Spectrum allocation and a short tale of two curses
PremiumIt’s good news that India’s telecom regulator has sought to cheapen airwaves, but we should check if our allocative devices for such resources are doing the best they can for the economy
How resources are allocated in an economy is key to how well it performs. Last century’s great debate over central plans versus market mechanisms, however, was so broad that sector-specific cases had a tendency to get lost, with lingering effects. As India prepares for another round of spectrum allotment to telecom operators, let’s look at two ‘curses’ that could attend a country’s quest for overall value maximization. Take the ‘resource curse’. This can afflict an economy richly endowed with something scarce, like oil, in such heavy global demand that it forces its currency up, prices other exports out of world markets and thus lets one big earner dominate. Solving this may require an exchange-rate peg, which has its own risks of rigidity. That we do not face such a problem is evident in India’s diversified economy. A plentiful resource, however, can suffer another sort of distortion if it gets overpriced internally by state intervention. The usual culprit is the ‘winner’s curse’, which befalls winning bids for auctions that end up as whimpers for the buck instead of bangs.
Over the past two decades or more, the Indian telecom sector has been battered by all manner of policy flip-flops and worse, but its enlarged cost base is a drag that could yet be eased. Like air corridors for aviation, airwaves for telecom services are a public resource that costs the state almost nothing to either hold or give away. Even so, spectrum is costly. The chief reason is a government addiction to a windfall source of revenue. It was not a policy call, but a judicial directive in 2013 that led airwave-frequency bands to be auctioned. Huge bids filled state coffers at the expense of operators. And with tariffs held down by a retail price war that broke out in 2016, topped by an extractive court ruling in 2019, even efficiently run businesses began to wobble. The Centre offered a relief package recently. If that was welcome, so is Monday’s breather from India’s telecom regulator. For upcoming airwave bids, it has proposed that reserve prices be set 36% lower than suggested in 2018 for a prized 5G band, with deeper cuts for some other bands. Apart from this move to cheapen spectrum, some payment flexibility may be on offer, too. As new gigs expand service usage and tariffs recover, so might this sector.
Even with lower minimums, though, we don’t know how high 5G bids will go. Auctions, at first glance, would seem like both a fair and market-aligned way to allot bands. Alas, telecom is not your classic free market: Entry barriers restrict rivalry to a few, while regulation can shape wins and losses. Meanwhile, as data emerges as ‘the new oil’ for its promise of riches, and a gig economy lends itself to winner-takes-all plays on the internet, the premium on an end-to-end outreach over the airwaves has risen. Together, these factors could skew bids upwards, perhaps to ‘winner’s curse’ levels, as judged by what makes fiscal sense on a quarterly or annual basis. While this gives long-horizon capital a clear edge, with big bucks invested for eventual gains, it can also distort this arena’s field of play should big auction outflows weaken its weaker players. So, while our bid-for-bands model draws support for its use of a market device that clearly beats arbitrary allocation, its outcomes in an oligopoly sector need not be equitable. One solution can be to adopt an auction formula that fends off the winner’s curse—say, by later charging less than bid. Bolder still would be a policy bet that grants spectrum free—for India’s online economy to get a global cost advantage.