The Indian telecommunications market offers enormous opportunity for U.S. companies. There are only nine million phone lines in India today, and this number is expected to increase to 60 million by the year 2006—an increase of over 560 percent. Moreover, the United States is India's largest investor and its largest trading partner, but according to the U.S. Department of Commerce, India currently ranks only 32^nd among U.S. export markets. U.S. exports to India in 1996 and 1997 amounted to just US$ 3.3 and US$ 3.6 billion respectively, while U.S. imports from India during those same years amounted to US$ 6.2 and US$ 7.3 billion. Principal U.S. exports include computers, peripherals, and telephonic and telegraphic parts, equipment and services.

Currently, India has just 1.38 telephones per 100 people. The Government of India has set an ambitious target of six telephones per 100 people, which means that 45 million new telephone lines will need to be installed at an estimated investment of US$ 60 billion.

Although India enacted telecom liberalization policies in 1994, overall deregulation in India has slowed during the past several years, and numerous barriers to foreign participation in India’s telecommunications sector remain. Minor administrative decisions have served to block foreign investment, as have the country’s unrealistic and inconsistent policy objectives. Further, India's failure to make greater commitments in the WTO BTA raises doubt as to the sincerity of India's liberalization program.

If India does not make greater BTA commitments, U.S. companies will be hesitant to enter the Indian market and an opportunity to offset some of the U.S. trade deficit with India will be lost. Competitors in Europe, Australia, Asia will be ready to snatch up contracts if U.S. companies don’t sign them first.

U.S. firms will be willing to invest in modernizing the telecommunications infrastructure of India only if they can count on fair and stable rules of the game. They have already lost substantial amounts of capital and resources in attempting to do business in India.

In the absence of stronger WTO BTA commitments on pro-competitive regulatory principles, it is not clear that India's obligations on either basic or enhanced telecommunication services will materially increase opportunities for U.S. participants in India's market. Accordingly, the Telecommunications Alliance should seek USTR’s assistance in expediting telecommunication policy reform in India.

A number of Indian officials continue to support the government’s monopoly provision of telecommunication services. In their view, a competitive system would result in a wasteful duplication of facilities, inadequate universal services, and "cream skimming."

Figure 2 - Forces that Drive Telecommunications Reform

Source: Saunders et. al, Telecommunications & Economic Development

1. Wasteful Duplication of Facilities

Indian officials argue that the telecommunications sector is a natural monopoly. Because high overhead costs are associated with establishing a telecommunications network, one supplier can produce a range of telecommunication services more cheaply than multiple suppliers can. To avoid wasteful duplication, Indians argue that state telephone companies should maintain their legal monopoly.

Today, this argument is simply inaccurate:

• Unmet Demand. Current government providers of telecommunication services in India are unable to meet current demand, which signals that the established system is not working as intended.

• Production Inefficiencies. The absence of competition leads to costly inefficiencies. (It costs US$ 4,000 to install a telephone line in India but only about US$ 1,000 to US$ 1,500 in other developing countries.)

• Technological Advances. The "wasteful duplication" argument assumes that economies of scale and scope can be "harvested" only by a single supplier. Although once true, advances in technology now enable providers to supply telephony through various mediums (mobile, cable, "right-of-way" networks, low earth orbiting satellites, etc.). Technological advances also enable convergence of these mediums.

Box 1 - Employment, Liberalization and Developing Countries   India's DoT is grossly overstaffed at 24 telephones per employee, compared to 200 to 300 in the OECD countries. Indian officials and labor leaders fear that competition would trigger significant labor cuts, but the evidence suggests that this has not been the case in other developing countries. Network expansion creates a demand for labor that has outweighed the trend toward workforce reduction (Petrazzini and Clark, 1996).

 

2. Universal Service & Cross-Subsidies

Universal service is widely accepted as a legitimate public policy objective. However, depending on prices, household income, and consumption preferences, many households choose not to subscribe to telephone service, and therefore, it is not profitable to provide service to particularly poor market segments or regions, particularly in developing countries. With this in mind, India argues that, to achieve universal service, cross-subsidies are required, and a monopoly is needed to generate super-normal profits to fund this subsidization. Cross-subsidies normally flow from international and national long-distance service to local service, from urban to rural subscribers, and from business to residential service.

There are several problems with this argument:

• Priorities. Universal service, if it means a telephone for every household, is not necessarily the right goal for India where per capita income is low and capital scarce. The country has higher priorities.

• Competition can lead to universal service. Subsidization is not necessarily the best route to universal service. Since India is suffering from chronic unmet demand for telephone service, the key problem is inadequate supply (inadequate investment and inefficient investment and operations), not inadequate demand. While this demand may not result in universal service in the short run, competition in the industry will spur innovation and keep downward pressure on costs and prices, and these price decreases can be at least as important as subsidies in improving the affordability of telephone service. Competition will also benefit Indian household subscribers who have lost telephone service because they cannot afford to pay the high-priced long-distance portion of their bill (Canadian Minister of Supply and Service, 1986).

• Market Segment Satisfaction. Assumptions about the uneconomic characteristics of some market segments may be wrong. What is uneconomic for one segment can be profitable for others.

Source (Box 1 & 2): UNCTAD, World Development Report 1997

• Right-of-Way Networks. In order to secure additional revenues, Indian Railways is considering leveraging their "right-of-way" to attract investment in a fiber-optic network. Other sectors with similar rights-of-way will consider following the same path.

