Thursday, September 27, 2012

SC order wont save the telecom industry….

The order of the Constitution bench of the SC pretty much overturned the order of its own 2-judge bench which had canceled the 122 2G licenses issued earlier and ordered that auctions were the only way to allocate natural resources. It was always obvious that the judiciary had overreached and it could not dictate policy to the Executive. The order is a snub to the 2-judge bench. While it brings sanity to the resource allocation process itself, it does nothing to prevent the ongoing destruction of the 2G industry.

The one to blame the most is the government. It chose not to appeal against the order of the 2-judge bench for its own material considerations. Maybe the smell of the money got to the government’s nostrils and it found milking 2G to be the best way to fix its fiscal deficit problem. But if the government had opposed the cancelation of the 122 licenses, the SC’s Constitution bench would have found it very difficult to exclude spectrum from the ambit of its order. Today, it has said that only auctions should be pursued for spectrum allocation. This is a mistake. How can it order auctions for spectrum? That’s clearly in the government’s domain. It could have canceled the licenses that broke the policy; where there was foul play. But not all. But since the government didn’t challenge it, it managed to insert that bit in – perhaps to protect the dignity of the 2-judge bench. History will hold the government responsible for this.

The whole 2G “scam” (I never called it that) came into existence because of the so called “success” of the 3G auctions. Had 3G auctions failed to generate so much cash for the government, no one would have demanded that 2G spectrum also be given out that way. After the 3G auctions, the government became like a capitalistic blood-sucking warlord squeezing out every last drop from the private sector in the process. Whether the 3G policy has been a success or failure is clear from Kapil Sibal’s recent editorial in the TOI of 15th September: “Auction in 3G enriched the government by fetching over Rs 1 lakh crore, but since 2010, there is no evidence of the roll out of 3G services. Without the roll out, bank debt cannot be serviced. The telecom sector is now under heavy debt. It has not recovered since.

Sibal was right. 3G has been a dismal failure. The total number of 3G subscribers is less than 20 million. Tariffs are sky-high and it appears that India is missing the data revolution. As a desperate measure, telecom companies have slashed data rates, and while this has led to some growth in subscriber base, it is unlikely to help them recover their investments. Much of the pressure brought by 3G license fees is now being transferred to 2G subscribers.

Sibal was write in one more respect. In the same editorial, he wrote “Governments are not in the business of maximizing revenues. Instead of filling its own pocket, it is obliged, in a welfare state, to create an environment to fill the pockets of the ‘aam admi.’ Foregoing revenue in 2G helped tele-density and served a larger public purpose. Instead of the exchequer, the people were enriched.” The Supreme Court has ratified his views by stating clearly that “Maximization of revenue in the distribution of natural resources can't be the sole criteria in all situations and circumstances.” And further: “Each bit of natural resource expended must bring back a reciprocal consideration. The consideration may be in the nature of earning revenue or may be to "best subserve the common good". It is this “common good” that the cheap-spectrum 2G policy had served all along. That’s why India’s tariffs were the lowest in the world; that’s why teledensity grew from under 10% to more than 70% in the last eight years of the UPA government. People forget today – but in 2004 when the UPA took over, we had just 275 million mobile phones. Today we are nudging a billion. Nearly 75% of all mobile connections came because of the UPA continuing with the cheap-spectrum policy. Now all that is over.

But rather than focusing on the common good served by a cheap-spectrum policy, the government chose to fill its coffers. The signs of that are visible. The Reserve price for the forthcoming 2G auctions has been set at Rs 14000 crores for a pan-India license. And in a move that smacks of an extreme focus on “maximizing revenues”, the government has managed to get a higher revenue sharing formula in place as well by “lowering” the Reserve price from the earlier crazy number of Rs 18000 crores. The government’s gamble is that bidding will push up prices beyond Rs 18000 crores anyway (that is why it is releasing spectrum in small doses, creating artificial scarcity). It will end up with higher license fees and higher revenue share as well. Such motives of profiteering at the expense of the common good is despicable.

In anticipation, telecom companies have started “culling” low-ARPU customers, preferring to conserve costly spectrum. They have also raised tariffs by a whopping 25% in recent times. More tariff hikes are expected in the coming months. It is my estimate that teledensity will drop below 50% in the next few years. Is it “common good” when the government squeezes the private sector dry and makes them shrink services? Is it common good when 600 million people get deprived of this life-changing technology? Is it common good when the “successful” 3G auctions lead to a situation where usage of data in India remains at pathetic levels, and the country loses billions of dollars of growth opportunity as a result of that? Unfortunately, in the oneupmanship battle for popularity, the government has got sucked in. It’s been pushed by a reckless and irresponsible opposition, a politicized CAG and a recalcitrant SC bench into enacting a policy that is decidedly anti-common-good.

I would rather raise diesel prices and railway fares than increase 2G tariffs. The telecom industry’s low pricing represented the most efficient form of distribution of government goodies – far better than the subsidies program of the government, 85% of which is spent in the administration of the subsidy. In telecom, 100% of the benefits reached the end consumer. But does the government have the elbow room left to change its 2G policy? I doubt it. And that is why the telecom industry will falter. Investments will reduce. Job losses will happen. And a once proud sector of the economy will become another case of “failed policy”.

The real truth is that the government became greedy when it came to 2G spectrum. It decided to hoard it. It decided to overprice it. It decided on an ascending auction method – which leads to irrational price discovery – rather than the more rational e-tendering method. It became greedy. In the short run, the government may make large dollops of money. But in the long run, it has caused irreparable damage to the industry….

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