Economic Times

Avoid acrimony in hindsight

V Ranganathan, Dec 4, 2010, 05.35am IST
Former telecom minister A Raja was forced to quit after the Opposition raised a furore over a
report of the Comptroller and Auditor General of India (CAG) that alleged a loss of Rs 1.77 lakh
crore to the exchequer due to the sale of 2G spectrum at throwaway prices on a first-cum-firstserved basis. However, 3G licences were auctioned, unlike 2G licences.
While the government should ponder over the lack of professional expertise within its own
bureaucracy, resulting in such losses, there is no point in blaming the minister who takes a
decision mainly on the advice of the secretary of the department on such technical matters.
Taking a wrong decision merely reflects inefficiency and is not a crime.
On the other hand, taking bribes is a criminal offence, which this decision may have facilitated.
However, even that has to be proven. The CBI and enforcement directorate are on the job and the
verdict is not out yet. It is, therefore, premature to put a criminal tag on Raja.
Let us look at a similar situation in Britain. When Britain allotted 2G licences, they went through
a bureaucrat's version of an auction prequalifying bidders through criteria like knowing
business plans, their capital base that Prof Paul Klemperer of Oxford derisively calls 'beauty
contests' . They could raise only 44,000 pound through this route. Subsequently, Klemperer
conducted the 3G auctions, where he raised a whopping 2.2 billion pound for the government
and the consequent near-bankruptcy for the bidding firms. But no one in UK used this benefit in
hindsight and criticised the 2G auctions.
Besides, while many academicians have been consistently advocating auctions, there have been
differences in views even among telecom regulators. Mr Pradip Baijal, former telecom regulator,
picked by BJP minister Arun Shourie was completely opposed to auctioning spectrum, while his
successor Mr Nripendra Mishra was in favour of auctions. Baijal has been claiming that the
phenomenal growth of mobile telecom and the spectacular low prices have been the result of the
policy of handing out spectrum at low prices and allowing revenue share instead of lumpsum
payment.
His argument is that telecom companies will try to recover the high costs borne by them on the
auctions from consumers. And they will do so by charging them high prices. This kind of
argument has many takers even among the educated and informed, though it is plain wrong.
First, the bid amount at auctions is a sunk cost for the telecom firms, and their profit-maximising
behaviour in a competitive market cannot allow them the luxury of recovering their sunk costs, if
their competitors decide to undercut them.

Secondly, the firms will squeeze consumers as much as they can, based on what the traffic can
bear, and not be content with just recovering costs. To make this point explicit, consider a case
where each of those bidders who has paid a high bid amount, is refunded this amount. Will they
reduce the price now? No way.
Thirdly, telecom is an oligopoly, with large sunk costs, near-zero incremental (marginal) costs,
and with a huge network externalities, where the winner (i.e., number 1) takes the most.
In such a situation, market share is everything, and firms will try to maximise market share and
not be worried about recovery of sunk costs. The first mover has an advantage and every firm
will want to be that with a huge market share. Thus, low prices are inevitable.
CAG's figures are largely hypothetical and media has created an unnecessary and undeserved
authenticity to their figures. We should take this as a mature nation and carry on without
indulging in acrimony in hindsight.
(The writer, V Ranganathan, is RBI chair professor, IIM Bangalore)