Artificial scarcity

The reason bids in spectrum auction are so high

The government has received bids for a total of Rs 86,000 crore so far in the ongoing auction of telecom spectrum, as service operators vie with each other to get hold of the scarce resource. Before the auction started, the government was hoping to garner as much as Rs 1 lakh crore from the exercise. As expected, the service operators have bid aggressively, especially for spectrum in the highly efficient 900-MHz band. The first indication that they would go into this auction with all guns blazing came when they deposited earnest money of Rs 20,435 crore, almost double the base price of the spectrum up for grabs, Rs 10,376 crore. (Higher earnest money helps a bidder get higher participation points in the auction.) It is not hard to see why such aggressive bids have been made. Spectrum in the 900-MHz band that was allotted to leading service operators 20 years ago is up for renewal. Unless they hold on to it, they could lose subscribers to rivals. Bharti Airtel, the country's largest service operator, had hedged its risks by acquiring spectrum in the 1,800-MHz band last February in all the six telecom circles (the country is divided into 22 circles) where it needed to renew spectrum. Idea Cellular, too, had bought spectrum last year, except in two of its nine circles: Gujarat and western Uttar Pradesh. The one that didn't buy any spectrum last year is Reliance Communications - it has no choice but to win back spectrum in all its seven circles.

What has raised the stakes is the entry of Reliance Jio. Among the eight bidders in the fray, it has deposited the highest earnest money (Rs 4,500 crore), followed by Bharti Airtel (Rs 4,340 crore). It is speculated that the telecom arm of Reliance Industries wants to use spectrum in the 900-MHz band to launch its data-heavy 4G, or fourth-generation, services. That could also be the reason why incumbents like Bharti Airtel and Idea Cellular are bidding aggressively in the 900-MHz band, though they have 180-MHz spectrum.

There are legitimate questions about the industry's ability to take on the additional financial burden that the auction may cause. Is the government, in its quest to mop up as much revenue as possible, putting the telecom sector in a bind? To be sure, they need to pay only 25-30 per cent of the money upfront and the rest in 10 equal installments after a two-year moratorium. Still, it would mean a substantial burden on them in this financial year itself. Some like Vodafone, whose parent in the United Kingdom is flush with funds, may not feel the pinch but all others will have to contract new debt, which will put their balance sheets under fresh stress. Tariffs may also go up.

Unfortunately, this is largely because the government has artificially created scarcity. More airwaves in the 2,100-MHz band could have been auctioned, which would have complemented the spectrum available in the 900- and 1,800-MHz bands. The armed forces have already agreed to give up 15 MHz in the 2,100-MHz band. The government could have auctioned that spectrum now and allocated it later. The question that will always be asked is whether the government's refusal to do so was prompted by its desire to maximise revenues from the auctions at the cost of telecom service providers.