The 1981 contract signing of then Prime Minister Indira Gandhi with Alcatel CIT of France to merge with the state owned Telecom Company changed the telecommunications industry in India forever. According to BBG Communications, the projection for this joint venture was the setting up of 5,000,000 lines per year. But not long after, political pressures grew that despite of The efforts of PM Gandhi, one of which was an invitation she extended to Sam Pitroda a US based NRI to set up a Center for Development of Telematics, plans for liberalization had to be shelved.
Later, under the leadership of Prime Minister Rajiv Gandhi, many public sector organizations were set up like the Department of Telecommunications, VSNL and MTNL. Many technological developments took place during his term but the country's telecommunications business was still heavily working on a protectionist framework.
And yet the demand for telephones has been on the rise. It was during this period that the P.M. Rao led government introduced the national telecommunications policy in 1994. Changes in the areas of ownership, service and regulation of telecommunications infrastructure were in place. Where previous joint ventures failed between state owned telecommunications companies and international players, this time, it was all systems go. But still complete ownership of facilities was restricted only to government-owned organizations. Foreign firms were allowed only ownership of up to 49% of the total stake, which represents mostly their contribution in technology transfer.
During this period, recommendations from the World Bank and the ITU pushed for the liberalization of India's long distance services, which consequently released the monopoly of the state owned DoT and VSNL and opened the field to other players.
The Rao-led government indeed implemented liberalization but not according to the WB-ITU's recommendations. Instead, the country's local services was the target of liberalization efforts, which was a good way too in taking the opposition's confidence while not alienating foreign telecoms involvement. It promised that long distance phone liberalization will follow after 5 years.
The country was divided into 20 telecommunication circles for basic telephony and 18 circles for mobile services. These circles were divided into category A, B and C depending on the value of the revenue in each circle. The government threw open the bids to one private company per circle along with government owned DoT per circle. For cellular service two service providers were allowed per circle and a 15 years license was given to each provider. As these progressed, the government did face oppositions from ITI, DoT, MTNL, VSNL and other labor unions, but they managed to keep away from all the hurdles.
In 1995, the government set up the Telecom Regulatory Authority of India which significantly reduced the government's role in telecommunications-related tariff setting and policy making. The DoT was in opposition to this. The administration changed in 1999 and the new government under the leadership of A.B Vajpayee was more pro-reforms and introduced better liberalization policies. It was also during this time that DoT was divided into two agencies – DOT was one, which retained policymaking functions and the other concentrated on its service function (DTS), but which was later renamed as BSNL.
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