Thursday, October 2, 2014


Telecommunications technology is extremely powerful; cellphones have been the biggest technological advance seen by India in a long time. It could have a much greater impact; unfortunately, its potential was lost in the shortsightedness of the department of telecommunications and the turf battles of the two regulators, Telecommunications Regulatory Authority of India and Reserve Bank of India. In India, one tends to live with our institutional limitations. The year in Stanford opened my eyes to what opportunities we were wasting. I later wrote a book about it: India's Telecommunications Industry: History, Analysis, Diagnosis, Sage, Delhi 2006.


“Calling party pays” (CPP) has a long and sordid saga in India. It would seem natural justice that if I ring someone, I should pay, and not the poor recipient of the call. It is also obvious that the cellular operator pays for all the additional infrastructure he requires, and that the calls he feeds into the basic system cost its operator nothing extra. The cellular operator will want to recover the costs of his towers and so on, which he may do out of a one-time charge or periodic charges; as long as he does so, an additional call from or to a cellular phone should cost no more than to a wired phone. And yet, single calls from a cellular phone cost more. Why? Because Indian cellular operators avoid or minimize initial or periodic charges in order to encourage cellular ownership, hoping that anyone who gets a mobile will use it. American cellular operators reason the other way: when they sell a mobile phone, they give with it the right to use it free for so many hours.
CPP has not yet come to the US; here, the cellular operator pays for both outgoing and incoming calls. The cost of incoming calls can mount, especially if a caller receives long-distance calls from a distant friend who incurs high roaming fees. So, like in India, here too mobile owners switch off their phones or avoid giving their numbers to too many people. The pricing system goes back to the 1980s when cellular phones first arrived. At that time they were looked upon as a luxury for the filthy rich who could afford to pay for incoming calls. But today, 80 million Americans – over a quarter of the population – use mobile phones. Kids carry them to schools. There they are considered an utter nuisance, and their use during classes is banned. But that does not prevent defiant teenagers from chatting with their boy friends, who should themselves be in class. The growth of cellular ownership has slowed down, and cellular companies want to make inroads into the $100 billion cable telephone market.
When the US deregulated its telephone market in the 1970s, it broke up AT&T, the monopoly provider, into a number of regional Baby Bells, and prohibited the residual AT&T from entering into their local markets. They remain regional monopolies; new firms have not been able to make much of an inroad into their business. AT&T retained and developed its long-distance telephone business, and is trying to integrate it with cellular operations. It now offers “one-rate plans” which eliminate roaming fees and long-distance charges. But even its customers have to pay for incoming calls. Cellular operators are not prohibited from offering CPP. But Federal Communcations Commission, the national regulator, has studied the pricing for years without coming up with a set of rules; in the circumstances, operators are unwilling to go over to CPP.
Meanwhile, all of the European Union has CPP; the result is that cellular ownership has expanded faster there. Some countries like Finland have gone almost entirely cellular; Nokia’s success as a maker of mobile phones is at least partly based on the large and loyal home market it has. As the market has expanded, so has the size of cellular operators. The merger of Vodafone and Mannesmann is the world’s biggest to date; it was the merger of two cellphone operators. Here, the growth of cellular operators has been stunted by the pricing practices. In the US the government worries that American companies might lose out in the world growth stakes; so it is considering whether to introduce CPP.
But in the meanwhile, the cellular industry has moved off into a direction that poses problems. Frustrated by their inability to penetrate local markets, cellular companies have increasingly introduced roaming facilities – i e, the possibility of using the same cell phone and number wherever one is in a country, a region or the world. So by looking at the number of a cell phone, one cannot tell whether its owner is; for all one knows, he may be halfway round the world.
In Europe this does not matter so much, for people still remain by and large confined to their own countries and cities. Wireless phone companies get nationwide licences, so roaming fees do not apply. Also, in Europe as in India, cell phone numbers have a digit or two more than ordinary numbers, so a caller knows from the number he dials that he may have to pay more. But in America, basic and cellular numbers are the same ten-digit numbers. And America is a melting pot; a cell phone owner may be in Oregon today and Connecticut tomorrow. So if the caller has to pay, he would not know what he would be charged; and that might deter calls if CPP is introduced. If wireless companies in the US had their way, they would rather that he did not know. Their preferred solution is to introduce a beep that would tell the caller that he is calling a cellular number.
