service providers, c) between a service provider and a group of consumers, and d) to hear and dispose of appeals against any direction, decision or order of TRAI.

4.

4. Evolution of Sectoral Regulations since the Liberalization of Telecommunication Market

In Late 1990 government expected that economy’s growth was very much dependent on the growth of telecom sector. Telecom sector directly and indirectly put impacts on the country’s GDP. Now the need of new forward looking telecommunication policy was felt. So to achieve India’s dream of becoming IT superpower and creating world class telecom infrastructure, New Telecom Policy 1999 (“NTP 1999”) was announced.

4.1 New Telecom Policy 1999 Main objectives of NTP 1999 were as follows: 1

• Main goal of this new telecom policy was to make availability of effective and affordable communications for citizens.

• Provide a balance between provision of universal service to all uncovered areas, including rural areas, and the provision of high-level services capable of meeting the needs of the economy. Encourage development of telecommunication facilities in remote, hilly and tribal areas of the nation.

• To facilitate India’s journey to becoming an IT superpower by creating a modern and efficient telecommunication infrastructure taking into account the convergence of IT, media, telecom and consumer electronics.

• Convert PCOs, wherever justified, into public telephone information centers having multimedia capability such as ISDN services, remote database access, government and community information systems etc.

• To bring about a competitive environment in both urban and rural areas by providing equal opportunities and level playing field for all players.

• Providing a thrust to build world-class manufacturing capabilities and also strengthen research and development efforts in the country.

• Achieve efficiency and transparency in spectrum management. • Protect the defence and security interests of the country. • Enable Indian telecom companies to become global players.

In line with the above objectives, the specific targets that the NTP 1999 seeks to achieve were as follows:

• Make available telephone on demand by the year 2002 and sustain it thereafter so as to achieve a tele-density of 7 by the year 2005 and 15 by the year 2010.

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• Encourage development of telecom in rural areas making it more affordable by suitable tariff structure and making rural communication mandatory for all fixed service providers.

• Increase rural tele-density from the current level of 0.4 to 4 by the year 2010 and provide reliable transmission media in all rural areas.

• Achieve telecom coverage of all villages in the country and provide reliable media to all exchanges by the year 2002.

• Provide Internet access to all district headquarters by the year 2000. • Provide high speed data and multimedia capability using technologies including ISDN to

all towns with a population greater than 2 lakhs by the year 2002. Almost all the objectives set up in NTP 1999 has been achieved. Today telecom sector is completely reformed. Private players are operating in all the sectors of telecommunication.

5. Developments in Telecom Sector after 2000

Telecom sector has witnessed major policy developments in and after year 2000. BSNL (Bharat Sanchar Nigam Limited) was incorporated in September 2000. BSNL is one of the largest and one of the leading state owned enterprise, and operates in whole of India except New Delhi & Mumbai. BSNL provides a wide range of telecom services in India. Next noteworthy step was privatization of VSNL (Videsh Sanchar Nigam Limited) in 2002. Tata Communications acquired the 45 percent stake in VSNL in 2002. This ended the monopoly of VSNL in international long distance calling. Open competition was allowed in National Long Distance (NLD) and International Long Distance (ILD) services. Government introduces two licenses namely Cellular Mobile Telephone Services (CMTS) and Basic Telecom Service (Basic).These two license allowed private sector players to join telecom services in India. Further government introduced Unified Access Licensing (UASL) in 2003. UAS license allowed providing both services of Basic and CMTS under the realm of one license. In 2005 FDI limit was increased from 49 percent to 74 percent, and Mobile Number Portability in 2008 flagged way for the noteworthy growth in the sector. Let’s see these developments one by one in detail.

