Home >Market >Mark-to-market >The 2G scam: An earlier verdict and its harmful consequences

For all the noise that it generated, the 2G spectrum allocation scam has ended in a whimper. Or has it? A special court may have acquitted all the accused in the case, but the telecom industry is still reeling under the consequences of actions taken after irregularities in spectrum allocations came to light.

While the telecom ministry under A. Raja supported unbridled competition, policy decisions since then have gradually moved the industry towards an oligopolistic structure. Investors are now salivating at the prospects of high profit margins in the sector, with shares of Bharti Airtel Ltd and Reliance Industries Ltd both rising around 70% this year. If things play out as investors expect, customers will eventually lose out.

This is ironic. The path towards an oligopolistic structure was paved in response to the public outcry that followed the 2G scam. The people’s verdict was that grave injustice has taken place, and that justice should be seen to be done. But what began as an attempt to pacify the outrage of the people may well end up hurting public interest.

For perspective, a Comptroller and Auditor General of India (CAG) report pegged the loss on account of the scam at Rs1.76 trillion in 2010. While the methodology was questionable , this was pivotal in rallying people for the Indian anti-corruption movement in 2011. This was followed by the Supreme Court’s decision in 2012 to quash the licences in question.

To avoid the possibility of another public outcry, the government has since set high reserve prices for spectrum auctions. Worse still, it even decided to run an auction for in-use spectrum. Sanjeev Aga, former managing director at Idea Cellular Ltd, wrote in The Economic Times that this is akin to making a person bid for blood running through his own body, while trying to stave off a competitor who is trying his best to eliminate you.

It’s hardly surprising that almost the entire industry is struggling with high debt, and is, in turn, posing high risks to the banking system. It’s also not surprising that only three large companies are likely to remain standing at the end of the bloodbath. Why, even Vodafone Group Plc., valued at $83 billion, came to the conclusion that it didn’t make sense to continue fighting the battle alone. Its Indian unit will soon merge with Idea Cellular.

The upshot: these remaining companies can now be expected to milk customers once the consolidation process is complete. Also, while new entrant Reliance Jio Infocomm Ltd has brought down tariffs considerably for most urban users, the cost of a phone connection can end up being far higher for rural and low-income users. Jio’s entry plan, for instance, entails a monthly spending of around Rs150, which is far higher when compared to the average spending at the bottom of the pyramid. Who knows, if incumbents such as Bharti Airtel Ltd eventually decide to shut down 2G networks and migrate entirely to a network built on an IP-based communications protocol, the cost of a phone connection may well be prohibitive for many users.

The special court may have given Raja and others a clean chit; but, as far as the telecom industry goes, things only became messier after the 2G scam.

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