There is also the problem of sharing charges. Bell Pacific sends me bills which have two parts – its own charges, and long-distance charges that are due to AT&T. If CPP is introduced, every phone company may owe money to every other phone company. A bill would have to list charges due to all other companies, and the receiving company would then have to transfer charges due to other companies. The basic telephone operators are balking at it; they would rather that every company did its own billing. In which case I might be getting 25 telephone bills every month.
But a new type of company is coming up which will welcome such chaos, namely bill payment operators. You only have to tell them which bills you would like them to pay; they will track bills from those parties – bills for rent, groceries, club subscriptions etc – every month, consolidate them, and make a single charge to your credit card. Where there is a problem, there is an opportunity.
But the problem of intersecting cash flows is common to many businesses; the best solution for them is the one adopted by the better stock exchanges, namely a clearing house. Nowadays, a clearing house is just a computer; the more transactions it encompasses, the better.
This is why I am advocating the bifurcation of all banks into two businesses: a cash management company and a lending company. The cash management company would only keep your cash and make and receive payments for you; for this it would levy a charge. All the transactions would be implemented through a national computer to be managed by Reserve Bank of India. RBI is just beginning to introduce such a system. But it is being extremely cautious; and it does not allow anyone except the banks to use the system. It ought to be far more ambitious: it should aim to eliminate all currency transactions in ten years. Then we could have any number of telephone companies. Financial innovation is the key to competition.

Shuffling the cards

The Directorate General of Foreign Trade (DGFT) has been one of the most obstructive arms of the government; and obstruction always creates scope for corruption. Since India is poor in natural resources, it can build up exports only on the basis of imports. Quantitative restrictions on imports, which the DGFT administers, have been the second biggest enemy of exports – the biggest being the Customs Department. Between the two, they have ensured that India lost the growth stakes to Korea, Taiwan, Japan, Thailand, Malaysia and Indonesia.
The Uruguay Round sounded the death knell of the DGTD, for by 1 April of next year, India must remove all quantitative restrictions except for reasons of morality, defence and environment protection. Older Indians will remember the day ten years ago when P Chidambaram removed quantitative restrictions on the imports of industrial inputs and capital goods. At that time there was an even more corrupt government department, the Directorate General of Technical Development. Irate officials of the DGTD had then stormed Chidambaram’s office; his name plate, which they removed, was missing for many months.
Chidambaram was a brave – some would say headstrong – man; the threat of an attack is just the kind of thing that would have spurred him on to impetuous action. Murasoli Maran is a very different kind of man. He is not a reformer. That does not mean he is hopeless. Ministers can be classified into three classes. First, there are ministers who are venal or cowards; they either use their office for pecuniary purposes or allow their bureaucrats to do so or both. Then there are ministers who do nothing. They enjoy the trappings of power, get what publicity they can, but function essentially as figureheads. Finally, there are ministers with a bee in their bonnet. It need not be a reformist bee; it can even be a downright demented bee. But there are ministers who have a demon in them; they are the ones to watch.
Maran has till now fallen somewhere between the second and the third class. He makes it a point to be on good terms with his bureaucrats; he does not want to flutter any dovecotes or disturb any cozy games. At the same time he gets into these moods sometimes when he feels he must achieve something. As industry minister, he took his own time, but at some point he saw the point – which he could not miss, seeing the adverse publicity he was getting - that the games that certain IAS officers were playing against Suzuki were doing the country a lot of harm. Then he did seek a way out of the hideous labyrinth, and extricate himself with some skill.
He has become Commerce Minister at an interesting time. The Commerce Ministry’s prime function has been to license imports; it must therefore lose its raison d’etre by next year. So logically, the Commerce Minister ought to be preparing to do himself out of his job. This sounds shocking, but is not. In industrial countries, many ministers have done precisely this as government enterprises have been privatized and corporatized.
But if I am right in thinking that the Commerce Ministry has been a powerful force obstructing exports, then its officials – especially those of the DGFT – cannot face its demise with equanimity. So they would be planning ahead to create new empires of obstruction. Where would these empires emerge?
