Clear now what would have happened if 2G spectrum had been auctioned

Today’s ET carries the story that telcos are planning to raise talk tariff soon. The hike is expected to be around 20%. This follows a similar sized hike taken a few months back. Why is this not surprising at all? For the many who believed that 2G spectrum should have been auctioned the way 3G was, this is proof of why their belief was wrong.

Most people in the country misunderstood the entire 2G “scam” (I prefer to suffix 2G with “revolution”, not “scam”). There were a few issues all tangled up and hence it was confusing to start with. Then the CAG decided to put its hands into what is clearly not its  domain – policy making. It sensationalized the entire matter. And then the media – without as usual understanding the matter in its totality – decided to toss the CAG figure up in the sky and watch the fun. So what were the issues that were tangled together? The first was the policy issue – whether 2G spectrum should have been given free as it was or auctioned, like 3G spectrum was. Second was whether the entry fee (some Rs 1600 crores) – the sum that was determined many years ago and which was paid by new telcos and which came with some 4.2 Mhz spectrum bundled – should have been increased and if so by how much. The Government chose to retain the same number set many years back. The third issue was the way in which new telcos were chosen in 2008 by Raja.

I have no problem in admitting that there may have been corruption in the 3^rd issue – the way Raja went about favoring a few telcos to the detriment of the others. Raja is under investigation and while no one knows what the courts will conclude, it can be reasonably assumed that all is not hunky dory here. With respect to the 2^nd issue also, I have no problem in admitting that the entry fee should have been increased. It could have been adjusted for inflation – which would have been reasonable given the way the government usually handles such issues. It’s the first issue – the auction of 2G spectrum and the sensational Rs 1.76 lac crore “scam” that arose from it – that gets my goat.

I have always maintained that had 2G spectrum been auctioned – for an expectedly high fee – it would have left out a huge portion of the population from the revolution called mobile telephony. Phone rates would have soared and the poorest of the poor would have been unable to partake of the benefits of mobile telephony. We forget that in 2008, there were just 275 million mobile subscribers in India. Today, there are some 900 million. This jump would never have happened if the auctions had taken place. Telcos would have been forced to increase per-minute rates and that would have increased monthly ARPUs. When I first wrote about this, I got many comments suggesting that this was just my imagination. Some argued that license fees are a small part of operating costs and an increase would not have made much impact on pricing. Some others were taken in by the constant drop in pricing and simply could not understand what I was saying. Many others said that I was trying to defend the Government!

Today, the ET story proves what I was saying. Because of high auction pricing in 3G, telcos have had to take on huge amounts of debt. And since 3G’s uptake hasn’t been as good as expected, telcos are under pressure. Also, there are penalties being levied on telcos for “violations”. And then also, there are charges that DoT is planning to levy on telcos for excess 2G spectrum used over 6.2 Mhz. Under severe financial burden, telcos have no option but to pass on the costs. And who do they pass on the costs to? The poor 2G subscribers who had nothing to do with 3G at all.

But just imagine if the basic 2G spectrum also had been allocated through auctions (in addition to 3G). The cost of the auctions would have been so high in 2008 itself, that the tariffs would have climbed through the roof. Thankfully, the Government decided against auctions and gave the spectrum free. Many people felt that the telcos had benefitted tremendously from this free spectrum. They were wrong. They forgot that the rampant competition in the telecom industry forced telcos to pass on the cost benefits of free spectrum to the public. That’s why tariffs fell. That’s why except for the biggest telco (Airtel), all other telcos posted losses or very small profits. In fact, Vodafone declared its first profit only in 2010 or so. Reliance has been in losses for some time now. And Idea’s EBITDA margin is so small it would be difficult to justify all the capital investments it made.

With tariffs going up now, we can expect the number of mobile subscribers to fall. It may take time. Users get addicted to mobile phones and find it difficult to give them up. But if the prices rise too much – as they could – then the numbers could start to plummet. The mobile revolution has brought all Indians into one common marketplace. Today, it’s possible for us to reach almost all people using the phone. It’s improved our ability to reach out to our people. Today, we’re talking of m-banking – taking banking services to those who cannot even prove their identity otherwise. The benefits of the mobile phone are enormous for the poor. I am worried we could lose all the gains we’ve made if mobile prices rise too much.

To summarize, not auctioning 2G spectrum was the right thing. The Rs 1.76 lac crores was just a “presumptive” loss. Presumptive loss is just another term for describing subsidy. We have lacs of crores of presumptive losses on fuels (subsidized diesel, kerosene and LPG), fertilizers (subsidized), and electricity (subsidized rates). Such presumptive losses are good since the benefits are going to the poorest sections. They’re the ones who must be blessing the government, while the urban middle classes (those who suffer from subsidies) are the ones who’re complaining.

The real truth is that the 2G “scam” was totally misunderstood. The non-auction of 2G spectrum was the right policy decision. If something thinks it was the wrong decision, then surely that person also believes all subsidies are wrong. That’s why it’s in the domain of policy. And it’s rightfully a political decision. The Congress (and the BJP before it) thought that the free spectrum was correct. Another political party (though I still can’t figure out which one) may think otherwise. Take this issue out, and the 2G scam becomes a non-scam. That’s the real truth…..