Lesson In Telecom Crisis: Rent-Seeking Behaviour Is Bad Not Just For Business, But Also Government

If India’s wayward telecom policies since the early 1990s have brought home one simple lesson, it is this: rent-seeking policies do not help. By rent-seeking we are talking not only about crony capitalist rent-seeking, as happened during the 2G scam, but also the subsequent rent-seeking by government through high-priced spectrum auctions.

Over the last nine years, as auctions have become the primary mode of allotting spectrum to private players, we have ended rent-seeking by crony capitalists, but normalised the same practices by the state. The Indian state needs to embrace a simple idea: trying to collect more short-term revenues from rent-seeking policies can be injurious to the long-term future of the sector. Higher revenues must result from expanding economic activities, not from a public monopoly on the supply of scarce natural resources, including spectrum.

In the last two days, we have seen Vodafone Group chief executive officer (CEO) Nick Read suggest that his Indian company, Vodafone Idea, was on the brink of financial collapse (only to partially retract later to avoid upsetting the government). His joint venture partner, the Aditya Birla group, has indirectly threatened to opt for bankruptcy by refusing to pump in additional capital if the sector is not helped at this crucial juncture.

One can dismiss both these statements as intended to pressure the government to lower spectrum fees and waive at least a part of the overdues of over Rs 1.3 lakh crore payable now as per the Supreme Court’s verdict in the “adjusted gross revenues” case. Even granting this, there is no getting away from the fact that the industry is going down the tubes, and rating agencies are busy downgrading Vodafone Idea, thanks to highly extractive spectrum charges in a market where pricing power is weak.

As long as Reliance Jio is going to use profits from its oil-and-petrochem businesses to grow telecom market share at the expense of the other players, pricing power will not return. This leaves lower licence and spectrum charges as the only way of ensuring that the industry remains competitive, with at least three private players left in the ring. Vodafone Idea needs to be considered as a potential future casualty.

The second lesson for the government to learn, apart from eschewing mindless rent-seeking behaviour, is that policies need to be reviewed from time to time in fast-changing environments. They need tweaking all the time until an industry reaches a level of stability and maturity.

Consider the stages in which Indian telecom policy evolved.

In the 1990s, the P V Narasimha Rao government allowed private players to bid for telecom circles. Huge and unviable bids were received, and limited spectrum was made available. This defeated the whole purpose of allowing the private sector in so that competition improved services and teledensity expanded. New mobile phone call rates (as high as Rs 32 per minute) were simply too high to encourage mass adoption.

In 1999, thus, there was need for a new telecom policy. The policy was liberalised. In 2001, spectrum prices, discovered on the basis of the then prevailing demand for it, were fixed and given on a first-come-first-served basis to all comers. In other words, the idea was to bring in more players, and increase competition.

But by 2008, the policy needed changes, for the market was expanding at a frenetic pace and spectrum was being sold at bargain-basement prices by the government. Inside the United Progressive Alliance (UPA) government, both the prime minister and the finance minister, P Chidambaram, were in favour of new market-driven prices for spectrum, but the Telecom Ministry ended up as the personal fief of the Dravida Munnetra Kazhagam’s (DMK’s) Dayanidhi Maran and then A Raja. The latter misused Arun Shourie’s first-come-first-served policy to favour cronies. This led inevitably to the 2G scam. Rent-seeking went private.

This is where the UPA made the second mistake, a mistake compounded by the National Democratic Alliance (NDA) under Narendra Modi. After Raja’s shenanigans, the UPA opted for 3G auctions in which very little spectrum was on offer. The industry’s players then bid over the top.

In 2010, the government reaped Rs 1.06 lakh crore from just one auction of limited amounts of spectrum. This is what set the stage for aggressive rent-seeking by the government, an idea that took wing in the public’s imagination when the Comptroller and Auditor General (CAG) said the “presumptive loss” in government revenues from not auctioning 2G spectrum was Rs 1.76 lakh crore.

While, to be fair to the CAG, this was only one of the loss figures mentioned, this was the number etched firmly in public memory. After that, it was considered a crime to not fleece private operators by charging high spectrum fees. Given the public outcry over the 2G scam, the bureaucrats manning the Telecom Regulatory Authority of India (TRAI) and the Department of Telecom always played safe and recommended extortionate base prices for spectrum.

These three forces – government greed, bureaucratic fear, and public assumptions about there being a scan behind every government decision – have now entrenched eye-gouging rents as the norm in auctions. This has happened not only in telecom, but also coal mines and real estate.

The Modi government needs to make a historic U-turn by abandoning rent-seeking behaviour in telecom. This means not only licence and spectrum fees have to be dropped significantly, but the penalties and interest payable by telcos as a result of the AGR judgment must be dumped or stretched over very long periods. This way, the annual bite on the industry is small and bearable.

Over to Modi: this is a decision that needs political backing, for bureaucrats cannot be expected to stick their necks out to recommend such large writeoffs for private players.