There are two areas for them. One is the Export Promotion Capital Goods (EPCG) scheme. Here, firms apply to the Commerce Ministry promising to export a certain amount in the coming years, and in return they are given a licence to import equipment duty-free. This scheme is very difficult to police. A firm that does not export as promised may vanish in thin air; or it may be employing so many workers that the government dare not take action against it. But such a firm gives a bureaucrat an opportunity to shuffle files. And lo and behold, Maran has extended the scope of the EPCG scheme. Earlier it was available to firms that imported at least Rs 200 million of equipment; now even a firm that imports a thousand Rupees’ worth can get EPCG licences. So, more work for the babus.
The other is duty-free import of inputs. For this there is an age-old duty drawback scheme. The duty drawback is given by Customs, and they have traditionally needed much persuasion to give duty drawbacks. It takes exporters months to get drawbacks, if they get them at all. It is obstruction finessed to the nth degree.
Not only were duty drawbacks not working, but the benefit from them went only to Customs officials. So at some point the Commerce Ministry invented advance licences, which they gave out; now they had a slice of the action. But advance licences worked as badly as duty drawbacks; often the DGFT issued an advance licence months after the exports had left the country. And then Customs could also get back into the game: they would refuse to honour the duty-free licence because it was no longer in advance of the exports.
To get around these founts of obstruction and venality, I suggested a pass book when I was in the government: that instead of getting licences against each export transaction, exporters would get book entries in a pass book. Every export would result automatically in a duty credit which would be written off against input imports. The passbook was introduced in 1994. The Customs detested it, and harassed passbook-holding exporters to the worst of its ability. But the passbook was so much simpler than the alternatives that its popularity grew despite all obstruction.
Now Maran has announced that the passbook will be abolished in 2003 and merged into – guess what – the duty drawback scheme. Who will benefit? No prizes for a guess. The reason given is that certain European countries do not like it. But these countries are working in league with our Customs Department: both argue that the passbook scheme involves hidden subsidies. It need not – especially if customs tariffs were simplified, so that duty could not be saved by importing one thing rather than another. This is why I think that with this export-import policy, Maran has risen out of the second class: he has fallen into the clutches of self-seeking officials of the Commerce Ministry. 
But what about the Special Economic Zones? Just the kind of cosmetics that babus use to bamboozle the public. Renaming EPZs does not make India a China. The Chinese Special Economic Zones were not of a thousand hectares, but of millions of hectares: they were substantially self-supporting. The Indian SEZs are so tiny that they will continue to depend on surrounding unspecial areas for workers, food, inputs etc. There will continue to be vast economic flows between the two, which the babus will have a field day policing.
So has nothing changed? Yes, something has; in a year’s time, almost everything will become importable, and consumer goods imports will fatten the Customs and their revenue. But thank WTO for that; Maran himself is a mere vessel of the inexorable forces of globalization.

Microsoft: the judgment on law

In India we are used to judgments which encompass the facts, the law and the verdict. Hence I find the slow unfolding of the Microsoft case fascinating. In this case, Judge Thomas Penfield Jackson of the United States District Court in Washington gave his findings of facts in November and his findings in law on 4 April; he still has to give his verdict, which he seems to be in no hurry to do.
Even for Indians inured to cases on which courts do not come to a conclusion after 40 years, this deliberate pace may seem excessively slow. But Judge Jackson is pursuing two ends that are not often in the minds of Indian judges. First, he is giving the litigants time to come to a settlement amongst themselves. He even arranged for them an arbitrator, Judge Richard A Posner, an intellectual judge strong in economic law, to help them construct a settlement. If they settled, at least the present plaintiffs would not file fresh cases; and that is an important consideration in this prodigiously litigious society. And the plaintiffs will embody into any settlement instruments satisfactory to themselves for policing the agreement. That will make them less prone to running to the courts every time complaining that Microsoft was not following the orders of the court. The American judicial system has always been less adversarial and more accommodative towards bargaining between litigants. Here, even government prosecutors bargain with criminals on what charges they would plead guilty to – and what they will not be charged with. Thus whereas a judicial system of the British type results in punishments that are severe but uncertain, the American system aims at less extreme but more certain punishment. (Judge Posner finally gave up his mediation when he found that although Microsoft and the Federal Department of Justice could have reached a settlement, some of the 19 state attorneys who have joined this case were holding out and making an overall settlement impossible.)
