Enabling Equity and Efficiency through Auctions in India

By: Sumita Kale


Often a method is rejected on theoretical grounds, for instance, the use of auctions in spectrum licences was opposed on the argument that competitive bidding was not feasible and that it interfered with the government’s ability to regulate broadcasters. When the auctions were finally implemented in the early 1990s in the United States, these arguments ceased to be relevant.

A few excerpts from a white paper “Enabling Equity and Efficiency through Auctions in India”, Sumita Kale, Indicus Analytics, to be published by Liberty Institute, New Delhi 2008.

Role of policy makers - One of the crucial impediments to an efficient solution in the spectrum market is the oligopolistic structure of the telecom industry in India and the relationship with the government. On one hand, the incumbent being government owned has an unfair advantage with access to policy makers, and on the other hand, in the tangles over inefficient allocations through the auction route, private firms were quick to learn the necessity of being close to the political establishment. There is considerable literature on the changes needed in auction design, in the telecom industry structure and in the regulatory environment. However, the key issue in India in the context of spectrum allocation in general and an auction in particular, lies in resolving the inconsistency and lack of clarity from policy makers. It is not just in the auction sphere that there have been flip-flops as documented in the previous section; confusion continues to reign in the allotment of incremental spectrum in the last few months. It is not enough that the regulator, TRAI has recommended auctions, the government has insisted on a first come first served method and even here has displayed the same tendencies of favouring particular firms, like the 1992 auctions and HFCL instance. As a result, a statement made seven years ago is still valid – “It appears that, while the instruments for managing public service regulation and defaults were ‘right’, supporting institutional mechanisms and political will for implementing them were not adequate”.

With technology advancing rapidly, the mobile phone has become an instrument of communication, information and entertainment. M-banking and provision of microfinance through the mobile phone have become a reality, making the objective of financial inclusion in rural areas a feasible business venture. Value added services through mobile phones have the potential for not just raising revenues for the telecom operator, but for contributing to economic growth and regional development through applications in governance, transport, medicine, agriculture, finance etc. There has to be a broader dynamic view taken to find the process that will allow access to users who can exploit the resource most efficiently and provide maximum value to the economy.

Though there are some who feel that India has the a crowded spectrum market with up to seven operators in a circle, Ashok Desai argues that, “ heavy fixed investment requirements limit the number of wire line operators, but there is no limit to the number of cellular operators, other than the one imposed by licensing policies.” His radical suggestion is to remove licensing requirements completely and open the spectrum management space to an independent technical entity, rather than a committee under the Department of Telecommunications. The role of the government then moves away from licensing to ensuring interconnection, to set up a technological framework that will allow interconnection of a large number of operators and to set minimum quality standards.

With increasing convergence, as demands for spectrum grow, the issue of spectrum access rights that can be freely traded must be addressed. This calls for an open entry spectrum system where no oligopoly can survive as any user can enter anytime by paying the price for access that is continuously determined by the prevailing demand and supply conditions, a system run by a clearinghouse of users. There are numerous technical, legal and regulatory issues that are involved in setting up such a system but this is the need of the hour. A market solution is inevitably the best way forward but for the process to go through unhindered, it again requires support from the government and regulatory authorities.

For a country like India aiming at double digit growth, where resources are scarce, auctions provide the most preferred solution for allocation and pricing, on both theoretical and practical grounds. There is however serious issues of market structure, power of incumbent firms, political influences and auction design that have to be dealt with, which reinforces the need for informed public debate.

Often a method is rejected on theoretical grounds, for instance, the use of auctions in spectrum licences was opposed on the argument that competitive bidding was not feasible and that it interfered with the government’s ability to regulate broadcasters. When the auctions were finally implemented in the early 1990s in the United States, these arguments ceased to be relevant. Often a method is rejected because of irregularities in implementation in the past, but the process of learning can reveal how to resolve these issues in practice. In the case of spectrum auctions, the designs have evolved over the years, becoming more refined as errors and omissions are corrected. Often practical and simple ideas are rejected out of ignorance or out of disbelief that simple ideas can work There are innumerable applications for the use of auctions in the economy; in every case, it is the common man who as consumer or taxpayer stands to gain and it is for this reason alone that auctions should take first place as a solution to resource allocation in a country.

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Sumita Kale, (M.Phil, Economics, University of Cambridge, Ph.D. Economics, Pune) Chief Economist at Indicus Analytics, An Economic Research Firm. Analysis of Indian macroeconomic scenario and inflation. Editor of the monthly newsletter “The Emerging Economy” brought out by Indicus. A regular columnist of Mint and Indian Express and co-author of “Indian States at a Glance – 2006-07”.

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