The Dangerous Economics of The Auctions In Today’s India

As per the predictions, in the days to be followed, the czars of the telecom sector, ranging from the Sunil mittal to the rattan tata, are bound to be found to be cruising to the raisina hill just in order to seek the indulgence of the prime minister of the India, Mr Narendra Modi. As each of their companies, virtually the who’s who of the communication world is burdened under an enormous type of the debt. They were all found to be the willing victims of the zeal of the government of the modi just in order to wring the maximum money from the auctions of the telecom spectrum. At this time, it was observed that the companies were in a do or the die situation. They would have had to stop their mobile operations had they not participated in the auctions in order to renew the spectrum. But this was not the case if scenario that was existing few years back, is considered. A few years ago, our polity was sent in to a tails pin and this was because one CAG used to argue vehemently that the nation was being cheated of the grand sums of the revenue because of the natural resources were not being auctioned. Absence of the auction clearly meant scam. That got the cast in the stone. Naturally, the new government found it self forced to opt for the auction. Neither the exchequer nor the economy appears to have gained out of the auctions of the spectrum and the various mines of the coal. The new government was taking office with a land slide victory that had been abetted by the then comptroller and the auditor general (CAG) vinod rai’s staggering indictment of the UPA government in allocating the mines of the coal and the spectrum. Television scrolls and the head lines of the news papers screamed of the UPA government being culpable for a loss of Rs 1.86 lakh crore. For affect the no of the zeroes in the presumptive loss, nine in all, were splashed in the bold print across the front pages of the crusading newspapers of that time. The BJP cottoned on to the observations that were made and then twisted them slightly and then made them in to a campaign issue. India Inc happily went along on the presumption that they were going to reap a wind fall any way from the modi government in the form of the stepped up expenditure and an easier business climate and this includes the relaxed land allotment norms. But except for the single minded, which means that when distributing access to the natural resources, public good should be enhanced to the maximum. Public good with the help of the vinod rai’s crusading zeal, now stood only for the maximising government revenues through the various types of the auctions. It flew against the supreme courts observations that perhaps an auction was the best method of ensuring the fair allocation of the natural resources and the protection of the public interests. If the blow to the knees was not enough, the CAG matched his sensationalist loss figures in the mining of the coal. This time it was the notional loss in the auctions of the 2G. Being given on a first come first serve basis, the then minister of the communications blundered badly by the fore closing the process, thus unfairly keeping out the companies that may have wanted to apply just before the closing as per scheduled. What are these analogies to do with the woes of the telecom companies? And they may shortly be followed by the companies of the coal mines.

The auction of the goods of the public has always been a very controversial process. The balancing of the greater common good Vis-a Vis maximisation of the gains in the terms of the revenue is always a fraught term. But when Mr Rai claimed that the 2G spectrum had cost the government of the UPA and by the implication we the people, Rs 1.76 lakh crore in the taxes that were lost, he was making a strong case for the simplest of the simple auctions. When the present modi government tries to follow that prescription, it garnered very good head lines for the first few days. But it soon found it self at the deep end. The recent spectrum auction saw a commitment that touched just 25 percent of the targeted Rs 40000 crore. The coal block auction yielded a promise of Rs 2.07 lakh crore in the revenues, royalties, and also in the up front payments. The spectrum of the telecom auctions in the year of the 2015 and of the year of the 2016 promised an eye popping Rs 1.75 lakh crore. In the other words the present modi government had beaten the UPA hollow in the maximising public good by collecting of the IOUs for Rs 3.82 lakh crore. Out of this, a very little money actually flowed in as these were the promises of enriching the central exchequer when the operations got under way in the mines of the coal and on an annual basis by the telecom companies. The sector of the coal is now tottering. As many as the 11 companies with the 14 coal blocks under their belts have been found to be stressed financially. Out of these, three are among the list of the reserve bank of the India of the dirty dozen that owe stupendous amounts to the banks and also must be put on the sale. The industry of the telecom is groaning under a Rs 5 lakh crore debt according to its association and the Rs 7 lakh crore, if the banks version is to be believed. Undeterred, the government has gone in for the auction of the 67 small oil and the gas field that is projected to net Rs 70000 crore. The companies of the telecom are the first off the block. They are calling for the doubling of the deferred payment period for the spectrum, a lower interest rate on the loans and the permission to put up the spectrum to be used as the form of the collateral in case of the loans. All of these amount to the gross post auction changes and could even earn the government a moral rap on the knuckles from the courts if in the case the idea is entertained by it.

