COLUMN

Corruption and caretaker economics

Arbitrary moves by the caretaker government raise several questions.

C.P. CHANDRASEKHAR

THE drama of caretaker governance in Delhi is turning bizarre. The drama began when the defeated BJP-led government declared that it would not function merely as a caretaker till the elections, but as a legitimate government in office. This amounted to s tating that, even though it could not be held accountable by the elected representatives of the people, the caretaker Cabinet could exercise the powers of a legitimate government.

The first signs that these were not just veiled threats came when the Cabinet not merely approved a series of transfers at the highest levels of the bureaucracy, but chose to go ahead with a number of important economic decisions. The latter included the decision to infuse a sum as large as Rs.125 crores as equity into the public sector Indian Airlines in order to allow it to acquire new aircraft and become attractive enough to be privatised.

The fact that the government is not accountable has been established by the actions of the Defence Minister in the wake of the infiltration in Kargil. Not only has he dismissed demands that he should resign owning responsibility for the security failure that led up to the aggression, but he has compounded that failure by a series of irresponsible statements in the midst of a war-like situation.

SHANKER CHAKRAVARTY
Jagmohan. A Minister shifted.

This evolving drama has now turned bizarre, with the Prime Minister having shifted out of office Jagmohan, the Minister for Commu-nications, essentially because he insisted that cellular phone operators who entered the telecommunications sector in the wa ke of liberalisation must play by the rules that were made clear prior to their entry into the field.

THE cellular licence story goes back a long way, when, as part of the process of liberalisation, the government decided to allow private entrants into basic telephony and cellular phone services. There were two issues that the government had to deal with then. First, even though in liberalising mode, it could not allow unfettered entry into an area which inevitably involves large sunk costs in infrastructure. In the rush to occupy the market, the industry could get saddled with huge excess capacities, l eading to wastages. Thus, though private entry was to be allowed, only two operators were to be permitted entry in each circle, fostering a duopoly. Second, no cellular operator can make a success of the business unless subscribers can interconnect with the Department of Telecommunications (DoT), and through its network, contact land line subscribers. State guaranteed oligopoly would mean oligopolistic access to the DoT network as well.

It was in return for this oligopolistic access to the DoT's infrastructure that the cellular operators who were given a licence were also expected to pay a fee. To fix the licence fee, the government adopted a process which was hailed as transparent and in keeping with market principles. Licences were to be granted in different circles to the highest bidder in an auctioning process. And the bidder had to make available in routine fashion a bank guarantee for the amount which was likely to fall due as li cence fees over the year.

In practice, rather than ensure efficiency, this scheme encouraged irrational and speculative bidding. Driven by the euphoria generated by liberalisation, many groups made huge bids on the basis of grossly overoptimistic projections of market size and ma rket growth. Inevitably, they emerged winners in the race for licences. Even after the bidding process was over, in certain circles some groups bought out the licences from those who were originally the highest bidders, adding on an additional sunk cost to the project. It soon became clear that many of these operators would not be able to remain in business after meeting these sunk costs and paying such large licence fees.

IN such a situation, there are two approaches which can be adopted. Within the logic of the liberalisation ethos it could be argued that the state should maintain its distance and make the investor pay the price for foolhardiness. Bankruptcy and closure would follow. The bidding process can operate again, and the new winners may be the same groups or others who may buy up the infrastructure created by the original players. The second approach would be one which recognises that the premise that markets a re efficient, on which premise much of liberalisation works, was and is wrong. This would require a transition out of the current licence fee regime to one which allows operators to remain viable. This was what the government had decided to do, through a scheme involving a revenue sharing agreement between the DoT and the cellular operators, rather than a fixed licence fee.

Sensing this mood in government, existing cellular operators have been adopting postures that would be unacceptable within any regime, whether market-driven or regulated. They have been lobbying the government to make the transition to a new licence regi me within the current structure of the industry, so that irrational bidders would be the automatic beneficiaries of the revised scheme. And, pending this transition they had chosen to stop making licence fee payments to the state, an action which they wa nted the government to condone.

There were two problems here, however. First, there was no reason why those cellular operators whose irrational bidding generated the current mess should be the natural beneficiaries of this transition. This was especially so because their irrational bid ding may have kept out of the industry players who had greater capabilities in the telecommunications area and a more sober assessment of market conditions. Second, writing off past dues would amount to subsidising the speculative bidders rather than pen alising them.

JAGMOHAN was clear on both these counts. He was backing a scheme involving a one-time entry fee and a revenue sharing agreement, to implement which there would be a new round of bidding in which existing operators could participate. The idea was that if the existing operator lost out in that bidding process, he would be bought out by the winner at a price arrived at by an independent valuer. But the transition to that scheme was to be prospective. Meanwhile, companies had to pay up a minimum of 20 per c ent of their outstandings and securitise the remaining. Some operators agreed to this and obliged. Others like Aircel. Koshika and JT Mobile held out, leading to the cancellation of their licences and termination of the connection to the DoT network. Whe n the action was challenged in court, the judges backed the Communications Minister.

It is clear that forces in the Prime Minister's Office, who have allegedly been pushing the case of the cellular operators, had been unsuccessful in preventing Jagmohan from deviating from his economically, legally and morally correct stand. But obviousl y committed to preventing the DoT's strategy from being implemented, these forces have resorted to a most remarkable action: that of getting the Prime Minister, who has left the Kargil-stained Defence Minister untouched, to reshuffle his caretaker Cabine t and move Jagmohan out of the way. According to subsequent reports, the Prime Minister, who now holds the Communications portfolio, would back a decision to change the effective date of cellular licences by a year. Since most operators have held their l icences for three years and paid up licence fees for two of them, this action would virtually wipe out their outstanding dues. In practice this would amount to a huge reduction in licence fees pending the change in the licensing regime.

THE facts that a senior and competent Minister has been sidelined, that an unusual and controversial decision to reshuffle a caretaker Cabinet has been taken so brazenly and that there are reports that cellular operators are likely to be offered a bonanz a, all lend credence to allegations that much more than ideas have been exchanged between the Prime Minister's Office and the cellular industry. What is more, 'caretaker' decisions like the one to infuse equity funds into India Airlines to purchase aircr aft, trigger speculation that the telecom episode may not be an isolated incident. The need for funds to finance an impending election campaign, it is being alleged, could trigger many more such moves.

Many people had believed that a "retreat of the state" and the exposure of the economy to the discipline of the market would not just improve efficiency. It would also cut out arbitrariness of decision-making and the corruption that is inevitably associa ted with it. It would streamline the functioning of the economy by making it a "rule-governed system", though admittedly they will be the rules of the market. What episodes such as the telecom issue indicate is that liberalisation could possibly be accom panied by an increase in the level of corruption, cronyism and arbitrariness to unprecedented levels. In short, the "discipline of the market" has proved to be a chimera.

It is in this background that the demands emanating from the industry associations of chambers and commerce that there must be a consensus aimed at insulating economic decisions and the reform process from politics, must be assessed. The presumptions are that there is only one kind of reform possible, that industry is for this technocratically correct process and that politics and politicians should not be allowed to delay or destabilise this process of reform. As the telecom controversy shows, there ca n be more than one trajectory of reform - that what industry wants may neither be the most efficient nor the most acceptable trajectory and that there can be more than one view within government. Those arguing that what industry is lobbying for is "refor m" and what Jagmohan was attempting was an instance of political intervention that borders on bad governance, are merely arguing for a cosy relationship between industry and sections of the state at the expense of efficiency and justice.