2G spectrum auction - a flop show and blame game

By Dr D M Deshpande

The Supreme Court mandated 2G Spectrum auction that was carried out by the Government has not yielded desired results. The Government was hoping to rake in Rs 40,000 crore from the exercise; but ended up getting less than Rs 9,500 crore, which is not even fourth of the sum envisaged before the auction!

As recently as in 2010, the Government had garnered revenue of over Rs 1 lakh crore in 3G Spectrum auction. The flop show is being interpreted differently by various persons and institutions. The Government’s first response has been one of criticising the CAG for it’s projection of presumptive loss of Rs 1.76 lakh crore.

Conveniently, the Government is overlooking a few facts of this case. One, it has not included all court mandated spectrum for auction; it has kept aside a part of it and has now been questioned by the highest court. Probably in order to make up for deficiency in revenue, it increased the base price so high that investors refrained from bidding. In case of 5MHz the floor price was hiked to Rs 14,000 crore which is nearly four times the price fixed in 2010 auction. Second, the timing, the CAG report had talked about the losses for the Government in 2008. To compare that with partial auctions held in 2012 is not quite right. Further, the CAG had given three scenarios in which the estimate of presumptive losses ranged from Rs 57,000 crore to Rs 1.76 lakh crore. Whereas the estimates of potential revenue loss to the Government vary and could be debated, the fact remains that the spectrum allocation under A Raja in 2008 was not proper and the scam was unearthed by CAG.

It is wrong to interpret that auction is not the best method for allocation of natural/state resources. It is not the content but the context in which the latest auction was held, that is responsible for low pricing. In 2008, telecom was still a virgin market in the country with lower penetration of mobile phones. In 2012, penetration in urban centres such as Mumbai and Delhi is over 100 per cent, the reason why there were no takers this time in 2G auction. India had 234 million mobile subscribers in 2008 and the addressable market was around 800 million. Every month 8 to 9 million subscribers were added and it reached a peak of 20 million additional subscribers in 2009. By 2012, the growth turned negative with a subscriber base of 900 million. The tele-density then was 24 per cent but has now reached a level of 70 per cent in 2012.

All this must have gone in to the calculations of investors. The economy was growing at 9 per cent per annum in 2008 and a higher growth rate was projected for the coming years in 2008. Now, we are staring at 5.5 per cent growth with no major recovery in sight.  In 2008 there were around 575 bidders; most of them have fled because of issues such as corruption, losses and policy instability. Most of the existing players in telecom are cash strapped and some are facing problems of mounting debts. The ARPU (Average Revenue Per User) has dropped from Rs 316 per month in 2008 to Rs 97 now. In any case, the investment climate is hardly conducive with policy flip-flops and volatile capital
markets.

It is easy to blame the auction for all the other lapses of the Government and revert back to other methods of allocation such as first-come-first-served. This will take away the price discovery for distribution of natural resources from markets to bureaucrats and ministers. That the policy in telecom has once again gone wrong is undeniable. Government is to blame itself for this sorry state of affairs. Instead of playing blame games, it should try and retrieve the situation in a sensible manner.