Atanu Dey On India's Development

On the proposed spectrum auction for 3G services

Today’s Mint has an opinion piece by yours truly which they titled “India needs a good 3G order.” I confess that I don’t know what that title means. Whatever that means, here is the full text of the piece below the fold.

Subtitle text: “Spectrum auctions are good. But competition for the market cannot replace competition in the market.”

India’s successful mobile revolution story is poised to have an exciting and much anticipated sequel. The government of India has decided to auction radio spectrum in the 2.1GHz and the 700MHz bands to telecom operators for providing the so-called “3G” mobile phone services. The fast data transfer rates of 3G technology permit services that involve vast amounts of information needed for audio, video, gaming and other sophisticated services. The stated objective is to increase the number of users who use phones to access the mobile Internet.

Auctions are well understood and are an efficient mechanism for determining the price of economic goods. They have been used in India (tea, coal, spices) and abroad quite effectively. In the US, the Federal Communications Commission conducted two spectrum auctions recently, one in 2006 and the other in 2008, yielding $13.7 billion and $19 billion, respectively.

Existing and new telecom operators, domestic and foreign, are expected to bid for licences in the electronic auction to be announced on 30 September. The reserve prices have been determined. For example, for Mumbai and Delhi, the reserve price for a 2x5MHz block of spectrum is Rs160 crore. It is estimated that the auction will get the government around Rs40,000 crore.

Naturally, how much the 3G auctions raise is uncertain. But there are a number of certainties that follow the basic economic logic. First, the degree of competition allowed in a market, that is, the number of operators given licences to serve it, determines the competition for the market, in turn dictating the amount bid.

Competition for the market and competition in the market are substitutes. By restricting competition in the market, the amount bid will be higher due to higher competition for the market, but it also means that prices will be higher for the end users. Whatever the operators pay to serve the market will be eventually recovered through user prices.

Ultimately, it is the users who pay whatever the government gathers as licence fees, with the operators acting merely as intermediaries. Higher prices in services which have network externalities — that is, the more users there are, the greater the benefit to all users — lead to economic waste.

Second, higher prices directly translate into fewer users, with the poorer users getting priced out of the market. The objectives of telecom infrastructure development and rapid user adoption of 3G services is incompatible with the policy of imposing high licence fees on operators. The government temptation to make a quick buck has consequences in terms of retarded growth of telecom infrastructure and the digitization of India. The adoption and widespread use of telecom services positively impacts productivity and economic growth.

A quick comparative look at South Korea is instructive in this context. It has the most sophisticated digital infrastructure in the world and the most digitally empowered population. More than 90% of Korean households have broadband connectivity, compared with a world average of 20% and India’s 2%. More than 50% of Koreans use 3G mobile services, 10 times the world average. Their Internet is 100% broadband (the world average is 30%) and besides being the fastest in the world (between 2 and 10Mbits per second), it is also the cheapest. Only 5% of the world uses mobiles to make payments; 63% of South Koreans do.

South Korea achieved leadership in information technology use through enlightened public policy. The revenue from spectrum auctions and licence fees from telecom operators is used as investment by the government for initiatives that attract private investment into telecom, thus building infrastructure. The telecom sector has enormous scale economies and network effects. The wider the usage, the higher the benefits; the bigger the infrastructure, the lower the average costs. Widespread telecommunications use makes the South Korean economy more productive and further raises revenues in a virtuous cycle of growth and investment.

There are important lessons that India could learn from the experience of South Korea, a developed nation that pulled ahead of India even though at the time of India’s independence it was at par with India. One clear lesson is that the temptation to extract resources from the telecom sector with an aim to use it for non-telecom related expenses is short-sighted and inefficient.

A robust, affordable, technologically advanced telecom system is as vital to an economy as a functioning nervous system for a human being. A short-term policy of taxing the sector does have a long-term negative impact on the growth of the economy.

The case for auctioning the spectrum to the highest bidders is sound. However, two important considerations must be kept in view. First, the regulations must ensure a level playing field so that the most efficient set of providers compete vigorously in the market, not just for the market, during the auction. Most of all, incumbents must not be favoured because it would have a chilling effect on competition with negative welfare consequences. Second, the proceeds of the auction and licence fees must be invested back into the telecom sector.

  • mallikarjunasj

    Spend the revenue from Telecom on improving telecom infrastructure…..

    Whom are we kidding?
    We, a developing nation cannot afford that.
    Rich have to pay for perks, which will in turn feed the amenities of the poor.

    Spilling-off between is corruption.

    In good-humour, May I suggest something ?

    1) How about spending a small amount of Telecom Revenue on “Teaching people importance of Silence?”

    2) Small amount of Import Duty of Electronics Hardware on “Simple Living”?

    & Above all
    3) Crude Import Duty on “Bicycle Design Improvement”?

    Thanks,
    Mallik.

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