• Wireless Technology. In addition to the threat "right-of-way" leveraging poses, India will face increasing challenges from CDMA wireless technology that enables users to communicate and transmit large amounts of data with ease and at relatively low costs.

2. International Competition

Until quite recently, governments and public operators in India were fairly effective at blocking international competition in their domestic telecommunications markets. Since the mid-1990s, however, new and difficult-to-control sources of competition have been emerging and spreading rapidly. These include:

• Callback Operators ― which have thrived due to the differences in tariffs between industrial and developing countries. Callback operators have quickly grabbed a sizeable portion of the telecommunications market in India. Even though there have been attempts to limit competition from callback providers, there is no clear-cut way for India to block callback services without hurting their own business.

• Internet Phone ― which is a significant potential threat to established public operators. Software invented in 1994 now allows computers connected to the Internet to call telephones in the public switched telephone network (PSTN), and these services can be extended to phone-to-phone communication based on Internet gateways. The software allows telephone users to communicate over the PSTN at Internet prices.

• Mobile Satellite Services ― which present both opportunities and challenges to public sector operators in India. Using low-earth-orbit satellites (LEOS), mobile satellite services can offer services that complement the PSTN. They also can bypass the public network by providing direct global services to large customers at very low costs. Since large customers account for three to five percent of India's public operator's customer base but more than 50 percent of its revenues, the migration of even a small number of these customers to mobile satellite services could significantly erode the public operator’s profits.

India could attempt to contain these pressures through regulatory mechanisms, but there are few policies that can control the expansion of the new technologies, and unprepared public operators in India will find it increasingly difficult to compete against the commercial and technological sophistication and dynamism of international competition. New information technologies and services will progressively and irreversibly erode the market position of DoT, VSNL and MTNL, as well as their profit margins. The financial value of these companies are almost certain to deteriorate, making them even less attractive to future investors.

Since the 1980s, information has been recognized as a fundamental factor of production, along with capital and labor, because businesses are more and more dependent on timely access to physical and informational inputs from around the globe. The information sector accounted for one-third to one-half of GDP and employment in OECD countries in the 1980s, and this number is expected to reach 60 percent for the European Community by 2000.

The simple fact is that efficient and diversified telecommunications networks are now vital to the smooth functioning of an economy, and India’s economy is no exception. India’s information-based industries are expanding rapidly, and these industries are dependent on fast and reliable information transmission. Indian engineers, for example, transmit software code from Bangalore to Texas Instruments; they must be able to transmit large amounts of data securely and at a reasonable cost if they are to remain competitive internationally. By reducing telecommunications costs, India’s information industries can become even more competitive.

India’s policies need to be reassessed to better address the needs of its information-based industries, as well as other industries.

• Today’s end-user needs are multiplying rapidly, which requires a diversification of telecommunications services including security, high volume data transmission, accuracy, and/or control. It is unrealistic to expect that one service provider will be able to meet all these different requirements in a cost effective manner.

• Technological advances now enable providers to supply telephony through various mediums that increasingly blur the boundaries between these mediums.

• Technological innovation also enables the convergence of various networks. For example, cable television and electricity distribution companies in the United Kingdom use electricity distribution ducts and rights-of-way to connect to local telephone network facilities and provide local telephone service.

Figure 3 - Comparative Unit Investment Costs for Three Inter-City Transmission Technologies

The United States Trade Representative (USTR), Federal Communications Commission (FCC), International Trade Administration (ITA), and the National Telecommunications and Information Administration (NTIA) all participate in efforts to liberalize foreign telecommunications markets. Each has the ability to negotiate bilaterally, as well as through multinational fora.

• USTR – is responsible for developing and coordinating U.S. international trade and investment policy. It leads or directs negotiations with other countries on such matters. It also has authority to raise U.S. concerns at the World Trade Organization.

• FCC – is responsible for developing and implementing policy concerning interstate and international communications by radio, television, wire, satellite, and cable. It also can raise U.S. concerns at the International Telecommunications Union (ITU).

• NTIA – is responsible for championing foreign market access by advocating competition and liberalization of telecommunications policies around the world; participating in international government-to-government negotiations to open markets for U.S. companies; and negotiating with foreign governments to ensure adequate spectrum for national defense, public safety, and U.S. business needs.

• ITA – is responsible for supporting the growth and competitiveness of the U.S. telecommunications industry by promoting international trade and investment opportunities. ITA advocates on behalf of U.S. telecommunications firms and acts as an intermediary between U.S. firms and foreign government officials.

Members of Congress can help ensure that these agencies give priority attention to improving access to India’s telecommunications market. The following table lists those members who are most likely to be sympathetic to the U.S. industry’s concerns regarding India.

Table 14 - Members of Congress Likely to Support the Telecommunications Alliance

Each of the Congressmen identified in these tables either has a large U.S. telecommunications company in his district or plays an influential role in House or Senate subcommittees that address telecommunication issues or international trade issues as primary agenda items. TA can count on support from the majority of the individuals listed in Table 14.

Although many officials listed in Table 14 will be busy supporting other non-telecommunications issues, an effort should be made educate if not enlist the support of everyone on the list. Each official may have influence with other House and Senate members and staffers who would support such market opening efforts.

Associations that will likely lend support to TA’s efforts are listed in Table 15. Each association represents numerous private sector enterprises, most of which will eagerly support market-opening intervention by the U.S. government.