Reforms are a shapeless word that describes nothing. The closest one can come to their meaning is that they are the policy changes that occurred since 1991. They are like Mother Teresa; they have a good image.

So it was in the politicians' interest to call anything they wanted to do reforms. But the proof of reforms is in their results. Consequences often take years to work themselves out.

For some reforms, those years have passed, and it is possible to ask whether the reforms were really reforms or follies. Let me take that hotbed of reforms, telecommunications.

Here the government's overt goal was to introduce competition; but covertly, it wanted to make money -- a lot of money.

The more money it made, the less could the opposition -- which then was BJP -- accuse it of selling family jewels for a pittance.

So it introduced very few new competitors to the government-owned companies, and auctioned the licensees at fantastic prices.

What was the right price for a licence? The bidders could see the obscene profits of the government companies; they reckoned that the government companies had starved the market of telephones, and hence that there was enormous latent demand for them.

They employed costly consultants to tell them how many. What they did not reckon on was the government companies' fire power.

As soon as the government had collected billions from the licensees, the government telecom companies unleashed millions of telephones.

Soon the demand was satisfied, and there was no market left for the new licensees. Many sold out; some disappeared without trace.

Today, only two serious landline players remain. The first is Reliance. It has created such a huge system that it could achieve full network economies on its own.

The Tatas have been more modest because they do not command so much cash. They bought into VSNL to get at its cash reserves, but Pramod Mahajan threw a tantrum and spoilt the party.

Bharti may one day be a third serious landline player, but just now it has invested too much in its cellular business, and that business is not generating enough cash.

Thus the government companies played a trick and finished off most competitors in land lines. The cellular business was initially good; mobiles were novel and fashionable and attracted rich customers.

First the government companies milked it by charging absurdly high fees for cellphones' access to land lines. Then they got into the market themselves, and undercut the private licensees.

The licensees thought that the government companies had played dirty; but they could not make too much of a fuss because they needed access to government companies land lines.

Then the government gave licences for WLL. Everyone thought this was a new kind of phone, with limited reach and hence of less value.

Actually, the reach of a phone is the same as the reach of the total network; but hurdles may be put in reaching it in the form of interconnection charges.

It is just like the global market: the market for any good is the world, but import duties and transport costs cause variations in the cost of access to the market.

The reach of a WLL phone depended on access charges; and if the government companies were given a WLL licence, they could increase its reach, if necessary to the national market, by simply cutting out interconnection charges.

That is in essence what Reliance plans to do eventually -- offer cheap connectivity with 673 towns, and thereby to give their WLL phones the same reach as any cellphone.

The cellular business, which was humming along nicely, now threatens to become a dog.

That is why the cellular operators are so mad -- so mad that they refused connectivity to WLL phones, little realising that the government companies could play the same game, with deadly effect on the cellulars.

Meanwhile, the government keeps grinning like a Cheshire cat. It has already swallowed the huge licence fees that the poor private entrants paid out in their initial folly. Whatever happens to them, whoever wins, whoever loses, the government will continue to get its share of revenue.

The cellular operators found Pramod Mahajan unsympathetic. No wonder; he and his government are in clover. Why should they shed tears for the cellulars?

TRAI started with a mistake: it accepted the absurdly high interconnection fees that the government companies charged the cellulars, and thus approved a domestic tariff barrier, protecting the government companies' business from the cellulars.

If one player can impose tariff barriers, so can others. The cellulars are trying, though I doubt if they get much money from interconnection fees.

Reliance will do something cleverer. It will not charge high interconnection fees; it will charge higher lumpsums and lower variable charges. Thus its network will become a pool of low marginal costs, and traffic will tend to be confined to it.

Others will find other tricks to keep customers. But the effect of all these manoeuvre is twofold.

First, the market is getting divided up into submarkets between which calls do not move easily; so network economies are being lost.

And second, the charges and conditions are getting so complicated that new customers can no longer know what they are buying.

This is very dangerous; policymakers should be worried about it. But if you talk to them, they will tell you one or both of two things.

First, they have not got the powers to set things right. Since the powers are divided between the government and TRAI, both can play this game of impotence ad nauseam.

Second, they were not there when the mess was made, so they cannot be held responsible.

Arun Shourie has been telecom minister for less than a month; Verma has been there longer, but he was not there when the initial mess was made.

Justice Sodhi was there. He could see what a mess would emerge unless the powers were unified into one body. So he tried to assume the powers he needed. That was inconvenient to the bureaucrats in the telecom ministry, so they got rid of him.

Everyone talks of a level playing field. The way to level the field would be to return to everyone their licence fees with interest, and to ban all interconnection charges. That will never happen.

So I cannot see how Arun Shourie can succeed, but I am still fascinated, because even if he fails, he will fail interestingly.

He is highly intelligent; telecom is just the kind of conundrum on which he would like to try his skills. He is extremely patient; he treated even the yelping dogs that attacked privatisation with unfailing courtesy.

And he has gone through so much in life that he can't be easily depressed. He might even give some of the mischief makers a manic depression. It will be fun to watch.

Run-up to the Budget 2003

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