Senior advocate Harish Salve recently argued that Supreme Court (SC) judgments of 2012 and 2014 had contributed to the current economic slowdown. He was referring to verdicts that led to the abrupt cancelling of 122 telecom licences and the allocation of 214 coal mining blocks. In support of his assertion, Salve pointed to job losses and shutting down of businesses in the wake of those rulings. Whether the judicial action really caused the economic slowdown, directly or indirectly, is a matter for a separate discussion. But one aspect that influenced the cancellation of the licences is worth recounting. That aspect is the estimate of losses to the exchequer caused by underpricing of the allocations in question.

Never mind that until then, Indian policy had not adopted any price-based mechanism for allocations, however opaque or discretionary the system of the time might have appeared. It was first-come-first-served in the case of telecom, and a linkage committee mechanism for coal mining blocks. A report of the Comptroller and Accountant General (CAG) said that underpricing of the allocations resulted in a loss of nearly 4 trillion to the exchequer. This number was so enormous that it overshadowed all other subsequent conversations, even though it was a notional loss. It followed, as per some experts and in the popular narrative, that open and transparent auctions were the only way to allocate sovereign resources; these would ensure fair pricing and not deprive the exchequer of money.

Ever since then, whether it is mines, airwave spectrum, licences to explore minerals, or renewal of land leases, auctions have become the chief mode of allocation. Following the SC verdict, there were a series of auctions of coal blocks in the early few years. The total bid value of these auctions has been 1.8 trillion so far. This number is no longer notional, since these are actual bids.

In some ways, the figure seems to vindicate the earlier estimate of the CAG. But, here’s the catch. This revenue will be realized by the Centre only once actual production begins in those mines. Until then, there is a small penalty for non-operation of the mines. As of date, none of the mines which were auctioned after the Supreme Court judgment has started production. This excludes mines that were operational before the court case. The reason is that international coal prices fell steeply and, hence, importing it became cheaper, even at the cost of keeping the allotted mine idle. The bidding for mines in the aftermath of the court verdict was affected by a scarcity mindset, and there was a sort of mad scramble. And of course, there is the winner’s curse, which biases bidders toward overbidding. In the meantime, India’s coal imports have risen to record levels, and keep rising.

The same is true of telecom. The first ever auction of 3G waves yielded record revenues for the government. But, subsequent auctions have either gone with zero participation at the base price or minimal interest. Even now, corporate appetite for 5G auction is tepid.

Does this invalidate the notional loss estimate? Here’s one way to look at it. Consider a man who would take a bus to work every day. One day, the man is late and sees the bus leaving just as he reaches the bus stop. He chases the bus, hoping to catch it since traffic is slow. Huffing and puffing, he manages to reach it only after a few stops, by which time he has already reached his office. In the evening, he tells his wife: “Hey, I saved 10 today since I ended up chasing the bus all the way to office." She says: “You are stupid! Why didn’t you chase a taxi and save two hundred rupees instead?"

The broad point is that notional losses tend to cloud policy thinking. One of the biggest mid-course corrections of a major policy reform was the New Telecom Policy (NTP), 1999, put in place by Prime Minister A.B. Vajpayee’s government. The 1994 telecom auction had raised sky-high revenues, but all companies were in near bankruptcy within five years. That sky-high estimate for government revenues was going to evaporate. The PM and his team decided to switch from a fixed licence fee to revenue sharing in the new altered policy. The opposition cried that this was “the mother of all scams" and a huge giveaway to incumbent players who had bid recklessly. The number bandied about was 50,000 crore or higher. It was alleged that if the revenue-sharing formula had been known earlier, a different bidding strategy might have been adopted. The government held firm, the NTP was rolled out, and India’s telecom growth exploded over the next 15 years. If our policymakers had been guided by notional loss numbers back then, we may not have seen that phenomenal growth.

The idea of a notional loss is relevant in the case of hedging, too. India’s large public sector oil refiners have to import crude oil worth nearly $120 billion. Why don’t they hedge their imports, at least half the quantity, when crude oil prices are low—say, below $50 per barrel? Because, if they do a forward booking, then if, God forbid, the actual price were to dip below $50 for a few months, the notional loss (also called “mark to market loss" in the language of derivatives) could be $100 million or so. This is a notional loss, but no public sector executive would want to face the music—let alone a probe by a joint parliamentary commission—for this. Hence, India’s oil companies do not hedge and we stay vulnerable to oil price volatility. Beware of notional losses while reforming policy.

Ajit Ranade is an economist and a senior fellow at The Takshashila Institution

Close