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By The government can hardly be absolved of blame when it comes to its decisions on the 2G spectrum policy, writes Ashok Sanjay Guha The author is professor at the School of International Studies, Jawaharlal Nehru University
  • Published 27.10.11

As the greatest financial scandal in our history engulfs even more of our politics and politicians, one point of crucial importance seems to have eluded political commentators and the media. It is now generally agreed that A. Raja — possibly with the support of Kanimozhi — accepted bribes, retrospectively changed the cut-off dates for the receipt of applications and manipulated the procedure for the issue of licences to cell-phone service providers so as to favour certain enterprises and individuals. The recently-discovered note from the finance ministry to the prime minister has also broadened the consensus on the events that preceded Raja’s exploits. The government now concedes that the issue of spectrum on a first-come first-served basis at 2001 prices, while initially proposed by Raja, was, in fact, a collective policy: it was adopted only after discussions with, and with the acquiescence of, the then finance minister and indeed, the prime minister.

However, we are now in the midst of a concerted effort by the government and the Congress to draw a sharp line of demarcation between these two phases of the 2G scam. The policy, we are told, was adopted by the government in public interest. It aimed at increasing tele-density in the backwaters of rural India and providing a level playing field for new entrants and existing service providers. It was also a continuation of the policy established in 2001 under the National Democratic Alliance’s regime. True, the sale of spectrum in 2008 at 2001 prices caused the treasury the loss of 1.76 lakh crore that the comptroller and auditor general of India has been so vocal about. But that was revenue legitimately sacrificed on a noble public cause: the policy decision was taken in good faith with the interests of the nation in mind — it was not the product of some dark conspiracy to plunder the exchequer for private gain. The prime minister, the then finance minister and others involved can be accused, at most, of a misjudgment — an expensive misjudgment no doubt, but nothing more venal. In sharp contrast, the implementation of the policy by Raja was villainous, criminal and deserving of the worst that the courts and prisons could do to him. Signal punishment needs to be meted out to him and his ilk, establishing thereby that United Progressive Alliance II adheres to the highest standards of public morality.

Doubting Thomases may, of course, question the justification offered by the government for its policy decision. Increasing tele-density may have been a concern in 2001, when the dimensions of the potential market were unknown, but certainly not in 2008, when aspiring service-providers were literally beating down the doors of the telecom department and had to be excluded by dubious means like retrospective changes in the cut-off dates for applications. The price of telecom services is kept down not by subsidizing the sale of spectrum but by competition among service providers: witness the low prices of 3G services despite the auction of 3G spectrum with substantial revenue accrual to the government. And charging 2001 prices for spectrum on the plea of ‘a level playing field’ overlooks the risks undertaken by the pioneers relative to subsequent entrants who benefited from their experience.

Nevertheless, the government’s story will find many takers. The image of the prime minister as the gentle, helpless but incorruptible academic with P. Chidambaram as his most competent and loyal ally induces in us a protective reflex: we are eager to accept any explanation of events that exculpates the two of them and leaves this unwanted little basket on the doorstep of Raja. Yet the government’s explanation has a fatal flaw — a flaw that should be evident to any freshman student of economics.

Selling an asset at a rate far below the market price has two sets of consequences. First, it creates an incentive for the first buyer to resell, directly or in a roundabout fashion, as soon as it is possible to pocket the enormous margin between his purchase price and the market price. Second, the possibility of such enormous profit generates an excess demand for the asset in the first round: potential buyers have, in consequence, an overwhelming incentive to offer bribes to the arbiters of the sale process so as to influence the allocation of licences in their own favour. These are not mere hypothetical possibilities. They can be predicted with perfect certainty as the inevitable outcomes of pricing below the market rate.

According to evidence in the public domain, this is precisely what happened. In the two cases that the Central Bureau of Investigation has opted to focus on, Raja — for reasons as yet undisclosed — offered licences to two companies whose ostensible owners, Shahid Balwa of Swan Telecom and Sanjay Chandra of Unitech Wireless, were real-estate majors with no telecom experience whatsoever. Soon after acquiring their licences at 2001 prices, they sold out most of their stakes in telecom to foreign concerns, which invested astronomical amounts in buying their shares. For instance, an original allottee, Swan Telecom, sold its shares at Rs 15 each to a mysterious Mauritius-based entity, Delphi, which then transferred them at Rs 285 each to the Middle-Eastern telecom operator, Etisalat. While the ownership pattern of Delphi is shrouded in mystery, it is generally believed to be a front for Anil Ambani’s Reliance, which was a 10 per cent stakeholder in Swan. Since Swan (India) and Delphi had no significant assets other than their telecom licences, Etisalat’s payment for their shares effectively represented the market value of their licences. Likewise, Unitech sold 67 per cent of its equity to the Norwegian telecom firm, Telenor, at prices that yielded an enormous profit over the cost of the spectrum licences.

It was not merely out of affection that the government showered these individuals with such largesse. Balwa’s donation to Kanimozhi’s Kalaignar TV was a matter of 200-odd crores. As for the cash flows into Raja’s coffers, the CBI is, one hopes, still in the process of tracing the labyrinthine channels they followed. And the money bought more than spectrum. Balwa should never have been allotted the spectrum — not only because of his total lack of experience but also because of his proximity to the gangster-terrorist, Dawood Ibrahim. Etisalat, to which he sold most of his stake, should never have been allowed into our telecom industry because of the security implications of its links with Pakistan and China. And, of course, the Swan-Etisalat-Unitech affairs were just two samples from a vast saga of personal enrichment by members of this government and their friends as a sequel to the collective decision on the mechanism of spectrum allocation.

When they decided on the 2G policy, were the prime minister and the finance minister totally oblivious of the logical implications? Had Manmohan Singh left his knowledge of economics behind at Oxford or at the Delhi School? Had Chidambaram forgotten his experience of corporate management and law? Having given their blessings to the sale of a scarce resource far below market price, was it not incumbent on them to exercise the strictest vigilance so as to avert the predictable consequences — bribery and loot? Instead, Singh instructed his officers to keep themselves ‘at arm’s length’ from the goings-on in the telecom department. Was this complicity or child-like innocence? I leave the reader to draw his own conclusions.