The Hullabaloo over 2G Licenses

Last year, Time Magazine listed the Indian Telecom Scam 2^nd (after the Watergate Scandal) in the “Top 10 Abuses of Power” list. Considering that it has been making headlines since 2010, I suppose most of you know the details of the scandal. However, for those just tuning in, I thought I’d do a post featuring the 2G Licenses and Spectrum Scandal.

What happened?

In 2008, A. Raja, the erstwhile Minister for Communication and IT, decided to allocate 2G licenses and spectrum to several telecom companies, some of whom did not meet the basic requirements to be granted a license. Furthermore, he sold the licenses and spectrum at apparently throwaway prices, causing the exchequer to suffer from revenue losses, estimated up to Rs. 1.76 Trillion ($ 35.2 Billion) according to the Comptroller and Auditor General of India. Interestingly, Kapil Sibal, the incumbent minister of Communication and IT, dismissed the estimates calling them meaningless “notional” figures. Either way, this led to several new players entering the market, and the increased competition (read: price wars) meant lower tariffs for users, and squeezed the profitability of the incumbent players. 

The matter was mute for a couple years of until 2010, when during the 3G license and spectrum auctions, the government realized the amount it had lost in 2008. This incident of poor governance was termed as another scam by our particularly hardworking media. After much political ruckus, the Supreme Court of India declared the allotment as “unconstitutional and arbitrary” and cancelled all the 122 licenses issued by A. Raja. According to the Apex court’s judgment, A. Raja “wanted to favor some companies at the cost of the public exchequer" and "virtually gifted away important national asset" It is worth noting that the Telecom Policy does not have any specific provision for the licenses or spectrum to be auctioned off, and it was only in 2010 that an auction process was deemed to be the most appropriate method of allocating national resources.

Cancelled Licenses and Affected Parties

 

These firms, especially the foreign players, have complained that the Supreme Court ruling disregards the interests of the business community. Furthermore, it is unfair as it makes businesses suffer for what is in essence the Government’s gaffe.  They also said that such moves would make foreign investors hesitant and cautious against investing in India, and this would hurt the nation in the long term.

So what are the implications?

The cancellation of the 122 licenses will affect close to 45 million people around the country (roughly 5% of the total active user base) who will see their services go off. However, the court has given the companies 4 months, so the users will have some time to switch to a different service provider. As for the companies, they are left with 3 options. First, they can go to court and appeal against the verdict (a very lengthy and expensive undertaking). Alternatively, they could bid for the licenses and spectrum (whenever the auctions happen). Or finally, they could exit the Indian telecom market altogether. As for the incumbent players such as Vodafone and AirTel, it is an opportunity to increase their subscriber base, and also a chance to bid for more spectrum. The sector overall will hence see some much needed consolidation, and with competitive pressure reduced now, the unsustainable price-wars can end and the profitability of the firms would increase too.

Personal Take

At just point, I would like to highlight a couple of points, and let you assess the event at your own terms.

Firstly, If 2G spectrum was to be auctioned (like 3G was, and 4G seemingly will be), the government would get more revenues (only to give out more subsidies in my opinion). But would the tariffs be as low as they are? Would your milkman, driver, domestic helper, fruit vendor, etc. all be able to afford it? Would your life be more convenient or less if that was the case?

Secondly, since the spectrum was allocated on a “First Come First Serve” basis instead of an auction, many new players were granted license and spectrum. As a result, incumbent players such as Vodafone and Airtel who have a larger subscriber base were left with too little spectrum to work with while the newer players who were unable to build a sizable subscriber base were sitting idle on precious resource. So this not only prevents the players from achieving economies of scale, but it also translates to poor quality of network coverage for the 800 million mobile phone users across the country.

Thirdly, the scam has further tainted the image of the Government. However, one should really take a step back, and think if this was really as scandalous a misdemeanor as it seems? After all, it did make mobile usage more affordable to the masses. Would 3G (which was auctioned to service providers for Rs. 670 billion or $ 13.4 Billion) be able to achieve the same reach in India’s price elastic telecom market?

Finally, considering as telecommunication and connectivity as a vital infrastructure of the nation, it was an industry that grew at an exponential pace for some time, but that growth has now halted. Little room to expand due to over-competition has led to unsustainable business models. Hence, some consolidation could do wonders for both, consumers as well as the businesses.

The 2G licenses of 2008 were issued at 2001 prices, on a first come first serve basis rather than an auction.  

So, at this point, would you call it a scam or a blunder ?

Corruption or mere Inefficiency ?


I will let you decide for yourself . . .