Opinion | Let’s not muddle along on how we share natural endowments4 min read . Updated: 14 Jan 2020, 11:03 PM IST
Policies on the allocation of scarce resources must evolve to assure India the best eventual outcomes
The government’s decision to remove end-use restrictions on bidders for coal-mining leases is the right one, though it has come late in the day. This should have been done in 2015, when coal blocks were auctioned for captive use by various industries.
These mining leases were made available after the Supreme Court cancelled the allocation of 204 blocks where it had found the method of allotment arbitrary and non-transparent.
Governments love to play God with markets, believing (wrongly, usually) that they know how to allocate scarce resources based on a priority list they themselves decide upon. In the process, policies could artificially restrict either supply or demand, or both, often resulting in unrealistic or unworkable prices. This is why the 2015 auctions managed to allot only 29 of the 99 blocks initially on offer. According to coal and mines minister Pralhad Joshi, the country had to import some 135 million tonnes of coal that could have been produced locally if all mines had been allotted.
Beneath that statement lies another nuanced truth: while auctions may be the cleanest way to allot scarce natural resources to private parties, their design makes all the difference. We get sub-optimal results from auctions if we do not do three things: define clear policy goals for the allotment of the resource (whether coal blocks, spectrum or land); define a proper process for periodic review of the design itself, since it may not be possible to get everything right in the first instance, as the travails of the telecom industry, resulting partly from high spectrum costs, show; and third, make the political oversight process as non-partisan as possible, so that regime changes do not keep upending policies.
Both spectrum and land pricing reek of the kind of policy flip-flops that make the sectors either unviable or dependent on corruption and cronyism.
Consider spectrum. We know that the United Progressive Alliance (UPA) communication minister A. Raja presided over arbitrary tweaks in the telecom licence and spectrum allocation policy, which is what forced the apex court to intervene and cancel those licences. This followed a sensational claim by the then Comptroller and Auditor General (CAG) that the “presumptive" revenue losses may have been as high as ₹1.76 trillion due to arbitrary allocations. The net result was that all subsequent auctions were designed to maximize spectrum bids that finally ended up becoming a winner’s curse.
The truth is there is no such thing as the “right" price for spectrum, for that depends on demand and supply, and even technology improvements. The CAG’s loss figure was based on the extraordinarily high bids for 3G spectrum in 2010. These were the result of an artificial crimp in the amount of spectrum made available for 3G bids.
Raja’s decisions ensured that rent-seeking opportunities were loaded in favour of some private parties, while the post-2G scam auction process ensured that this kind of rent-seeking would remain with the state itself, with untold consequences for the long-term health of the sector. This happened because governments have not asked this basic question: What do we want to achieve by selling spectrum through auctions? Higher revenues, lower tariffs, or a mix of the two? Raja’s spectrum pricing wasn’t the problem. The problem was the lack of stated clarity on the government’s policy objectives and the arbitrary nature of allotments.
The same goes for real estate, which is struggling right now due to high land prices that make most properties unaffordable for middle and lower-middle income buyers. Again, non-transparent policies and bureaucracy prevent a price reduction in land. Urban land prices are high due to artificial constriction of supplies through the fixing of low floor space indices (FSIs) even in land-scarce localities. Land prices are being kept artificially high in order to facilitate private rent-seeking by bureaucrats and politicians who have a vested interest in this arbitrariness.
There is, however, another factor beyond auction design and allocation policy that impacts prices, and this is why periodic reviews are needed on how scarce resources should be allotted to private parties. This X factor is technology. Spectrum or land or coal mines are not always in short supply, for new technology lowers costs. The same spectrum can, with the use of newer technology, be used more efficiently; better infrastructure and improved building technologies (even 3D printing techniques for mass housing projects in non-urban areas) can lower housing costs enormously. Automated coal mining can lower coal production costs, enabling higher profitability even with relatively high auction bids.
The takeout is simple: Policies on the allocation of scarce resources need to evolve based on actual experience and changing technologies and processes. The success or failure of a specific policy cannot be judged purely from a revenue or transparency point of view. It needs to be assessed from the size of the gap between policy objectives and actual achievements. The case for more transparent, well-defined, and politics-neutral policies has never been stronger than now. It applies equally to coal mining, telecom and real estate, to name just a few sectors.
R. Jagannathan is editorial director, ‘Swarajya’ magazine