Selling mangoes by mobile.

Photographer: Noah Seelam/AFP/Getty Images

Don't Derail India's Mobile Revolution

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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The most revolutionary development in India in the last 20 years has been the rise of the mobile phone. Until 1996, nobody in India had access to a mobile phone. Today, encouraged by rates that are among the cheapest in the world, some 800 million do. With the advent of affordable smartphones, India is one of the best-positioned economies to take advantage of the mobile revolution -- both in terms of designing and testing new apps, as well as transforming industry and commerce. So why is the Indian government putting all that potential at risk?

At issue is a February deadline, when the 20-year leases on spectrum given to India's original mobile telecom operators run out. To continue to operate, giants such as Airtel and Vodafone will have to bid anew for spectrum in blind auctions.

There's nothing inherently wrong with this process. The previous Congress-led government got itself into trouble by allocating natural resources like spectrum and coal in an arbitrary, non-transparent fashion, leading to charges of corruption. Auctions at least ensure transparency and a fair way to discover proper market prices.

The problem has to do with what's being auctioned. The government's telecom ministry wants to put up only a limited number of spectrum blocks for auction, hoping that fierce competition will drive up bidding and earn the state maximum revenue. An independent regulator for the industry is pushing back, urging the government to free up for bidding additional spectrum which is currently monopolized by the military and state-owned telecom BSNL. The regulator has suggested delaying the auctions until the issue is resolved.

Certainly no one can accuse this government, unlike the last one, of selling off spectrum too cheaply. But a poorly designed auction could cast a shadow over one of the few bright spots in the Indian economy. Most telecom companies are deep in debt already. If forced into artificially high bids, they're likely to pass costs on to consumers. Eventually, while the damage would be hard to measure precisely, the government could be hurt by a loss of innovation and economic vibrancy, and thus lower tax revenues.

There is a fundamental question at stake here that goes beyond telecom: how best to price and allocate India’s natural resources. In coal, for instance, the government has set in motion a process to auction off 74 of the 214 coal blocks that were cancelled by the Supreme Court earlier this year. Ostensibly, these are the blocks which are operational or near-operational. But again, by limiting the number of blocks up for auction, the government is creating an artificial scarcity and driving up bid prices. Most of the companies involved are also deeply indebted -- and likely to pass costs on to consumers. Well-designed auctions should instead strive to ensure the maximum benefit to the maximum number of stakeholders, not just the state exchequer.

It's well within the government's power to free up more spectrum for bidding. Both the military and BSNL under-use the spectrum they control now, and they take orders from the defense and telecom ministers, respectively. A nod from Prime Minister Narendra Modi would solve the problem swiftly. If Modi wants to strengthen India's economy for the long term, rather than score a quick but temporary windfall, he should give that order. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net