Sunday, March 15, 2015

The hidden cost of lakhs of crores

Recently the spectrum was auctioned for a whopping one lakh crores. The coal block licensing was also sold for two lakh crores. It has been all over the news as a positive story trying to depict how the government has managed to "raise" the money through its auctions, particularly after it failed to get the money leading up to the 2G scam few years before. With the fiscal deficit target fixed at 4.1% for the current financial year, this is a welcome boost to the government treasury.
Just like the famous "Broken window" economic story (Economics in one lesson), the public is being brain-washed to believe how this "new" money was generated that the government can use for people's welfare, also known as the redistribution of wealth. But what is not often said or discussed in public forums has been - who has paid this money and what is his incentive to part his cash. In other words, someone has invested in the auctions and the investor is planning on getting returns on his investment. Ideally more that what he invested.

Lets take a look at the blind spots in these unimaginably high revenue transaction.

In any transaction, there is a buyer and a seller.

The seller economics

The first and the foremost negative of the auction is, there is an assumption that the money raised is going to be put to effective use. What is the government going to do with this much huge sum. Does it have a game plan to make efficient use of this money? Probably not. Usually governments all over the world, and particularly in India collects a lot of money from the haves' and then wastes it in the guise of helping the have-not's. I am pretty sure, this time its going to be no different. Why would the government need this money? Water supply is erratic, roads are horrible and the power supply is not regular - on top of it - the people pay for all these services in the way of water bill, tolls and electric bills. Petrol and diesel - the lifeblood of the economy is heavily taxed. So in-spite of all these earnings that the government benefits from these huge sums are really fat-fat bonuses the government can play with. It would be ideal, if the money is put to efficient use? but if we have to go with past performance, then even this would be perennially wasted on welfare schemes that will not reach the actual beneficiary but will be sucked up by the corrupt bureaucratic system in place. Even if you would want to use this money on capital incentive project like metros in few cities, how would you invest this pan-India money on say developing a particular infrastructure like a metro in few particular cities. What happens to this money is never known unfortunately, except it gets lost overtime. Taking this money to fill a hole somewhere else is a usual way how these are used. Want to pay interest on an already existing loan!

The buyer economics

Now lets talk about the giver The companies that paid for the auctions have to find a way to retrieve this money by doing a business. It so happens, when the cost of doing business goes high (like here) the profits are squeezed. The money is absorbed in through its customer base. If you take mobile spectrum - a huge chunk of people are charged more to retrieve this money from. The companies are left with no option but the charge more for existing services. In the case of spectrum - the customers are charged extra and in the case of coal - the buyers are charged more, who in-turn charge the customers more (with high utility bills). Just imagine - the price is just 10% of what it has been. Then the companies can afford to share that windfall with its customers. It would not be possible for the companies to charge lot more, when they got with less money. The companies are there out there to win more customers with less fees. This money that the company saves - the remaining 90% would be put to use for a different investment that will again benefit its so-called customers. And more importantly - this private money would be invested wisely unlike the government. It will not be wasted. More often these companies have shareholders - who again are common man - who reap the fruits of better investment. In a real free society - businesses do good for the society. In societies that have crony capitalism like in India - the government loots all the money instead of productive companies. What doesn't happen - is the climate of crony capitalistic society being gotten rid off, instead of the government trying to fill in those shoes.

The public get a feel good feeling - where the government "successfully" managed to suck the "extra" money from big corporations and in the process has got ample money to serve its poor but "good" people. The sad part of this transaction is - the public never see the benefits that WOULD HAVE happened had this auction not happened involving such a huge sum.

Inflated prices - of any commodity is bad for society. It merely reflects that the Indian rupee is losing value.

Bottom line the citizens of India LOSE A LOT from these huge deals. The establishment is successful that the blind spots are not highlighted and discussed in civil society. Its all bash the rich and praise the government attitude. The way they are supposed to operate, governments can never do profitable business, they always lose financially. Unfortunately the media and the society in which we operate highlight it in a "non-productive" or "not realistic" approach. Awareness has to spread on who really can make a difference in the way we live our life. Rise in our quality of living is what every citizen wants and there is absolutely no-one who is an exception to it.

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