5.1 Universal Service Obligation

In order to provide affordable telecom services to all people and to provide access to telecom services in rural areas, government set up a Universal Service Obligation Fund in April 2002. The Indian Telegraph (Amendment) Act, 2003 provided the statutory status to the Universal Service Obligation Fund (“USOF”). The resources for USOF would be generated through a ‘Universal Access Levy (UAL)’. UAL would be the percentage of the revenue earned by the operators under various licenses. The UAL presently is 5% of the Adjusted Gross Revenue (AGR) earned by all operators except pure value added services providers like internet, voice mail, and e-mail service provider etc. In addition, the Central Govt. may also provide grants and loans. This fund is utilized for the purpose of developments of telecom sector in rural and remote areas such as: (a) to increase wireless network, (b) to provide public access through public or community telephone and (c) to provide individual telephones in identified net high cost rural and remote area. With the

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help of this fund teledensity in rural areas was to be increased. This fund was to be utilized to create mobile and broadband services infrastructure in rural areas. By amending the “The Indian Telegraph Act (1885), mobile services were included under basic telephony in rural areas. This helped the cellular service providers to access the USOF for creating telecom infrastructure in rural areas.1

5.2 Universal Access Regime

In 2001, basic service operators in India were allowed to provide limited mobility services in their coverage area, using CDMA Wireless Local Loop (WLL (M)) technology. They were also offering all-India mobility using CDMA WLL (M) technology. Price of these services were lower as compared to GSM cellular mobile services, this increased the popularity of CDMA WLL (M) services. Now CDMA WLL (M) services were seen as good substitute of GSM cellular mobile service. Finally government decided to combine these two services and introduced Unified Access Services (UAS) licensing regime for basic and cellular services in 2003. Under UAS licensing both basic and cellular service operator have freedom to offer basic and/or cellular mobile services using any technology. Ultimately this gave rise to fair competitive market for the service operators. For providing Unified Access Services country is divided into 23 Service Area. These service areas consist of 19 Telecom Circle and 4 Metro Service Area. The license for Unified Access Services is issued on non-exclusive basis, for a period of 20 years. This license is extendable by 10 years at one time within the territorial jurisdiction of a licensed Service Area.

5.3 Interconnection Usage Charges Regime

Interconnection of services is of great importance for service providers and even for users. To make local, national and international calls possible a variety of networks of fixed and mobile phones, national long distance network and international long distance network have to work together in interconnection with each other. All this makes necessary to have an effective interconnection usage charge (IUC) regime. TRAI announced and implemented Telecommunication Interconnection Usage Charges (IUC) Regulation in 2003. These regulations decided the terms and condition of interconnectivity between various service providers. Now there were clear regulations among service providers, for sharing their revenues which are derived from providing telecommunication services to each other.

5.4 Internet Service Providers

In 1998 internet services were opened for private participation. This increased penetration of internet and encouraged growth of internet services. Keeping in mind general public interest and particularly consumer interest government decided to issue new guidelines for grant of Internet services. Now any Indian company with a maximum foreign equity of 74% is eligible for grant of license.

5.5 Broadband Policy 2004

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Penetration of internet services and broadband were very low till December 2003. On the recommendations of TRAI to increase internet and broadband penetration in India, government announced Broadband Policy on 2004. The main emphasis of broadband policy was to create an infrastructure for the growth of broadband using various technologies. These technologies include optical fiber, cable TV network, Direct To Home (DTH) and Asymmetric Digital Subscriber Lines (ADSL) etc.It was recognized that by improving broadband services there will be a positive impact on the society. There will be increased usage of online education, tele-medicine, e-governance, entertainment and employment opportunities.

5.6 Foreign Direct Investment FDI is the major source of financial investment made for the growth of telecom sector. In 2005, the government allowed 74 percent FDI in telecom companies, earlier this limit was 49 percent. This resulted in incomparable foreign direct investment in the telecom sector. FDI up to 100% was allowed in respect of the following telecom services:

a) Infrastructure Providers providing dark fiber b) Electronic Mail; and c) Voice Mail

5.7 Mobile Number Portability Mobile Number Portability (MNP) provides subscribers opportunity to change their telecom service providers while retaining their previous number. It is two way sword, on the one hand it provides more choice and freedom to the consumer and on the other hand it also encourage telecom service providers to further improve their services to retain existing consumers. On 1 August 2008, Department of Telecommunication announced guidelines for MNP service license and has issued a separate License for MNP service w.e.f. 20.03.2009. As per the regulations, the subscribers would be allowed to retain their mobile number while moving from (within the same service circle):

• One access provider to another irrespective of the mobile technology / platform; or • One cellular mobile technology to another of the same access provider.

For the purpose of MNP country is geographically divided into two Number Portability Zones namely Zone 1 and Zone 2. Each zone consist of 11 licensed service areas.

