UPA will have to swallow its ego on 2G auction to make it work

By R Jagannathan

After just a few days of gloating over its own failed spectrum auction, the UPA government received another knock on the head from the Supreme Court yesterday. Why, asked the court, did the government not auction all the spectrum vacated by its judgment of 2 February, when 122 licences were cancelled?

The Supreme Court was miffed over the fact that the government chose to file its affidavits through a junior officer in the department of telecom, and also that it failed to inform the court about which spectrum it was offering for auction despite making several requests for postponements - which the court granted. "Government is very casual in dealing with the matter," Justices GS Singhvi and KS Radhakrishnan observed.

With the court taking a tough stand now, the government - which has been claiming that everyone, from the courts down to the CAG and the media were trespassing on its policy space - will have to abandon its political posturing and address the issue: how to make the spectrum auctions work without crippling the tottering telecom industry.

The issues are simple, and largely of the government's own making.

Caught between the need to protect its government - especially Manmohan Singh and P Chidambaram - from the charge that they were party to selling spectrum cheap in 2008, and the pressure exerted by the courts and public opinion to hold an auction, the Congress decided to fix a high spectrum reserve price in the hope that it will fail and vindicate their stand.

If the sector is freed up, and if foreign players are allowed to enter easily without forcing them into an Indian partnership that brings no value, demand for spectrum will perk up. AFP

The problem is the auction did not fail completely - it raised over Rs 17,000 crore (against Rs 9,200 crore raised by A Raja in 2008 - even without selling enough spectrum. The point that Raja sold cheap has been established.

It is now caught in another legal pincer. The people who bid at the last auction will not take kindly to another auction based on lower reserve prices. On the other hand, with the Supreme Court pressing the government to sell all the spectrum freed by the cancellation of licences last February, there is no way the current prices will hold in a weak market.

The only logical way to have dealt with the problem was to fix the reserve price in 2012 on the basis of a new price adjusted for inflation since 2001. This way the Rs 1,650 crore base price of 2001 could have been raised to around Rs 4,000-5,000 crore, and the auction could have been conducted over the share of revenue offered by bidders.

An alternative route could have been one where bidders agreed to periodic increases in spectrum prices based on demand - for the simple reason that spectrum cannot be sold for 20 years based on a single year's demand (in 2012) for it.

But the government chose a high base price of Rs 14,000 crore for 5 Mhz of all-India 2G spectrum - which most players were unwilling to pay, except in circles they needed it most.

Contrary to public perceptions, the base price can be considered high only in the context of today's market, and not if one considers that there is only one payment (apart from a small revenue share) to be made over 20 years. Assuming the telecom market booms again after two to three years, the Rs 14,000 crore price may not only look all right, but even cheap.

So what is the way ahead?

Thomas K Thomas, writing in BusinessLine, suggests that in the next round, only spectrum where there were no bids could be repriced and sold. In last week's auctions, costly circles like Mumbai, Delhi, Karnataka and Rajasthan received no bids. The reserve prices in these circles could be lowered in the next round to encourage more bidding.

While some adjustments to prices may make sense where they were out of line with comparable circles (Tamil Nadu and Delhi have similar revenue potential, but the former was priced at less than half the latter's reserve price), a wholesale cut across the board is not advisable for the simple reason that the recent auction has already established a price.

A better bet would be to improve demand for spectrum by liberalising it - allowing parties to use any spectrum for any service, 2G, 3G, voice or data - and allowing foreign companies to own 100 percent equity. And yes, mergers and consolidation must be eased up quickly. This will create strong, genuine players who will take a long-term view, and not fly-by-night operators who are in it only to collect a rent and run.

If the sector is freed up, and if foreign players are allowed to enter easily without forcing them into an Indian partnership that brings no value, demand for spectrum will perk up.

The important thing is not to rush into kneejerk changes driven purely by revenue considerations in this fiscal year, or just to show the world how wrong the CAG or the Supreme Court was in ordering auctions.

Do the UPA's ministers have the maturity to do the right thing and bury their egos on this one?