Consumers are going to pay the price for the spectrum auction.

Photographer: Sam Panthaky/AFP/Getty Images

India's $18 Billion Mistake?

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."
Read More.
a | A

A decade ago, Korean steelmaker Posco’s proposed $12 billion investment in the eastern Indian state of Odisha (then still known as Orissa) was hailed as the country's biggest-ever foreign investment commitment, as well as a vote of confidence in India as a potential manufacturing power. Ten years later, Posco's reported pullout is a PR debacle and a blow to Prime Minister Narendra Modi's hopes to convince companies to "make in India."

QuickTake India's Aspirations

Worse, it's the government's success rather than its policy failures that appear to have driven out the steelmaker. On the heels of a lucrative auction of telecom spectrum, which garnered bids totaling a record $18 billion last week, the government is set to sell off iron ore and the rights to limestone mines by auction as well. Under the old regime, the state would have allocated these kinds of resources to industry at a nominal price. Now that the government is looking to maximize profits by putting them up for bids instead, Posco has apparently decided that the additional costs make the Odisha project unappealing.

The political logic of auctions is obvious. Under the previous Congress-led government, the opaque process of allocating resources to private companies quickly led to accusations of cronyism and corruption. Anger over the 2G spectrum scandal of 2008 and the coal scandal of 2009 played a huge role in Modi's landslide victory last year.

Unfortunately, criticism has focused on the idea that the government gave away India's resources too cheaply. In fact, the criminality never lay in “revenue loss," although the government’s official auditor gave that impression. The real problem is that the process was too discretionary and easily manipulated, giving rise to favoritism. 

Auctions are one way to eliminate the potential for corruption and rent-seeking. But there's no inherent reason they need to be designed to maximize revenues for the government, as happened with the spectrum auctions. The government deliberately chose to create an artificial scarcity of spectrum by selling off only a limited amount of airwaves. That pumped up bids but has also piled debt onto telecom companies, who will no doubt pass on higher costs to consumers. While insisting any tariff increases should be minimal, the government doesn’t deny they're inevitable.

This raises the question of priorities. If the state is going to control natural resources as it does now -- whether spectrum, commodities such as coal and iron ore, or land -- the goal should be to harness them to create a competitive private sector that generates jobs and serves consumers. By that standard, the government should have put up more spectrum for sale -- including some claimed but hardly used by the military -- even if that meant earning less revenue.         

Nor are auctions themselves immune to manipulation. While recent coal auctions sent the cost of some mines soaring, questions have been raised about those that went relatively cheaply; the government canceled four winning bids on suspicion that companies had colluded to keep the bids artificially low. The Supreme Court is set to scrutinize the winning spectrum bidders as well later this month.                             

Voters might well ask why companies should be favored over the state, which obviously needs money to fund its ambitious development plans. Yet it's equally important to ask whether India's government is the best spender of resources, or whether private companies and consumers can use those resources more efficiently. India's fiscal deficit is 4 percent of GDP and its bill for misdirected subsidies totals around 2 percent of GDP. By contrast, projects like Posco's steel plant have the potential to generate jobs in some of India's poorest states, enabling workers to get over their dependence on leaky government schemes. 

In the end, an obsession with selling natural resources at the highest possible price may put an unnecessary burden on highly indebted private companies, not to mention consumers who want low-cost, high-quality goods and services. The goal should be a clean, transparent process that maximizes benefits for India, not its often inefficient state.

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