Investor confidence takes a knock

The capacity of the state to redistribute wealth is a primary obstacle to growth. Providing credible institutional constraints on the state to redistribute wealth and ensure equity leads to efficient economic growth.

Yet, India has embarked on a major wealth redistribution exercise, and has raised the likelihood of the abrogation of earlier-granted property rights, as the 2G spectrum drama has unfolded.

The Government’s role lies in providing clarity to property rights allocation, ensuring ease of asset rights and security from trespass. It could have ensured growth by committing to institutional credibility. Instead, India’s institutional bodies have behaved like bandits, perpetrating a hold-up on the information superhighway.

Socialisation of Punishment

This drama has reached its unenviable, unwarranted and unfortunate conclusion. The re-auction of the confiscated 2G spectrum licences commenced from November 12. Numerous irregularities had taken place in 2008, when the 2G spectrum licences for mobile communications were awarded to firms. After complex investigations, India’s Supreme Court confiscated the licences of all firms involved, even of those not culpable in the irregularities.

Of these 2G licences, 112 licenses awarded to Uninor (22), Loop Telecom (21), Sistema Shyam (21), Idea Cellular (13), Videocon (21), Etisalat (15), S-Tel (6) and Tata Teleservices (3) were cancelled.

These licences were re-auctioned. The proceeds of the licence re-auction represented a comprehensive trespass over the property rights of firms, with several parties to business transactions held to ransom and coerced into a negative outcome. India’s 2G spectrum auction drama has ended in tragedy.

India has socialised punishment. Instead of taking punitive actions against the primary culprits, by confiscating all licences, and the loss of all sums expended on their acquisition, all firms have suffered.

The diffusion of sanctions provides incentives for others to engage in future similar acts. Individuals and firms will know that engaging in underhand means is a lottery. The rewards can be unbelievably large. Conversely, if one is caught, the sanctions will be borne by all.

Administration at Standstill

Therefore, the institutional bungling saga has continued. The latest formal CBI charges against former Telecom Secretary Shyamal Ghosh are risible.

This administrative process turns the clock back, and makes the then Secretary to Government culpable for what was a collective cabinet policy decision at that time, that licences for additional spectrum capacity be given to the principal operators of the day, in return for the Government receiving a small increase in its revenue share.

While this set the communications revolution off on its way in India, that is not the issue either. The issue is that the CBI’s retrospective action goes against the grain of the principle concept underlying civil and political administration in India --- that it is the role of the government of the day to make policy, and the role of the Secretary to Government to implement it.

If the government of the day believes only in passing the buck, shifting the blame, and making honorable civil servants pay a retrospective price for policy decisions that the political authorities made a decade ago -- whether these were right or wrong, and well or badly implemented -- it will make decision-making on all major investment programmes, those utterly critical for India’s future, come to a full halt, if this process has not already happened.

No civil servant will advise on policy. All implementation will stop. No candidates will be found for the numerous positions of Secretary to the Government of India. It is the beginning of the end of India’s administrative system as we know it.

Institutional Consistency

Institutions are human constructs structuring human interactions. They reduce uncertainties involved in interactions. In a stroke, India has shown itself to be an uncertain investment destination with unreliable administrative processes. Investments required to sustain a double-digit growth will dry up in the face of overwhelming uncertainties.

The industrial revolution was possible because a set of institutions formulated and implemented it, so that laws and rules facilitated innovation and efficiency.

Prior to the UK’s 1689 revolution, pruning absolute monarchial power and replacing it with citizen and Parliamentary power, the rapacious activities of monarchs had destroyed all efficiency-oriented activities. Such a situation was detrimental to the common good. This rapaciousness led Charles I to lose his head in 1649.

The revolution constrained an absolutist state’s ability to redistribute wealth, generated by citizens, towards itself and its supporters. This wealth redistribution constraint set forth institutional conditions enabling the industrial revolution to succeed in Britain.

The foundations of an independent British civil service were laid at that time. These institutional conditions have survived, providing security for those investing in Western economies.

Indian State’s Credibility

A feature of ideas dealing with institutions is the notion of credible commitments. By upholding the sanctity of property rights, governments commit themselves to constraining their power to arbitrarily change property rights. Through a neutral and competent civil service, governments commit to providing efficient implementation.

The communications revolution might be for India what the industrial revolution was in the 19th century, with the right institutional support. India has shown she does not possess these institutions.

Countries such as China will become world powers. Investors’ mental constructs will be of India as a country where commitments are not credible. It will not be a chosen investment destination.

(The author is Professor of Technology Strategy, University of Dallas, Texas.)

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