Thursday, February 10, 2011

New TRAI recommendation on 2G spectrum pricing is a joke

Yesterday's papers reported a recommendation made by TRAI that telcos that possessed spectrum above 6.2Mhz would have to pay Rs 16000 crores for it. This includes BSNL, Airtel, Reliance and almost all the incumbents. This recommendation was received by media with cheer.....partly because it vindicated their stand that there had been underpricing. There is nothing wrong with this recommendation, except that it is sought to be applied with retrospective effect.

Applying retrospectively is a ridiculous concept. This specific instance is an effort by TRAI to cover up for its own past goof-ups. It's also a decision taken keeping the present mood of the country in mind (illogical; pandering to the mood of the people). It has no legal legs and will surely be challenged by the affected corporates. After all, how can the rules of the game be changed by the government after the game has been played???

If the government accepts TRAI's recommendation, it's basically accepting that it made a mistake in the past.....and now wants the corporate sector to pay for it. Why should the  corporate suffer because the government made a mistake? Is it not possible that the corporate may have decided against taking the spectrum had it known that the cost would have been this high? What's left of the credibility of any government decision if a corporate cannot be sure that it wont be reversed at a later date?

To understand this better, lets shift the time frame to the present. The government recently rolled out the 3G spectrum policy (and the irony of course is that the success of the 3G policy put the government in the dock. But that's not the point of this piece). Many telcos bid and acquired the licenses and some have even rolled out their services. They will invest many thousands of crores more in the next 2-3 years. Now imagine....if after 2-3 years, the government does a re-think and believes that actualy the pricing of the telcos should have been double of what it actually charged, and imagine....if it actually made the telcos pay up. In turn, just imagine.....if the the telcos asked us users of 3G services to pay up higher rates for the past??! Would you pay up? That's what this TRAI recommendation amounts to! What kind of a country would that make India? Where even the government's decisions are not reliable? What kind of damage would that do to investments flowing into the country? Would you like to invest money in a government deposit scheme if the government could later revise the terms of the deposit? Say the government agrees to pay 9% interest today......but a few years later say: Sorry I made a mistake. It should be 6%. Now please return the excess interest I pay you in the past!

This is as serious in nature as a country defaulting on its sovereign debt.....what we are seeing happening in Europe. But no decent government will actually default. Sovereign debt comes with the guarantee of the country itself. How can an Ireland or a Greece refuse to pay the debt it took after giving a guarantee? When it took the debt, it promised to pay the debt. There was no risk to the investor....hence they accepted the cheap interest rates. Now, how can the government default? This is why the European Union and the IMF and a few countries like Germany individually came to the rescue of these embattled countries.....just imagine if European countries went back on their promise to pay, would anybody invest in their sovereign bonds in the future? What credibility would they have left? Sure, they can say that in the future, their debt is not guaranteed.....that's fine....and for this, they may have to pay higher rates of interest.....those who invest would do so with this knowledge.....but under no circumstances can a government go back on its word. Changing a policy with retrospective effect amounts to exactly that.

So what should the government do? Should the country simply lose all this revenue?

1) The answer is unfortunately YES. Its simple. You make a mistake, you pay for it. But either which way, you cannot make others pay for your wrong decisions. If the people want to punish the government for this mistake, they can do so in the elections. That's the power the people have.
2) The government should severely penalize TRAI who seems to be waking up at this late hour and realizing its mistake (without actually accepting that it made a mistake). One of the past TRAI Chairmen is in any case in the dock. But maybe TRAI should lose some of its autonomy. Maybe it needs to satisfy the Parliament or the Judiciary that it has made changes to its constitution and its ways of working. Its powers need to be trimmed.
3) Fundamentally, the government should beef up its own systems of decision making. With the knowledge that it cannot reverse the decisions taken.

And by all means, the government has every right to change its policies.....but they should apply in the future and even then......with adequate warning to the incumbents. Changing any policy is bad.....if it affects others....changing it with retrospective effect is vindictive and criminal.

The real truth is that at this time, everyone is trying hard to appear above the board. TRAI, DOT, the ministers, everyone....and in the process, they are taking stupid decisions. If this continues, India will genuinely earn itself the tag of a banana republic. I heard somewhere that India has still not become a banana republic but it has surely become a banana-skin republic. With the kind of government policies we have..... you can slip anytime!

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