Re-forming the state: telecom liberalization in India

A fundamental problem in the new strategies of telecom development is attracting private investment for network expansion. Following the insights of institutional economists, and from evidence gained through the case study of the telecom liberalization process in India, this paper contends that the success of private investment depends on the creation of a regulatory mechanism that provides 'credible commitment'--that is, provides both a set of rules and regulations that ensure prospective private investors a reasonable return on investment, as well as a governance mechanism that insures them against the possibility of arbitrary governmental discretion. The problems of the liberalization process in the telecom sector in India reflect the failure to institute such a regulatory regime. Following a process of macro-economic liberalization in 1991, India adopted the New Telecom Policy (NTP) in 1994, opening up the basic telecom sector to foreign investment. The implementation of NTP, however, was marked by a series of conflicts and controversies, resulting in extensive litigation and conflict between the Department of Telecommunications and the private operators, and erosion of investor confidence. These problems of implementation represent a problem of institutional change associated with a fundamental shift in the institutional regime, from one based on a high level of discretionary power on the part of state actors, to institutions based on transparency, accountability, expertise and insulation from the political process.