In the emotionally surcharged atmosphere of outrage against corruption, it is necessary not to lose sight of some first principles and get locked into firm but sub-optimal policy positions. One such maxim that is in danger of becoming a sacred principle is that government allocations should be done only through auctions.
First, some basics. A monopolist with a new product would, based on his judgement of the demand curve, enter the market at a sufficiently high price, and when sales go down, lower the price to get additional sales and profits. The process could even end with sales below cost price to get rid of inventory. The monopolist uses his best judgement to determine the entry price and subsequent lower prices to maximise profits. His objective is profit maximisation and not price maximisation. It is well known that welfare is better achieved with competition than with a monopoly. But what is not so well known is that with price-maximising behaviour welfare is even lower than with profit maximisation by a monopolist.
Government finance and audit functionaries have difficulties in seeing a downward-sloping demand curve and to come to terms with it. The consequences are not usually seen or commented upon. To illustrate, the Delhi Development Authority (DDA) has had a policy of auctioning commercial properties for decades. The auctions are usually conducted whenever a particular piece of land or set of shops gets ready for disposal and the amount of such properties to be developed is set in an archaic formula that has not seen revision in the light of experience. The auction price forms the basis of the reserve price for subsequent auctions implying that bids below the reserve price cannot be accepted. This is to avoid the standard arithmetical computation of loss in an audit observation. The DDA, which has had a monopoly over land in Delhi for 50 years, has been pursuing price maximisation and not profit maximisation for commercial spaces even as it has involved carrying inventory, repeated auctions and slowing the pace of development and disposal to let prices rise. Builders who have bid very high prices for commercial land have, in turn, waited for prices to rise sufficiently before building and selling commercial properties. The commercial centres of the original Master Plan are still being built in some cases. The result has been that Delhi has one of the highest commercial property prices in the world. This market distortion has created the absurd situation in which, increasingly, economic activity, job and wealth creation have been taking place in unauthorised premises in violation of land use norms. When the Supreme Court tried to uphold the law and insist on its enforcement, the capital came to a standstill and the government was struggling with ordinances to restore normalcy. The judge who showed activism is accused of trying to help builders sell expensive properties by creating demand from those forced to shift due to court orders. Incidentally, the same DDA did great service by giving abundant land to cooperative housing societies through its lower-income group, middle-income group and self-financing housing schemes at no profit, no loss.
The state has a monopoly over its sovereign functions. It is expected to use its monopoly power in the economic realm to promote public welfare. It is, therefore, not an issue that decisions on taxation should not have revenue for the government as the sole criterion. Some of the worst excesses against the peasantry occurred in medieval times when rulers auctioned governance and taxation rights to the bidder who promised the highest revenue. Allocation decisions through auctions are naturally attractive both from the point of revenue and transparency. But they need not always be the best for promoting public welfare. Allocations through lotteries, selection on merit and first come, first served basis have all been used and each one could be the right approach depending on circumstances. Of course, transparency and fairness have to be ensured. For instance, states that still have industrial land with a system of fixed rate allotments have an advantage in the eyes of potential investors on this account. On the other hand, affordable housing has been the biggest casualty of the retreat of the state from fixed price land and housing allotments.
The telecom sector has been India’s remarkable success story with mobile phone connectivity levels nearing China’s. Broadband development, however, has been delayed due to slow decision-making. Broadband penetration would be a far bigger game changer than mobile phones have been. This would be key to the access to knowledge and consequent productivity gains that would give us GDP growth of over 10 per cent on a sustained basis. There is a need to move on from 3G to 4G quickly. We need to target broadband penetration of over 200 million by 2015 and evolve a strategy to attain this objective.
This would require an early evaluation of the experience of the 3G services rollout on the basis of the spectrum auctioned. There is a need for a conceptual willingness to be pragmatic about issues such as additional spectrum allocation, making shared spectrum available as technology matures and determining the rate for this purpose, industry consolidation, use of unutilised spectrum with some licensees and so on. A consensus based on consultation across industry players and party lines would need to be evolved. This, in turn, would need the separation of the surcharged, partisan postmortem on corruption from a rational discussion on the right way forward.