The government of the BJP had been hoping that the revenue from the sector of the coal and from the sector of the telecom auctions would in any type of the case, would expose the corrupt ways of the government of the UPA. Pure auctions have never ever in any of the case been fool proof for they can be affected by any of the following factors, these factors include the rigged technical standards to qualify and the other factor can be the factor of the cartelisation. The aggressive bidding that makes the asset no longer worth the amount paid for, can be the other factor in some of the cases and one more factor that can show its affect can be the unexpected post auction deterioration of the quality of the asset. Having taken a shrill moral stand when the government of the UPA was found to be handling the auction of the natural resources, the government of the modi may soon find that the process will hardly have any type of the elbow room for the flexibility when the coal companies and also the telecom companies begin sending the distress messages. One more scenario that depicts the difference between the era of the government of the UPA and the modi government is of the poor facilities being offered at the attari border and as a result of which, the trade comes to a halt at the attari very often. The trade between the India and the Pakistan through the integrated check post (ICP) at the attari usually comes to a halt due to various reasons and the major one of this is the lack of the proper facilities available at the work place. Raj deep uppal, senior functionary of the confederation of the international chambers of the commerce and the industry (CICCI), said there is no proper facility in order to store the imported goods at the check post. Trucks that are entering the India from the Pakistan and various other nations, up load goods in the open and hence as a result of this, the goods are damaged because of the various factors and one of them being the rain and as a result of this, the traders have to bear the severe type of the losses. According to the traders, the concerned authorities have been requested so many times about the conditions and have been told to build the plat forms and the sheds at the ICP but up till now nothing has been done and at the least nothing has been even initiated. As a result the traders boycott the trade and as a result of this, severe losses are incurred as this ICP acts as great plat form for doing the trade with the various nations and this ICP is build in about 120 acres and this ICP cargo was launched in the year of the 2012 and at present it is handling the goods such as the gypsum, the cement, the chemicals, the salts, the dry fruits and many other products.

We seem to have run out of the policy options on how to break the vicious circle of the low investment that has been leading to the low growth and in turn leading to the still lower level of the investment. The economy of our nation India has been performing way below the potential in the recent times as the facts have been suggesting. An economic survey is essentially referred to as an economic score board of the government in the power. To the extent it is an insider’s view, the survey is the handiwork of the chief economic adviser, it is usually a charitable view. At the same time, since it reflects a technocrat’s view, it is also an apolitical view of the economy and the various types of the challenges that are present ahead. What ever the yard stick, there is no denying that the economic survey mark II, a mid year update of the survey released before the union budget, that released just a few days before the country of the India celebrated its 70th independence day, makes the sombre reading. Though it tries hard to strike an optimistic note, citing the fundamental optimism about the medium term, it is very hard to ignore the under current of the anxiety. Gathering the anxiety about the near term deflationary impulses are how the survey describes it. There is no one getting away from the fact that the economy is performing way below the potential. Worse, we seem to have run out of the policy options on how to break the vicious circle of the low investment leading to the still lower investment. As the survey points out, the structural reforms are the most successful in the implementation when the under lying macro economy is very healthy. But unfortunately, the macro economy is so far away from being healthy. Sure, the stock market has gained close to the 23 percent this year of the 2017 but the bond interest rates have fallen at a large scale and hence the currency has been strengthened. But the real economy has been left behind. Whether it is the Gross domestic product growth or the industrial growth or the performance of the core sector, there is a very little to cheer about as far as the real sector is concerned. Hence it can be said that the survey points out the various important policy choices will have to be made. But sadly the survey has nothing new to offer and indeed even as it lists the choices, essentially easier monetary policy and the relaxed fiscal targets, it is very difficult to ignore the feeling that it is going over the old ground. For instance, the reserve bank of the India has been very unwilling to ease the monetary policy, read, cut the interest rates much more aggressively, has long been a pet peeve of the chief economic advisor, Mr Arvind Subramanian.

