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Balasubrahmanyam, Sandhya (2015) Ringing in the rents : policy drivers in Indian telecom. PhD Thesis. SOAS, University of London. http://eprints.soas.ac.uk/id/eprint/23588 Copyright © and Moral Rights for this PhD Thesis are retained by the author and/or other copyright owners. A copy can be downloaded for personal non‐commercial research or study, without prior permission or charge. This PhD Thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder/s. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders. When referring to this PhD Thesis, full bibliographic details including the author, title, awarding institution and date of the PhD Thesis must be given e.g. AUTHOR (year of submission) "Full PhD Thesis title", name of the School or Department, PhD PhD Thesis, pagination. Ringing in the Rents: Policy Drivers in Indian Telecom Sandhya Balasubrahmanyam Thesis Submission for the degree of PhD in Economics 2015 Department of Economics SOAS, University of London 1 Declaration for SOAS PhD thesis I have read and understood regulation 17.9 of the Regulations for students of the SOAS, University of London concerning plagiarism. I undertake that all the material presented for examination is my own work and has not been written for me, in whole or in part, by any other person. I also undertake that any quotation or paraphrase from the published or unpublished work of another person has been duly acknowledged in the work which I present for examination. Signed: 2 Abstract The growth of mobile telephony in India from its inception in 1995 has been remarkable considering the inconsistent policy directions and the high levels of corruption inherent in the sector’s development. Current analyses of the sector characterize the sector’s growth as having taken place in spite of poor and inconsistent policy choices. As a result, policy prescriptions focus upon appropriate auction design, to ensure that the correct market value of spectrum can be discovered, or upon regulatory independence, to ensure that the extraction by the state is curtailed to within levels that do not adversely affect the sector. This thesis argues that viewing the income streams in the sector from the perspective of rents generated through the creation of property rights in spectrum and using the analytical lens of a political settlement to study the rent distribution and outcomes can better explain the choice of policy as well as its impact on the sectors growth. This analysis allows us to draw conclusions that explain the underlying structural dynamics of the industry, as well as the evolution of policy. First, it indicates that the primary source of rents in this industry, spectrum scarcity, is itself policy driven. Second, the persistent domination of the three big telecom providers is a consequence of their access to differential rents from early access to better quality administratively allocated spectrum. Third, the seemingly inconsistent policy and high levels of corruption are better explained as arising in the context of a particular political settlement and then reinforcing or modifying the political settlement as an outcome of the rent streams they generate. Further, the analysis helps identify potential future directions of development of the political settlement and the impact these may have on policy effectiveness in the sector. 3 Contents Acknowledgements ................................................................................................ 12 List of Abbreviations .............................................................................................. 14 Chapter 1: Introduction .......................................................................................... 18 Chapter 2: A Note on Telecoms ............................................................................ 36 2.1 Sector Boundaries: ........................................................................................ 36 2.1.1 The Structure of the Sector ...................................................................... 41 2.2 Technology ................................................................................................... 43 2.2.1 Basic Network Architecture ................................................................... 44 2.2.2: Technology Choice: GSM vs. CDMA.................................................... 47 2.2.3: Transmission Mechanics: 2G vs. 3G ..................................................... 49 2.3 Economics of the Sector ............................................................................... 52 2.3.1 Competition: ........................................................................................... 55 2.3.2 Spectrum Assignment: ........................................................................... 56 2.5 Summary ....................................................................................................... 67 Chapter 3: India’s Sector Dynamics ...................................................................... 69 3.1 Introduction: ................................................................................................. 69 3.2 Rents, Spectrum Rights and Policy .............................................................. 71 3.3 Sector Structure and Dynamics ................................................................... 76 3.3.1 Telecom growth metrics: Putting India in perspective ........................ 76 3.3.2 The Shape of the Market ....................................................................... 82 3.3.3 Sector’s Contributions to National Product ......................................... 88 3.4 Economics of the Firm: ................................................................................ 90 3.4.1 Evolution of TSP Profitability ................................................................ 92 3.4.2 Data ....................................................................................................... 100 4 3.5 Summary: ..................................................................................................... 104 Chapter 4: Rents and Political Settlements ......................................................... 108 4.1 Introduction ................................................................................................. 108 4.2 Theoretical Perspectives on Rent ................................................................ 112 4.2.1 Early Theories of Rent ............................................................................ 113 4.2.2 The Classical Economists: ..................................................................... 115 4.2.3 The Marginalist Revolution: ................................................................. 126 4.2.4 Developmental Statist Perspectives .................................................... 136 4.2.5 New Institutional Economics ............................................................... 140 4.3 Khan’s View of Rent Creation and Political Settlements .......................... 150 4.3.1 Property Rights, Transaction Costs, Transition Costs ......................... 150 4.3.2 Political Settlements ............................................................................. 152 4.3.3 India’s Political Settlement – Clientelism and Informality ................. 158 4.3.4 The Sectoral Political Settlement in Telecom ..................................... 164 4.4 Summary ..................................................................................................... 166 Chapter 5: Research Methodology ....................................................................... 170 5.1 Introduction ................................................................................................. 170 5.2 Methodology:................................................................................................ 171 5.2.1 Research method ................................................................................... 174 5.2.2 Methods of Data Collection ................................................................. 175 5.3 India’s Political Settlement in Telecom ..................................................... 177 5.3.1 Political Agencies: .................................................................................. 178 5.3.2 Bureaucratic agencies ........................................................................... 184 5.3.3 Lobbying Agencies ................................................................................ 186 5.3.4 Private Sector Agencies ........................................................................ 187 5.3.5 State Owned Telecom Service Provider: .............................................. 192 5 5.4 Limitations of the study .............................................................................. 192 Chapter 6: Rent Creation and Distribution in the sector 1995-2014 .................. 197 6.1 Introduction: ................................................................................................ 197 6.2 Prior to Mobile Telephony: ........................................................................ 199 6.2.1 The Telecom Dark Ages ....................................................................... 200 6.2.2 The Decision to Privatize .................................................................... 202 6.2.3 The Tipping Point ...............................................................................