A while ago, I read about the “American System” which led to the rapid rise of the United States in the 19th century as well as Japan and China in the 20th century. This is based on 2 principles. First, the government makes it very hard for foreign companies to sell inside the country leaving the playing field open for domestic players. Secondly, it does not favor any particular domestic player allowing competition and market forces to run their course and create strong domestic companies which can eventually compete with global entities. Current examples include China pushing out Google to favor local player Baidu.
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From its independence in 1947 till the 1990s, India did the first part with ferocity but failed utterly in implementing the second. The result was a lethargic bureaucratic system and poor quality everywhere. Finally, all restrictions were dropped and growth picked up.
I discussed this with a friend, but he brought out an interesting example that runs somewhat counter to this simplistic narrative. The telecom sector. 10 years ago, the Indian cellular telephone system was one of the best in the world and dominated by domestic players who were in vigorous competition with each other. Then entered Reliance Industries.
Reliance is a behemoth with massive investments across sectors like petroleum, gas, infrastructure, textiles and much more. They also have very deep pockets. Their initial offering was way cheaper than what any of the other operators had. A price war got underway. Eventually, Reliance never won dominance because it’s coverage was patchy, its tariffs were uneven and its service was unreliable. But the deed was done. Low telephone prices were here to stay.
This sounded like a good thing for consumers. Cell phones went from a being luxury to becoming a commodity. With the coming of mobile internet and smartphones in the next few years, a huge number of people logged on for the first time using a mobile connection.
But low prices mean low profit margins. This is what economists call the position of “perfect competition” where competing companies lower their prices till their profits shrink to minimal levels. At this point, the sector becomes unattractive to any new entrant.
But telecom is not a static sector. Technology improved, the number of subscribers increased, even the geography changed as new buildings rose in cities and blocked the signal path of the cellular towers. The government also sought to bring in revenue by auctioning off new spectrum blocks at high prices. All this meant the money available for the telecom service providers to upgrade their infrastructure remained scarce.
Nor did things remain clean. India’s most notorious scam in the last 10 years was related to the sale of 2G spectrum approved by then telecom minister A Raja who was convicted of accepting bribes to favor some telecom companies. The fallout of this mess was one of the major factors in paralyzing the UPA led Indian government and its eventual downfall in the next election.
Today, the quality of signal and service provided by all Indian telecom companies is poor in most cities. Also, last year Reliance again entered the telecom space offering months of free 4G services in exchange for trying out their network. Some of the existing operators are trying to consolidate with Idea cellular merging with international giant Vodafone. Choppy times ahead.
The point is, it takes many things to make a complex system like an industry sector thrive. Oversimplifying it to one or two buzz words is likely to do more damage than good.