A part from which there is little to suggest a very sharp reduction in the rates of the interest will surely spur the levels of the investment. Sure, the reserve bank of India’s inflation projections have proved off the mark, with the inflation being over estimated by more than the 100 basis points in six of the last 14 quarters. One could also argue that there has been a paradigm shift in the inflation to a new phase of the relatively low, possibly very low inflation. But once we have shifted to a regime of the inflation targeting there will always be an in built bias in the favour of the under shooting rather than the over shooting, inflation projections or the targets that have been set in the view. That leaves us with the only other lever for the economic growth, the fiscal deficit. Though the size and the composition of the fiscal consolidation is entirely with in the sovereign’s domain, the government seems as the reluctant as the reserve bank of the India to breach the lakshman rekha, 3.2 percent fiscal deficit target for the 1917-1918. The net result is the widening wedge between the asset prices as reflected in the stock, the bond and the currency markets and the real economy. Thanks to the sharp run up in the share prices, the price earnings ratio of the Indian stock market is now in the mid 20s well above the long run average of the 18. Why should this be a cause of the worry? Simply because of the reason of the very high valuations can not be sustained indefinitely. Unless supported with the help of the rapid growth in the corporate profits riding on the strong economic growth, it is only a matter of the time before the stock prices of the stock fall with the various spills over effects of the entire economy. The survey also admits as a whole that the various historical evidences suggest that there is mean reversion towards the more realistic valuations, especially when the global excess liquidity is driving the high valuation in the first place. A market correction is there fore very much on the cards. With all the negative spin offs on the over seas port folio flows, the rate of the exchange of the rupee and the balance of the payments. Where does this leave us? In a rather very unhappy position, with the real gross domestic product growth slipping by more than a percentage point, from the 7.7 percent in the first half of the 2016-2017 to the 6.5 percent in the second half and more importantly, the investment declining steadily, the out look is far from the word encouraging. Add to this the fact that though the real gross domestic product growth averaged about the 7.5 percent in the last two years, this growth has come despite the weak levels of the investment, the exports and the poor credit growth. While the exports have been performing better of late, the investment as measured by the ratio of the gross fixed capital formation to the gross domestic product has slipped steadily over the years. From a high of the 38 percent in the India shining days to as low as the 27 percent for the latest fiscal, investment has been falling continuously. Ironically even as the growth recovered to the 7.1 percent in the year 2016-2017 after falling to a low of the 5.5 percent in the year of the 2012 – 2013, but the investment has not at all.

The survey also acknowledges this conundrum is unprecedented in the cross country experience, it also admits that the sustaining of the current growth trajectory will require the action on the more normal drivers of the growth such as the investment and the exports and the cleaning up of the balance sheets of the various types of the corporate and the various types of the banks, just in order to facilitate the growth of the credit. But after coming so far, it shies away from following through with the concrete plan of the action. Instead, it sets up the hope on what it calls the 4 Rs recognition, the resolution of the corporate debt, the recapitalization of the banks and then the phase of the reforming. It will be native to imagine these will suffice to get the economy out of its present day slow down. Not unless the government at the centre accepts it has to stop the treating of the public sector banks like the various departmental under takings and also allows them to function at the arm’s length distance from the finance ministry. Unfortunately given the political economy compulsions of keeping the public sector banks in the public domain, that is in fact a very tall order. So now it is very important that we explore all the types of the options that are available. Monetary easing alone will not suffice. Not unless it goes hand in hand with some off the fiscal easing, read, public spending of the right kind to the crowd in the private investment as distinct from the current level of the consumption. And last but not at all the least, and rate of the exchange policy that does not result in an artificial and the unsustainable appreciation of the rupee that hurts the levels of the exports at a very large level. Failing which, according to the survey, there is no other alternative left but to moderate our expectations about the growth. In the month of the January 2017, the economic survey mark. I had estimated that the growth will in the range of the 6.75 percent to the 7.5 percent for the year 2017-2018 after the factoring in the buoyant exports, a post demonetisation catch up in the consumption and the relaxation in the monetary policy. With the exception of the monetary policy that has delivered partially, the reserve bank of India cut its policy rate by the 25 basis points earlier in the month of the July, 2017; the other two expectations have been belied. It is no surprise that it is because of this reason that the down side risks to the earlier fore cast have been increased to a great level as to the level that was in the earlier days. The message and the most important learning from such a experience is that one must always brace our selves for the sub 7 percent growth and not very good news in the midst of the chest thumping and the back slapping as we complete 70 years of the existence as an independent nation.