In morning, I got to read an article written in WSJ India explaining economics behind the 2G verdict & why it should be called as win. I appreciate the economic theories behind such verdicts, but a closer look has to be taken, before we argue it as a win or loss.

As argued here days before, SC of India’s verdict has come late off. But again, it could have been averted, if we had known something is hurting the economics of scarce resource management like spectrum management.

The spectrum aka telecom natural resource is scarce. Since inception of National Telecom Policy or even before, Department of Telecommunication has always looked spectrum as consumable commodity, whose prices can be set fixed forcefully.

Now when in a competitive open market, when government tries to fix the prices of its scarce natural resource, it would always results in shortage of spectrum aka natural resource. When there’s shortage of spectrum or say there’s supply shortage, then applicants would have to wait long in queue to get it. So the one who queued first would get it like Airtel, Vodafone or even Idea in some circles, but who queued up last like Uninor or MTS or even Videocon had to struggle to get a chunk of it. That’s something obvious.

See again in entire decade government has tried to keep base prices of spectrum at nominal Rs 1659 Cr only. So once you get license & pay the amount, you are allotted a basic chunk of spectrum say 4.4 MHz. The logic behind such allocation goes to basic idea of ‘rationing system’. So has DoT allocated coupons or ration cards to those who queued up to get spectrum?

Yes, that’s exactly what happened in entire decade. The so called coupon or ration cards are allocated to applicant with set quota of spectrum (say 4.4 MHz) which would be made available to them once they pay some base price to get it. Once resources are scarce and has to be distributed equally to all, government has followed the standard practice of ration cards with set quota of resource on payment of fees. Nothing wrong…?

Please remember that, during last decade at some of point time, there’re more than 350 applicants for telecom license. This is partially because government has forcefully created the supply shortages (along with spat with Ministry of Defense’s inability to free up some spectrum) by keeping price of basic spectrum fixed which was too low. So entry into market was quite easy. Everyone could afford to setup shop, provided they get license. This low entry barrier has shoot up the number of applicants exorbitantly and because of that anyone, so be it real estate firm or petroleum firm could afford the price of entry.

But when there’re supply shortages, the price equilibrium would have shifted upward to higher side. And as there’s no other alternative available, prices of spectrum could rise up and up. This created the price difference between the market driven equilibrium price & the fixed price set by government. This price difference is government’s lost revenue of entire decade and there’s debate going on about exact value of lost revenue by government. This is the entire 2G scam is all about.

So we can claim 2G scam as ‘Lost Opportunity Cost’, had government allowed the prices of spectrum to be fixed by market and not by themselves. The lost revenue could have been better utilized somewhere resulting into better benefits of entire nation or even reducing fiscal deficits. The opportunity cost could be much much higher, which has been demonstrated by recent 3G spectrum auctions. We might never be in position to know the opportunity cost of lost 2G spectrum revenues.

What DoT did was the perfect example of why rationing system used in awarding license could fail while trying to achieve the equitable distribution of resource. You mightn’t equally distribute the natural resources by fixing its prices fixed. Some would get it, some would never get it. DoT’s intention wasn’t unjustified but it had too many caveats to exploit it further. And that’s what happened.

In the rationing process, as always happens, the one who has license becomes the king. The one who has ration card can even sell the allocated quota of ration on his card to anyone at much higher price (market price) making cash benefits directly. It’s what exactly the kerosene or even grains or LPG vendors are doing in the country for past 5-6 decades. The same has happened when Unitech and Swan diluted their stakes on the basis of spectrum ration card.

In short, all this could have been averted, had DoT allowed or even TRAI has recommended the market based spectrum prices discovery long back. Look what has happened now…Spectrum shortfall can’t be fully recovered at present and there will always be shortage. Had market be allowed to discover the spectrum prices, thenIndia’s telecom growth story would be different and might not be as successful as it looks now.

For telcos, who bought the licenses had huge plus on opportunity cost, which otherwise had to be put up for buying up spectrum only. The same has happened. The growth story of telecom is just because telcos had better deployed the cost saved on buying spectrum on deploying network across country. In short span,Indiabecame the second largest telecom market by size. In this case, money circulated remained inside the industry and resulted into positive spiral. Look how many businesses are now dependent on telecom growth ranging from local mobile shops, recharge points, telecom infra companies to even mobile companies, which is entirely a different ecosystem altogether.

That’s why telcos & entire telecom ecosystem shouldn’t be punished brutally like what SC judgment has done. It’s not applicants fault that they are in telecom business inIndiaand that too when policymakers themselves are too convinced about keeping prices of spectrum base fixed for entire decade. Whose fault is it?

Will you charge/punish a person, who has bought ration from wrong agent at much high price than quota price, just because the agent involved has made cash benefits through such transactions? Hadn’t government lost the revenues? Who would be held responsible for lost opportunity cost for government? And what’s the guarantee that such recovered opportunity cost would have benefited the nation given the track record of poor fund management by government? Has anyone noted the opportunity cost of USO fund lying idle for years? Can government manage its revenue better or industry?

Now when in next four months, DoT would re-auction the spectrum, telcos would have to pay market prices of the spectrum once sold at some fixed price. For telcos this would be again lost opportunity cost, where thousands of crores of rupees are invested already. What about sunk cost into investments made in setting up entire telecom infrastructure?

It would always be cost of opportunity, either between industry ecosystem and policymakers, saved on spectrum. In any case, punishing the industry might hurt in long way rather than just recovered revenues for government.

(You can read entire Supreme Court Verdict on 2G scam here)

Tags : 2G ScamOpportunity Cost of spectrum pricesSpectrum managementSpectrum priceSpectrum scam of IndiaTelecom IndiaTelecom Spectrum