If the 2G auction elicited a poor response, it was more due to ambitious pricing than any inherent flaw in the system of auction.

The tepid response from operators to the Government’s auction of 2G spectrum is in essence, a reflection of the state of affairs in India’s telecom industry today. Unlike in 2010 — when sale of 3G and broadband wireless access airwaves — fetched the Government over Rs 100,000 crore — Monday’s auction saw a third of the 176 spectrum blocks (each of 1.25 MHz) finding no takers. Again, not a single operator put in a bid for a contiguous 5 MHz slot that would have allowed the bidder the chance to have a pan-India presence. Worse, there were no takers at all for Delhi and Mumbai, once considered among the world’s most lucrative telecom markets. And in no circle, barring Bihar, did the bid amount exceed the base rate fixed by the Government — meaning there was no real price discovery through the market mechanism.

The above washout may embolden those in and outside the Government, who would see it as vindicating their stance that auctions are not the best method for allocating scarce natural resources; in this case, the bids received will not yield even a fourth of the Rs 40,000 crore that the Government had targeted. That, in turn, would seem to justify reverting to administrative mechanisms like first-come-first-served, which takes the allocation process away from markets to bureaucrats and ministers. This is a completely nonsensical argument. Auctions are the most natural, transparent and fair way to distribute any public resource – whether it is electro-magnetic frequencies (spectrum) or the rights to build and operate highway stretches. Monday’s auction failure had entirely to do with the context rather than the auction process itself. Telecom companies today are relatively cash-strapped and neither are banks too eager to lend them money, given their already high exposure to the sector. Nor are new global operators willing to take a bet on India, given the regulatory uncertainties and the bitter experiences of those who had invested earlier. Moreover, mobile penetration is already over 100 per cent in some circles, which explains why nobody bothered to even bid in Delhi or Mumbai.

Things would have been better had the Government been more sensitive to the current market realities. It erred in not putting on the block the entire spectrum freed up by the Supreme Court overturning some of the past allotments. As if to make up for the resultant shortfall in revenue, it ended up setting an unrealistically high base price (Rs 14,000 crore for 5 MHz, which was four times that for a similar pan-India slot in 2010). This strategy of fixing a high reserve price and creating artificial scarcity, apart from not facilitating the discovery of the market price of a resource, also rebounded on the Government. If the latter has failed to realise the revenues that were projected, it has only itself – and not the auction process – to blame.

(This article was published on November 13, 2012)
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