Second, Judge Jackson is also aiming at a judgment that is likely to be upheld by higher courts. For his is the lowest in the hierarchy of federal courts. Above him is the US Court of Appeals of the District of Columbia. Beyond it is the Supreme Court. This too is unlike Indian courts, where some lower judges are prone to give extreme judgments in the belief that there is a higher court to moderate or correct them. But here Judge Jackson had a delicate task, for the Washington Court of Appeals had already in 1998 ruled in favour of Microsoft on a crucial point: it had conceded Microsoft’s right to integrate its internet browser with the Windows operating system. But in that judgment, the Court of Appeals had split 2 to 1. So Judge Jackson did something that would never happen in India: he disagreed with the superior court, and said that it had interpreted the case law, embodied in earlier Supreme Court decisions, wrongly. He was thus looking forward to the time when the appeal would land up in the Supreme Court, and acting on the expectation that the Supreme Court would support his interpretation.
Resiling only slightly from his statement of facts of five months ago, Judge Jackson has now ruled that Microsoft did not make it impossible for Netscape to distribute its Navigator browser. Although its packaging of Explorer with Windows shut out Netscape from the OEM and IAP markets, it did not close all routes. This finding follows from the fact that Navigator did actually win a fair share of the browser market.
The plaint against Microsoft rests on Sherman Act of 1890. That was the time when Rockefeller was rapidly creating a monopoly by buying up kerosene and fuel oil marketing outlets and depriving oil well owners of markets. It is a federal act and hence cannot apply to what happens within states; it applies to what happens between states, and between the US and other countries. In respect of this area, its Section 1 prohibits “every contract, combination …, or conspiracy, in restraint of trade and commerce”, and section 2 makes it unlawful “to monopolize … any part of the trade and commerce among the several states, or with foreign nations.” Following the passing by Congress of the Sherman Act, various states passed equivalent legislation for themselves; they are suing Microsoft with their own Acts.
Judge Jackson first finds against Microsoft under Section 2, which was easier to deal with. Microsoft’s “monopoly power” is difficult to deny in view of its market share. The only contrary argument is that Microsoft never priced Windows as high as its monopoly would have enabled it to. But that is consistent with a monopoly trying to reduce the possibility of competition eventually emerging. More important for its attackers to prove is that Microsoft used anticompetitive means to maintain its monopoly power.
Here, Judge Jackson did not in November and does not now accept Microsoft’s defence that Windows and Explorer are a single integral product. He enumerates Microsoft’s efforts against the Navigator in the browser market and against Java in the applications market, and comes to the ringing conclusion: “Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems. While the evidence does not prove that they would have succeeded absent Microsoft’s actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft’s anticompetitive actions trammelled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers.”
He relies on the same rejection of integrity in finding against Microsoft under Section 1. He regards the markets for operating systems and browsers as separate ones, and finds Microsoft guilty of tying the sale of one to the other. This is where he is in conflict with the Court of Appeals, and relies on Supreme Court judgments which enjoin that the definition of products and markets must depend on buyers’ perception rather than on legal dogma. On the charge of exclusive dealing, however, he absolves Microsoft on the grounds that Netscape did manage to sell its Navigator despite Microsoft’s exclusive dealing arrangements.
In a few weeks we should get Judge Jackson’s verdict; given his leanings, I cannot see how he can avoid ruling for a breakup of Microsoft. That is going to be hugely unpopular, for Bill Gates and Microsoft have enormous public goodwill. It is also likely to have no immediate effect, for an appeal to the Supreme Court is inevitable. And by the time Chief Justice Sandra O’Connor masters the lore of IAPs and ICPs and comes to a decision, Linux may well have won the war in the operating systems market. For all future IBM machines will operate on Linux; and even now, anyone with access to the internet can unload it free. For all their passions, the government attorneys are fighting a battle of yesteryears.