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The spectrum licence raj

By restricting spectrum use to firms that can afford to pay, India is blowing up its chances of being a leader in 3G-based technologies. High licence fees not only create oligopolies, but also squeeze out investments, says SUMIT K. MAJUMDAR.

The opportunities India had lost in manufacturing because of faulty policies perpetrated for over a generation have been won back, thanks to the information technology and communications revolutions. India can zoom ahead, having shed the hang-ups of a bygone licence raj era. The question, though, is: are we serious about this?

Thanks to the licence raj, India's manufacturing capabilities have been lost forever. India is an irrelevant manufacturing country. It never will be the manufacturing powerhouse with deep technological capabilities that China, Japan, South Korea, Taiwan and Malaysia have become.

Their economic performance, based on investments in education, knowledge, technology and manufacturing capacity, has ensured that the locus of global economic control has shifted to the East. And India is not, by any stretch of imagination, a part of that East. India can never participate in the 21 {+s} {+t} Asian economic century based on manufacturing.

India could, however, have been a major player in the knowledge sector, although Indian policy-makers are all set to blow up this chance as well. Their focus is on how much they should charge for allowing a limited number of firms to have access to wireless infrastructure capacity.

By licensing entry into a potentially vibrant sector, restricting it to a limited number of firms that can afford to pay up, India is re-creating the licence raj — this time the spectrum licence raj.

The policy-makers' favourite pastime is practising déjàvunomics. In area after area of economic policy-making, the current administration simply does what was done three, four or five decades ago. No fresh thinking is brought to bear on the present realities. Spectrum management is a classic instance of the application of déjàvunomics.

Then and now

The 1956 to 1991 licence raj was all about manufacturing capacity allocation. The Directorate-General of Technical Development was the last word on how much of a particular item could be made, how many firms and of what size could participate in certain industry segments.

Others firms were shut out. Artificial entry barriers were created. This created huge entry costs and monopolies. Capacity pre-emption, or hoarding of capacity to shut out new entrants, was chronic — a feature highlighted 40 years ago by the Industrial Licensing Policy Inquiry Committee, headed by Subimal Dutt.

India's economy was severely constricted for over a generation because of these policies. The manufacturing firms were small-scale in nature and unable to compete globally eventually when the markets opened. All the licence raj firms have died. India's manufacturing sector is a joke. Exporting radiator caps for the automotive sector, and manhole covers for city streets, do not suggest the existence of a vibrant and globally competitive manufacturing sector.

Yet, nothing has changed. Now, spectrum capacity has become a candidate for the licence raj.

The principles underlying both are the same. The industry context has changed. Modernisation has crept into the control approach. The method of allocation of capacity has changed. Whether allocation is based on a beauty contest, or on a first-come first-served approach if you pay the fee quickly, or an auction, all allocation methods have one common aspect — to control the number of players in a particular sector.

Now, the government decides precisely how much spectrum capacity each firm can have and the precise number of firms that can play in the field. Again, the government decides what the best method of competing within a particular industry context will be.

In the old licence raj, capacity pre-emption by big industrial houses resulted in concentration of economic power. India's current spectrum auction policy encourages the pre-emptive acquisition and warehousing of spectrum.

Oligopoly power

If this seems like a far-fetched scenario, take the case of the US. The latest auctions of ultra-high frequency (UHF) spectrum led to a spectrum race and raised more than double the revenues expected.

Why? Simply because two giants with deep pockets outbid everybody else. AT&T paid $6.64 billion and Verizon paid $9.63 billion. These two players paid $16.27 billion out of the $20 billion raised for the 700 megahertz band spectrum auctioned, and captured 80 per cent of the capacity.

This process has led to the monopolisation of spectrum by two players. The smaller players do not have the resources to pay similar sums. The two firms have raised rivals' costs so much that the entry barriers are permanent.

This is exactly what will happen in India. India's revenue maximisation policy is wrong. It will create an oligopolistic sector by design. It will not achieve what it has implicitly and ostensibly set out to do, which is the creation of a vibrant and cost-effective high technology sector.

The creation of artificial oligopolies in the US and Europe have led their mobile telephony sectors to fall behind substantially in the last decade, compared to those of countries such as Japan and South Korea.

In countries such as the United States, Britain and Germany, spectrum auctions led to the receipt of large sums by the government treasury and the relative impoverishment of companies. They did not have the funds to invest in network infrastructure, and they did not start investing in 3G network assets until recently, several years after they had bought the licences.

The 3G segments in these countries were not expected to break even for 10 years at least, as the analysis that my students and I had done for some large companies in Britain then had shown. Yet, this is precisely the situation that Indian policymakers will create for the Indian mobile sector in 2010, because of their greed.

Unrealised potential

The wireless phenomenon heralds new revolutions. These are revolutions in speech communication, as well as in data and media availability for the masses. With wireless broadband diffusion and 3G-based content services, India can march ahead in content creation and diffusion of knowledge. It might even lead Asia, and by default the world in knowledge-based enterprises.

But this will not be. The licence raj has been re-invented. The country has yet again been deprived of a great opportunity to catch up with the world.

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