India's Telecom Policy, Trade Barriers, and Financial Crises

India's National Telecom Policy and Market Liberalization

India has instituted a number of industrial policies over the years, ranging from a wave of nationalization in the late 1970s to more recent reopening of the country's markets and participation in the international economic system. More recently, the country has made a push for a booming telecommunications industry. This is one area where government can have a significant influence, because telecommunications are almost always highly regulated. Moreover, governments have the ability to invest — or to undertake policies that encourage investment — in telecommunications resources.

In 1994, India introduced the National Telecom Policy (NTP). This set out the basis for competition in the telecom industry, including in basic services, cellular services, and paging, and also allowed for private long-distance carriers. The NTP was the first step towards the liberalization of telecommunications in India — a move that preceded the technology boom but allowed for the infrastructure investment that has supported the country's call center and high-technology industries (Singh, Soni & Kathuria, n.d.).

This policy set out the basic framework for the modernization of India's telecom industry. By creating the opportunity for profit, India encouraged infrastructure investment and innovation in this sector. The move came at the right time, just as mobile phones were beginning to take off and just as the Internet was emerging. It allowed India's infrastructure development to keep pace with the growth of telecommunications in general. The country did not support firms with instruments such as low-interest loans, but it created the opportunity for investment by reducing the risk associated with investing in new technology and infrastructure.

The policy existed in response to market failure in telecommunications. Out of necessity, the original networks had been developed as public goods, run by the government to ensure that the nation had some level of infrastructure without duplication. The change in technologies spurred the change in policy, but under the government-run system, telecommunications companies were not necessarily profitable and had no particular incentive to innovate. The government was running telecom not as a business but as a public utility. This created significant market failure. The move was therefore made to bring market forces into the telecommunications industry. While the industry was still strongly influenced by the government, it moved closer to being a market-based enterprise, and subsequent reforms only served to improve the market's influence over the country's telecommunications sector.

The subsequent reforms, however, highlight that the initial move to modernize the industry was incomplete. There is reason to believe that the move was only partial, and that the government wanted to observe outcomes before opening up the market further. When it became evident that the market was allocating resources in telecom more efficiently than the government had been, further steps were taken to bring about greater market participation in the industry.

Indian firms are not required to invest their own resources in telecom — they may borrow. There are, however, some limits with respect to foreign ownership. This is common in telecom, as telecommunications carries national security implications; a nation could not responsibly allow the market to run such an industry without restriction, since foreign entities could gain control over critical communications infrastructure. In that sense, no legislation or policy will ever fully open up the Indian telecommunications market. Nevertheless, the country is definitely taking a policy approach that allows the market to improve the state of its telecommunications infrastructure, and the government is working to encourage this development for the betterment of the country.

Trade Protectionism and India's WTO Engagement

India still engages in trade protectionism. While all nations do so at times, India is not among the world leaders in free-market international trade. In the 1970s, it nationalized industries to keep out foreign competition. While India has improved since then, it still ranks poorly for trade freedom. India was a founding member of the World Trade Organization in 1995. Nonetheless, the World Bank reports that India's trade barriers are higher than those of most nations. Before the WTO, India commonly maintained tariffs in excess of 200% on foreign goods; while those rates have declined, the country is lowering its trade barriers slowly to allow time for its market to adjust. The view of the Indian government is that it retains the right to protect local industries when the need arises. Only as India has begun to see benefits from freer trade has it started to become a more enthusiastic participant on the world trade stage and lowered tariffs to more reasonable levels (World Bank, 2013). For example, it now carries an average tariff of less than 15% on non-agricultural goods. This has allowed more foreign goods to enter the country and compete more effectively, though it has placed some pressure on domestic producers with respect to quality and pricing. Such a policy can cost jobs in certain sectors, but will also deliver a more efficient market in those non-agricultural goods.

India is involved in several disputes before the WTO. One such case was brought by India against South Africa. The latter nation instituted anti-dumping duties on Indian pharmaceuticals in response to the low prices for those drugs and the threat this represented to South Africa's domestic pharmaceutical producers. India made several claims, including that South Africa had not accurately calculated the dumping margin and had not accurately calculated the damages (WTO, 2016).

Financial Crises: 1991 and 2013

India has faced financial crises before. In 1991, the country experienced a balance of payments crisis. In 2013, a crisis led to a crash in the country's stock markets. Capital controls were instituted in August of that year, but they failed. There was capital flight at the time, and the new rules did not stem it because foreign investors were worried that they might not be able to repatriate their funds from India. As a result, foreign investment dried up — a consequence of a measure that had sought to boost foreign confidence in India.

The country responded to the 2013 crisis with market interventions aimed at propping up the value of the rupee. Currency controls proved ineffective, making direct intervention necessary to help stabilize the economy. Aiding the country at the time was the fact that its economy was performing well, with a 12% increase in exports in the previous month. Such improvement in the trade balance bolstered the government's ability to intervene in the currency markets (The Economist, 2013).

The crisis was a combination of exchange rate and banking instability. There were concerns at the time about the viability of several of the country's banks, and by late August the government had not yet pursued recapitalization of the banks as a means to stabilize the economy and restore confidence (The Economist, 2013). The exchange rate, which the government sought to manage, began trading outside the bounds it had targeted. Its difficulty in controlling the exchange rate was one of the factors driving capital flight, which in turn weakened the banking system. The measures taken were thus intended to stem capital flight and give the government an opportunity to address underlying weaknesses in the economy.

Conclusion: Resilience, Reform, and Remaining Challenges

India has, however, proven resilient to global crises. Its economy is growing quickly relative to most major economies, which provides a bulwark against financial crisis, at least for the time being. The country is also making further investments and benefits from a young workforce, both of which should help maintain a healthy rate of growth in the coming years. This should give the country time to develop better policies with respect to capital flows and to strengthen the nation's banks. Still, there is risk that if India does not act on these issues, another crisis could follow the current growth spurt. As of yet, however, there is little evidence that the government is moving towards the needed reforms.

References

Gerber, J. (n.d.). International economics: Sixth edition. Pearson.

Rajan, R. & Prasad, E. (n.d.). Next generation financial reforms for India. Booth School of Business.

Singh, H., Soni, A. & Kathuria, R. (n.d.). Telecom policy reform in India. World Bank.

The Economic Times. (2015). Economic crisis: Is the future bleak? The Economic Times.

The Economist. (2013). Through the keyhole. The Economist.

World Bank. (2013). India: Foreign trade policy. World Bank Group.

WTO. (2016). South Africa — anti-dumping duties on certain pharmaceutical products from India. World Trade Organization.