VR Logo

Cronyism Ringing Aloud

A decade-old success story of the telecom sector is being undone by vested interests

The past has an uncanny way of catching up with the present and influencing the future. Consider, for instance, the 2G spectrum scandal. The misallocation and undervaluation of scarce spectrum took place in late-2007 and early-2008. Despite adverse media reports, the government initially pretended nothing had happened. The CBI started its probe against “unknown persons” in October 2009. But it was not until November 2010, a few days before the Comptroller & Auditor General (CAG) of India presented its report on the scandal in Parliament, that Andimuthu Raja, former Union Minister for Communications, was forced to resign. The CAG report argued that the “presumptive” loss to the exchequer could be as much as Rs 1,72,000 crore or the equivalent of nearly $40 billion. On February 2, 2011, Raja was arrested.

Despite the passage of time, the 2G scam refuses to disappear. Even as the ruling Congress party and the Opposition trade charges about the alleged involvement of Home Minister P. Chidambaram and his son in the scandal, the telecom industry is up in arms over a set of recommendations made on April 23 by the Telecom Regulatory Authority of India (TRAI) which include a proposal to increase the reserve price or floor price for auctions of spectrum held by 122 licence-holders whose licences were cancelled by the Supreme Court on February 2.

Three large incumbent operators – Airtel, Idea and Vodafone – are upset with the TRAI’s recommendations because the reserve price recommended by the regulator is at least 10x higher than the price paid for spectrum from 2001 onwards. For the “big three”, what is worse is that TRAI has recommended “refarming” or re-allocation of spectrum from the more efficient and powerful 900 MHz band to the 1,800 MHz band, ostensibly to ensure that the most efficient spectrum is used to provide the most modern (mainly 3G and 4G) services such as high-speed data transfer and mobile television. Many of the TRAI’s suggestions are likely to be overruled.

As telecom expert Mahesh Uppal points out, “by creating an extraordinary situation of spectrum scarcity, the incumbents had to bid high for 3G spectrum in June 2010 to secure future supplies of spectrum which have now become the artificially-high reserve price for spectrum recommended by the TRAI”. He adds that while the government did not spend anything from the $20 billion it earned from auctioning 3G and BWA spectrum in mid-2010 for developing telecom networks and instead used the money to bridge the budget deficit, what the TRAI recommendations end up doing is to add huge costs to the industry without adding benefits to consumers.

The telecom sector mess is largely a legacy of the past because large sections of the industry turned a blind eye or actively colluded with a bunch of corrupt bureaucrats and politicians. Prime Minister Manmohan Singh and Chidambaram, who was Finance Minister when the scam took place, have unsuccessfully tried to play down the scandal. Kapil Sibal, who replaced Raja as Communications Minister, floated a “zero loss” theory, while the PM has compared cheap spectrum to subsidized goods, such as kerosene and fertilizers. While blame for following faulty processes of allocating and pricing spectrum was passed on to the disgraced former minister, it was claimed that inexpensive spectrum enabled companies to provide their services at cheap rates to ordinary citizens.

The facts tell a different story though. Three years after 122 licences were issued from January 2008 onwards, the new operators were able to obtain barely 12 per cent share of the total market. The situation is now going to change. Tariffs have already started moving upwards and a section of the industry believes that call rates are bound to go up further, with little or no improvement in quality – even as corporate captains lobby to influence the government that has to ensure that the re-auction process is completed by the end of August, the extended deadline set by the Supreme Court.

Many describe India’s telecom industry as the success story of deregulation. Others call it as epitomising crony capitalism at its worst.