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Why is India being shortchanged?

By Business Standard
May 01, 2009 12:24 IST
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India's political climate gets very hot very quickly if anyone suggests the privatisation of individual enterprises owned by the state. The Manmohan Singh government did none in the last five years, and the Congress manifesto now formally abjures such privatisation in selected sectors.

Oddly, though, the political class does not object to the privatisation of whole sectors -- as has happened with civil aviation, telecommunications, coal mining, power generation and much else. The economic implications are greater, but politicians seem to not mind so long as their existing PSU toys stay with them.

Which raises the question: is the objection to letting private enterprise flourish, or to losing patronage?

That the latter is the more plausible explanation becomes obvious from a scrutiny of the manner in which sectors are privatised, and new rules drawn up.

In the telecom sector, for instance, anything up to Rs 40,000 crore (Rs 400 billion) were lost to the exchequer when Communications Minister A Raja decided that he would not auction new telecom licences, and simply gave them out at the prices charged by the government way back in 2003.

The story has been the same, with smaller sums involved, in many other sectors. And since the opposition does not make any noise about this at election time (preferring instead to chase mythical numbers in overseas tax havens), the suspicion should grow that the real name of the game is what economists call 'rent seeking.'

This is not without cost, if the country hopes to attract investors into the infrastructure area. When word gets around that favouritism is de rigueur, it keeps away serious bidders and also ensures that the winners feel they can get away with shortchanging the country.

Given the huge infrastructure shortages and the need for private investment to fill this gap, this is an issue of critical importance.

While evaluating the losses on account of poor contracting procedures and other lapses, it would be a good idea to keep an eye on the alternatives.

Better contracting would be a no-brainer of an option. The problem arises when the alternative is giving the project to the public sector -- as happened recently when bids for locomotives were cancelled and it was decided these would be produced in the public sector.

General Electric's may have been a single bid for the loco project, but it happened to be lower than the estimate made by the railway ministry as to what it would cost if the locomotives were to be produced by the government.

Another example is the 3G spectrum given recently to public sector telecom companies MTNL and BSNL. There was no protest over this since it appeared then that auctions for 3G licences were going to be held soon and private sector firms would also get spectrum without delay.

As things turned out, however, the auction plans got stuck, and spectrum will now be given out by the next government. That is, the decision could get delayed by several months.

Given how 3G is the next leap in telecom technology, allowing users to experience on their mobiles the kind of broadband internet speeds that are currently available only on fixed wirelines, most private firms were keenly waiting for the auctions. Indeed, it was expected that the government would net several billion dollars as one-time entry fees.

So, what did BSNL and MTNL do with the huge lead time that they got over their potential private sector rivals? According to reports, the two firms have managed to get just a few thousand subscribers so far, as they have not been able to convince users about the benefits of going the 3G way.

Had the same licences been given to private players, there is little doubt that the number of users would be bigger by orders of magnitude, and that work would have begun by now on creating useful applications, including movie downloads.

Opportunity lost, of course, but no one is counting the cost, and no one making a noise either.

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