Recently the trial court acquitted all the accused in the 2G ‘scam’ case. Since then a lot of articles have been written, lot of memes and social media jokes have been circulated ridiculing the now ill-famed CAG report.
In this article, I don’t intend to justify the ‘176000 crore’ figure or usage of the word ‘scam’. Neither am I an expert on law or government procedures to explain why the court gave that judgement or whose stand does it vindicate and whose not. I really don’t understand these points. But the limited point I am going to make is that it is a bit of a stretch to dismiss that report in its entirety said as one man’s quixotic quest against imaginary devils.
I understand it is government’s policy to give many things at nominal prices in public interest. For instance government regularizes encroachers by allotting them land for agriculture or for building houses for free. In doing so, no one can deny it suffers revenue loss (the one called ‘notional loss’ in that report) but the idea is, it serves public purpose. The job of government is not to make money, rather it is to maximize public welfare, so it is ok. In fact, if we look at our history, we have suffered from the worst of the revenue maximization policies – the Permanent Settlement of Bengal in 1793.
When the government back then was allotting 2G spectrum at heavily subsidized prices, perhaps the idea was that it would reduce the cost of business for telecom companies and they would pass it on to the consumers. This would make telephone calls cheaper and this would benefit the nation. Public purpose served, so Ok. Hindsight now tells us that indeed call rates were cheap and this increased mobile penetration.
But the question is, were the call rates cheap because of subsidized spectrum or something else? Did the spectrum subsidy really reach the consumers or was it pocketed by companies? Swan Telecom got spectrum for Rs. 1500 crores. Before commencing any operations, in a matter of weeks, it sold it at 6 times that price to Etilstat. It sold in the form of ‘FDI’ – 45% shares to Etilstat at Rs. 4200 crores. Similarly Unitech Wireless sold its spectrum too at 6 times the purchase price – bought spectrum at Rs. 1650 crores and sold 60% share to Telenor at Rs. 6200 crores – again within weeks without commencing operations. What was essentially being sold here was the spectrum. Thus the real ‘telecom’ players, the guys who would actually carry out all the operations, got the spectrum at the market price only – the consumers didn’t get any substantial benefit of the spectrum subsidy. The calls were cheap despite this perhaps because of the competition in the market and the industry structure where marginal cost of a call is almost zero and bulk of the costs are fixed – so it pays for the company to get as many consumers onboard as possible. The difference (approximately 5 times the allotment price) was pocketed neatly as windfall gains by the companies.
Now we should ask, was the public purpose really served by subsidizing spectrum? Most humbly, perhaps not. Pronouncement on words like ‘scam’ and ‘corruption’ involves law – legal answers can be mysterious and I don’t understand them. Interpretations of what constitutes a faulty procedure and what not can be highly subjective and vary from person to person. But basic economics is hundred percent objective and it tells us that there indeed was a loss of public welfare. The notional loss was real because the government could have auctioned the spectrum and still the call prices would still have remained cheap. The money from the auction could have been used to build real schools or hire real doctors.
That report, if nothing else, contributed in amending the policy and preventing such future losses.