5.8 Spectrum Management Spectrum Management is very important these days. Use of radio waves or radio frequencies for the purpose of telecommunications services is known as spectrum. Spectrum is treated as public property and the government is only the caretaker of this public property. In India, Spectrum is shared among railways, ONGC, Defence and Telecommunication services etc. In telecom sector spectrum is shared by both GSM and CDMA cellular service providers. Spectrum is important factor in the growth of wireless services. Recognizing this fact Indian Government set up two committees: first was “Spectrum Management Committee”, and the other was a “Steering Group

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on Spectrum Pricing”. Both were set up in 1999. In India assignment of spectrum is governed by the National Frequency Allocation Plan (NFAP) 2002 and “International Radio Regulation” of the International Telecommunications Union (ITU). After taking in account changes in international allocations and changes in national spectrum requirement as well as emerging technologies, NFAP has been revised from time to time.

5.9 National Telecom Policy (NTP) 2012 In the year 2012 DOT introduced NTP-2012. The main objectives of NTP 2012 are as follows1:

1. Provide secure, affordable and high quality telecommunication services to all citizens.

2. Increase rural tele-density from the current level of around 39 to 70 by the year 2017 and 100 by the year 2020.

3. Provide affordable and reliable broadband-on-demand by the year 2015 and to achieve 175 million broadband connections by the year 2017 and 600 million by the year 2020 at minimum 2 Mbps download speed.

4. Provide high speed and high quality broadband access to all village panchayats through a combination of technologies by the year 2014.

5. Promote innovation, indigenous R&D and manufacturingto serve domestic and global markets, by increasing skills and competencies.

6. Simplify the licensing frameworkto further extend converged high quality services across the nation including rural and remote areas.

7. Strive to create One Nation - One Licenseacross services and service areas.

8. Achieve One Nation - Full Mobile Number Portabilityand work towards One Nation - FreeRoaming.

9. Reposition the mobile phone from a mere communication device to an instrument of empowerment that combines communication with proof of identity, fully secure financial and other transaction capability, multi-lingual services and a whole range of other capabilities that ride on them and transcend the literacy barrier.

10. Put in place a simplified Merger & Acquisition regime in telecom service sector while ensuring adequate competition.

11. Ensure adequate availability of spectrum and its allocation in a transparent manner through market related processes.

12. Promote efficient use of spectrum with provision of regular audit of spectrum usage. 13. Enhanced and continued adoption of green policy in telecomand incentivize use of

renewable energy sources for sustainability. 14. Strengthen the grievance redressal mechanismsto provide timely and effective resolution. 15. Put in place a web based, real time e-governance solution to support online submission of

applications including processing, issuance of licenses and clearances from DoT.

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NTP 2012 is very progressive in its outlook. It is going to provide the required impetus to the growth of telecom sector.

6. Summary

• In 1980’s telecom services were fully under the control of Department of Post and Telegraph.

• In 1985 Department of Telecommunication (DoT) was created. Dot was a wholly-owned government operator for whole telecom services in India.

• In 1994 Government adopted National Telecom Policy 1994 (NTP 1994). NTP 1994 recognized the fact that private investors should be allowed to bridge the resource gap in services.

• In 1997 Telecom Regulatory Authority of India was established. TRAI was aimed to regulate telecom services, fixation and revision of tariffs for telecom services.

• To achieve India’s dream of becoming IT superpower and creating world class telecom infrastructure, NTP 1999 was announced.

• Telecom sector has witness major policy developments in and after year 2000. Universal Service Obligation Fund, Universal Access Regime, Interconnection Usage Charges Regime, Broadband Policy 2004, Increase of FDI (2005) limit from 49 percent to 74 percent, and Mobile Number Portability in 2008 and Spectrum management are notable developments.

• In the year 2012 DOT introduced NTP-2012. NTP 2012 is very progressive in its outlook.

7. References

• http://www.dot.gov.in/telecom-polices/national-telecom-policy-2012 (accessed on 18 September 2015)

• https://www.dnb.co.in/IndianTelecomIndustry/RegulatoryFramework.asp (accessed on 7 September 2015)

• The Indian Telecom Sector: Legal and Regulatory Framework (July 2014), pdf version, Nishith Desai Associates, downloaded from www.nishithdesai.com

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BSE P10 M35 e-Text