Vivek H. Dehejia
There is much confusion in the press and the social media about the economics behind the putative loss of the equivalent of US $40 billion to the central government’s exchequer as a result of the way in which 2G spectrum was allocated “first come, first serve” to cronies rather than being auctioned publicly in a transparent manner.
Some people are contending that the loss is not real, only notional. One such, not surprisingly, is the new Telecom Minister, Kapil Sabil, who uses the fancy legal-ese word “presumptive” for the loss. A presumptive loss, presumably, is not real, and therefore shouldn’t worry us. This is bunkum. Economists have a term called “opportunity cost” – it is the cost you incur by making one choice rather than another. It may not show up as an accounting cost, but it is a cost nonetheless. In this case, the $40 billion lost by undercharging telecom providers for access to the 2G spectrum is money that the government didn’t earn, and therefore couldn’t spend on something useful – like infrastructure, public works, social policy, military hardware, whatever. To quote Rupa Subramanya, writing recently in the Wall Street Journal India: “After all, a rupee not earned is a rupee wasted.”
Sonali Ranade, a trader, who is very active on Twitter, makes an interesting argument in favour of the view that selling the spectrum cheaply had economic benefits for the average person. She suggests that giving away spectrum at below the maximal possible cost can be explained as a policy choice, since, presumably, the end result is a lower cost per call to the consumer. In fact, the discredited former Telecom Minister, A. Raja, made a similar argument in his defence. The difficulty with this is that it appears as an ex post facto rationalization of what was evidently done in a shady and opaque manner, not a high-minded policy decision to help the public get cheaper mobile calls. So much for Mr. Raja.
However, Ms. Ranade’s argument needs to be taken seriously. If I understand correctly, her explanation is that the licensing costs have to be amortized by each provider, and, therefore, if the spectrum had been auctioned and the full value extracted by the government, these higher costs would be passed on to consumers as higher costs per call.
This explanation is plausible, but requires some background assumptions on market structure to be considered economically valid. In an oligopolistic industry, in which monopoly rents are shared amongst a small number of sellers, I can see this argument as having some validity. However, as the number of providers increases, and the industry’s structure becomes nearly competitive, the cost per call, which is a marginal cost, should be unrelated to the licensing cost, which is a fixed cost. This is first-year principles of economics, right out of the textbook. Indeed, in the United States, which has a highly competitive industry, the cost per call is nearly zero for many domestic calls.
The right response, in the Indian scenario, would be to open up mobile telephony to much more robust competition, and thereby destroy the value of the monopoly rents being earned by incumbent providers. Costs per call, which now average 25 or 50 paise, should drop down to 5 paise or less in my judgement.
My bottom line: just because a loss to the exchequer doesn’t show up in the account books, that doesn’t make it a fictive or “presumptive” or notional loss. It is as real as the cost of sleeping late, arriving late to a job interview, and so not getting a raise. Your income hasn’t changed. Does that mean there is only a notional loss? No. The loss is the income you didn’t earn but could have if you had shown up on time.
We need to tone down the political rhetoric and hyperventilation in the social media and inject some basic economics into the debate if we are going to dissipate the fog of obfuscation and chicanery surrounding the 2G mess.
After the initial post of this piece, I had an enlightening Twitter exchange with Sonali Ranade, mentioned above. It adds some important nuance to the broad strokes with which I have painted the picture. In her view, the “first come, first serve” policy, which basically gave the spectrum away for free, was the correct policy framework back in 2001 under then-Telecom Minister, Arun Shourie. The argument being, for a nascent industry, this was a way to jump-start it, and that charging the full value of the putative monopoly rents via auction would choke it off. Nominally, in 2008, Mr. Raja just continued the policy of the previous government. But, Ms. Ranade contends, by this juncture the climate had totally changed, and there was no economic rationale to give away the spectrum rather than auctioning it. Through the lens of my analysis, my interpretation would be that the industry was now rather more mature and “contestable” (if not competitive), sufficiently dense in a word, that it could have more nearly approached the competitive rather than the oligopolistic situation, and that an auction would be warranted, without fear of jacking up prices for consumers.
You may follow Vivek H. Dehejia on Twitter @vdehejia.