2G Scam — The Rs 1.76 Trillion 'Loss', Corruption Claims, And Allegations of Favouritism

Just a Mercenary? Notes from My Life and Career. Duvvuri Subbarao. Penguin. Pages 336. Rs 581.

In 2007, the Department of Telecom (DoT) under the ministerial charge of A. Raja of the DMK, a partner in the UPA coalition, determined that there was a case for licensing more 2G operators in each of the twenty-three telecom circles in the country in order to encourage competition in the sector.

The department consulted TRAI (Telecom Regulatory Authority of India), and TRAI, in turn, endorsed the need to increase the number of operators and recommended that fresh licensees should be given spectrum at the same price at which incumbent operators had gotten it, which was the price set in an auction in 2001. The absence of a level playing field, TRAI argued, would disadvantage fresh entrants and defeat the goal of deepening telecom services.

The 2001 cabinet decision stipulated that all future pricing of spectrum would be decided jointly by DoT and the Ministry of Finance. When the issue came to the finance ministry for opinion, I took the view that it would be inappropriate to sell spectrum in 2007–08 at a price set in 2001 and that we must rediscover the price through a fresh auction.

My opinion was informed by the experience in India and around the world during the intervening years that spectrum was a scarcer commodity than originally believed. It was only appropriate that the government should garner a part of that scarcity premium by rediscovering the price through a fresh auction.

The DoT wrote back to say that they saw no reason to revisit the pricing issue and that they preferred to go along with the TRAI recommendation. For sure, there was some logic to the DoT position. If the objective was to deepen telecom penetration, it made sense to keep the price of spectrum low; competition among operators would then ensure that the lower price was passed on to customers.

Even as this disagreement on pricing remained unresolved, the DoT went ahead and invited applications for licences in September 2007 and awarded 120 licences to forty-six companies on 10 January 2008. Although these licences were given away at the 2001 price, the licence agreement contained a clause that the price could be increased later to accommodate the possibility of the finance ministry’s view prevailing.

The whole licencing process turned out to be controversial and contentious. There were allegations of arbitrarily advancing the cut-off date for receipt of applications, abrupt announcement of the successful applicants, tampering with the first come, first served principle and allowing a very narrow window for payment of the licence fee to favour some parties. This licensing part was an issue in which I was neither involved nor had any locus standi.

In July 2008, some six months after the licences were issued, the two ministers, Finance Minister Chidambaram and Telecom Minister Raja, reached an agreement that this round of 2G spectrum would be given at the 2001 price while all future spectrum, including 3G, which was then on the anvil, would be auctioned. Both ministers presented this agreed package to the prime minister at a meeting where I was present. I recorded that decision in the file.

Very soon the trickle of allegations of corruption turned into a flood. That the government had ignored the advice of its own finance secretary added fuel to the fire. There was a furore in the parliament. The decision was attacked in the Public Accounts Committee (PAC), the Central Vigilance Commission (CVC) ordered a CBI investigation, the Comptroller and Auditor General (CAG) decided to take up a special performance audit and a public interest litigation was filed in the Supreme Court.

This meant that the 2G issue was simultaneously the subject of a CBI investigation, a PAC inquiry, a CAG special audit and a Supreme Court probe. And subsequently, it would be the subject matter of a Joint Parliamentary Committee (JPC) inquiry as well.

The CAG report, signed off by Vinod Rai, incidentally my IAS batchmate, was tabled in the parliament in November 2010. Its most important conclusion was that the government had incurred a ‘presumptive loss’ of Rs 1.76 trillion by selling spectrum at below market price. This huge number, as much as 3.6 per cent of GDP, was explosive and turned the 2G issue into a full-blown scam.

The locus standi of the CAG to take up a special audit is unquestionable. However, the CAG’s decision to go into the question of a ‘presumptive loss’ to the government and its methodology of quantifying that loss are questionable on several grounds.

The CAG estimated the ‘presumptive loss’ by calculating the difference between the revenue actually generated and the revenue that would have been generated under four different hypothetical prices for spectrum. The assumptions underlying the estimates of these hypothetical prices are contestable. Moreover, in burrowing deeply into just the pricing issue, the CAG did not reckon with the significant recurring revenue the government would earn via larger spectrum charges consequent on the expansion of telecom.

Finally, the CAG did not take into account the substantial equity and efficiency gains that would accrue to the economy via deeper telecom penetration.

The reality is that it’s difficult to quantify the costs and benefits of decisions like this without making heroic assumptions. Arguably, it’s possible to come out with a study that would, in fact, show ‘presumptive gains’ to the government — that the overall benefits to the government far exceed the costs it incurred — by making assumptions that would be no less robust than those underlying the CAG findings.

More important than the estimate of presumptive loss, questionable as it was, was the CAG’s locus standi in questioning the right of the government to decide to sell spectrum at below market price. If a democratically elected government decided to forgo revenue in order to serve a larger public good of deepening telecom penetration, was it open to the CAG to substitute his own judgement for the government’s?