Apotek Forman
11 Mar

Spectrum auction: Modi government’s approach is out of sync with Digital India plan

*As featured on Economic Times on March 8, 2015

- By Mahesh Uppal

By Friday evening, bids in the ongoing spectrum auction had reached Rs 77,000 crore, or over $12 billion. They could rise substantially before the auction concludes. The bids are great news for the central exchequer. Regrettably, the bids also suggest the government’s approach to spectrum is out of sync with its ambitious plan for a Digital India. More on that later.

Despite the spectacular bids, the government would be nervous about the decision of the Supreme Court which has stayed the publication of auction results and the award of spectrum to winners. GSM operators have challenged some of the provisions of the auction. We will know more on the next hearing on March 26.

The spectrum being auctioned includes frequencies in the 800, 900, 1,800 and 2,100 MHz band. Except for the 2,100 MHz band, almost all of the spectrum being auctioned for any service area, or circle, is in use by operators whose 20-year licences will expire in the next few months.

No Surprises There

The high bids are not surprising. Several companies face unenviable choices as they have large investments and revenues to protect. For instance, Reliance Communications could have to discontinue services in up to seven circles, if it can’t win back its spectrum. The auction has bearing on up to 75% of Idea’s revenues. Vodafone faces serious pressure in six circles. Reliance Jio, which has a nationwide 4G spectrum, has deposited the highest earnest money. It can wrest spectrum from current incumbents as well as raise their costs of acquiring spectrum.

It is easy to understand the rising bids for 900 MHz spectrum. It is by far the most valuable because lower frequency signals can cover longer distances and therefore require fewer telecom towers. The spectrum also supports 3G data services. It was allocated first when mobile services were launched 20 years ago. Early entrants would be especially keen to retain high-income subscribers acquired when call rates were several times higher than today. This spectrum thus allows operators to combine their immediate commercial goals with their future ambitions in mobile broadband.

The auction of 2,100 MHz (3G) spectrum saw less action in the beginning of the auction. But this is changing and bids can be expected to rise further. This spectrum is globally harmonised and companies have repeatedly sought more 2,100 MHz spectrum. They had offered to accept partial assignments in areas where defence needs some of it and to bid for spectrum before it is fully vacated. So, one can expect more interest in 2,100 MHz once bidders take a final call on the price they are willing to pay for the 900 MHz spectrum.

The demand for wireless spectrum reflects the fact that 95% of Indian users rely on mobiles for telephone calls and internet. Further, no other country has more operators in any service area (called circles in India). The limited spectrum must cater to more users as well as operators than elsewhere.

Thanks to the high competition, bids may not cause a dramatic rise in rates, though the prices are climbing steadily in recent months. However, the operators can be expected to prioritise high paying customers over growing markets — especially weak ones e.g. rural or broadband services where much more investment is needed. This is no less worrying.

What about Digital India?

The high sums do not mean spectrum auctions are a bad idea. On the contrary, auctions are the only transparent way of dealing with a demand for spectrum that far exceeds its natural supply. However, better auction designs are possible and eminently desirable. For instance, regulators often mandate that winners deploy broadband services in a prescribed short time or face penalty. This could have resulted in lower bids but better use of spectrum without compromising on transparency.

India’s overwhelming reliance on wireless is all the more reason to manage spectrum strategically. Fortunately, unlike other natural resources like coal or water, it is totally inexhaustible. Its use today has no bearing on the interests of coming generations. This allows much greater flexibility in managing it.

It is self-defeating to design auctions solely to maximise upfront revenue. Unfortunately, the government has chosen poorly. It went against the advice of a statutory regulatory body on critical aspects of the auction. It failed to accept the recommendation to auction more 2,100 MHz spectrum despite declaring that it had an agreement that defence would release more soon. It couldn’t deliver on the spectrum sharing and trading guidelines due in December last. That would have eased the pressure on bidders. The government seemed to have prioritised its revenues over a coherent regime for spectrum.

A government that believes a “Digital India” can be an engine of growth and governance cannot justify artificial barriers to efficient use of scarce spectrum. The success of Digital India is critically dependent on how well India manages the allocation and price of spectrum.

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