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June 30, 1997


N Vittal

The death of distance

The telecommunication pact signed at the World Trade Organisation on February 15, 1997, is yet another testimony to the international flavour inherent in the telecommunications business and technology.

This international flavour obviously arises from the very definition of telecommunications, the ability to quickly communicate across large distances. Perhaps that is why the International Telecommunication Union is the oldest international body still functioning today. It was founded in 1865.

There are five elements which reinforce this basic propensity of telecommunication to be internationalised:

The first is the driving force of technology. Initially, wireless and wireline technologies were developed simultaneously but wireline emerged to be dominant. However, in recent years there have been phenomenal developments in wireless methods, thanks to the development of digital and satellite technologies. The launching of geo-stationary and low-earth-orbit satellites has given a tremendous boost to global telecommunication. Projects like Iridium of Motorola are aiming at the ultimate mobility in telecommunication where with a single telephone number one can move about anywhere in the world and communicate.

The second international dimension of telecommunications is the pressure of global trade. Telecommunication has spelt the death of distance. This helped in the rapid growth of global trade. Trade not only grew quantitatively but also qualitatively. The nature of global trade undergone tremendous change because of advances telecommunication technologies. Today, for competitiveness in the global market, good telecommunications is essential.

The third element enforcing international thrust to telecommunication is the competition in global trade itself. Trade is becoming more and more dependent on time. In time-based competition information technology, the synthesis of computing and telecommunications, is not just a necessity, it is vital. Perhaps there is no area of manufacturing or services where one cannot use information technology to improve productivity and profit. Incidentally, information technology, in its own way, has contributed to outsourcing of jobs from developing countries to developed countries.

The fourth element is political ideology. So long as the world was divided between centrally planned economies led by the communist bloc and the free market system led by the United States and western Europe, there was greater control over telecommunication from the national point of view. Now, with the collapse of the Soviet Union and the end of the Cold War, more countries are moving towards a market driven economic paradigm. This means that regions are becoming even more important than national boundaries. In this context, the General Agreement on Tariffs and Trade has naturally led to a situation where international agreements on opening up borders in telecommunications have become a necessity. In fact after the signing of the GATT, two of the earliest agreements were inked under it were regarding information technology.

The fifth element in the international dimension of telecommunications is in the interest of the developed countries to find markets for their telecommunications and other technologies in developing countries like India where customers are becoming aware of a wider range of choices.

As I see it, the growth of telecommunication in any country depends on four engines. These are [a] technology, [b] political will, [c] regulation in judicial activism and [d] market dynamism.

In India, the telecommunications sector of the economy is coming alive after a government monopoly of over a century, thanks to the 1991 turnaround in economic policy.

Later the 1994 telecom policy articulated the political will of the government. With the setting up of the Telecom Regulatory Authority of India we will hopefully see greater play of regulatory forces and judicial activism.

These will create the requisite environment for market dynamism which will ultimately benefit the consumer on the one hand and on the other the Indian industry to compete effectively in the domestic and global markets.

The main highlights of the Indian offer in the global telecommunication agreement are:

  • No change in 25 per cent binding offer on foreign equity participation in telecom service companies.
  • An additional commitment to review VSNL monopoly on international telecom services in 2004 and the Department of Telecommunicaitons' monopoly over national long-distance services in 1999.
  • Participation in discussions over information technology agreements.
  • Adoption of '85 per cent' of principles laid out in the reference paper on regulatory framework for basic telecom services.

India has joined 67 countries in signing the global telecommunication pact and we hope that this will have a positive impact on the telecom industry.

Ending government and private monopolies that still control the industry in many countries would bring rapid growth to the telecom sector and could add $1 trillion - or 4 per cent - over the next decade to the value of the world's economic output.

For the first time, the global telecom pact will bring services like basic telecom, cellular phone services, satellite systems, data transmission and paging under the WTO and its dispute settlement system.

The commitments made by countries on allowing foreign equity in telecom services companies has varied greatly. But there was unanimity in opening up the domestic markets.

There were offers ranging from 10 to 100 per cent (foreign equity) at the negotiating group talks. But the key is that there was a move to open up home markets. The negotiating group on basic telecom talks broke down in April last year after the US withdrew from the discussion because countries like Malaysia and Indonesia had not even tabled offers.

Indian officials made no significant changes in the country's offer tabled at the NGBT talks in April last year. The country retained a binding commitment of 25 per cent foreign equity in telecom service companies in its offer.

Earlier there were indications that India would increase its offer to 49 per cent ownership. India already allows 49 per cent - up to 74 per cent if the holding company route is adopted - foreign ownership in telecom services but does not want to bind itself to over 25 per cent foreign ownership.

A binding agreement means India cannot ever reverse the decision in the future without the risk of inviting hefty sanctions.

The only change made in the Indian offer was an '85 per cent' acceptance of the principles laid down in a 'Reference paper relating to regulatory framework for basic telecom services'. Indian negotiators did not commit the country on a safeguard that countries would not engage in 'anti-competitive cross subsidisation'.

Charlene Barshefsky, US trade representative, told a press conference in Washington that the $600 billion telecom industry will double or even triple in the next 10 years under this agreement.

The global telecommunication pact is good news for Indian telecom users because it commits the government of India to review the monopoly in long distance services by 1999 and international telecom services by 2004.

In fact, in the context of Article 19 of the Constitution if the monopoly of the department is challenged in the court, the monopoly may have to be given up even earlier than the date committed in the global telecommunication pact.

The commitment for pluralism in the telecom sector internationally is also a welcome measure because the Indian consumer can hope for the normal market dynamics to operate. Greater competition is the only guarantee for better services and lowering of tariffs.

Thanks to the pact, public sector telecom monopolies can breathe easier till 1999 and till 2004 as far as the Videsh Sanchar Nigam Limited is concerned.

In view of the potential vulnerability of Section 4 of the Indian Telegraph Act, 1885, if there is an activist consumer movement the monopolies may go. In the light of the Supreme Court judgement in the Hero Cup case, this becomes a distinct possibility.

The government strategy to bind themselves only to 25 per cent in the global telecommunications pact while in practice even more foreign equity is permitted is in a way a very prudent measure.

The government, in the light of the National Telecommunication Policy, has been pushing systematically towards greater competition in the sector. Nevertheless, if there are unexpected developments and there is a backlash against the opening up of the telecommunication sector then the commitment of 25 per cent will come in handy for the government to reverse policy without having to lose face internationally.

However, it will be worthwhile to recall how some very effective and well-known practitioners of the liberal market economy like George Soros have been raising a voice of caution against the excesses of free-market economies.

I entirely agree that the only way Indian companies will gain from this pact is by globalising. I have always been pleading for allowing our Indian companies to grow into multinational companies. Our large country, with 21 telecom circles, provides an excellent opportunity to develop home-grown Indian companies to become capable of operating at global levels.

If the present restriction about the number of circles in which the private service providers can operate is removed, it will be the first step towards making the Indian companies compete in the domestic market so as to grow to global dimensions and then take on the emerging world market which is expected to exceed the trillion-dollar mark. In fact, the capping of the circles was a retrograde step because it upset investors' economics in the first place.

N Vittal is chairman of the Public Enterprises Selection Board. However, he is best known for his tenure as the secretary of the Telecom Commission and the many revolutionary policies he introduced.

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