The Delhi High
Court is hearing the appeals of the Union of India against the acquittal of all
the accused in the notorious 2G scam case. Among those in the dock are DMK
leaders like Kanimozhi and A. Raja the then Union Minister. The hearings on
these appeals are likely to get over by early November with the judgment likely
to be out by the end of this year. The political ramifications of the judgment
would no doubt be felt. Given the approaching elections to the legislative
assembly in Tamil Nadu, the opposition DMK would sitting on razor’s edge
awaiting the judgment. In some ways, if the accused are convicted, this could
have certain implications for the succession planning within the DMK. DMK might
be in an advantageous position going into the elections, but an adverse
judgment might derail its plans. Incidentally in some quarters, the current
hearings are being viewed in the context of the hard bargaining that might be
going on between the DMK leadership and the ruling BJP at the centre. While the
BJP was in alliance with the AIADMK in the Lok Sabha elections last year,
politics is of course the art of uncertainties.
Yet, this scam
goes beyond the political ramifications. The scam attained notoriety when the
then CAG Vinod Rai claimed a loss of Rs. 1.76
lakh crores. The Supreme Court judgment cancelling the allotment of
licenses is one of the direct causes of the telecom woes that exist today. There
were certain judicial overreaches both in 2G as also in the coal scam cases. The
economic recovery has been impacted by these cases indirectly. Because the
licenses were cancelled, the firms could not generate the revenues. Yet the
money they spent in acquiring the license was not given back. This meant they
could not pay the loans they had accumulated resulting in the build-up of
non-performing assets (NPAs) in the banks. This hindered further lending.
Meanwhile, the firms saddled with debt could not plan for fresh investment
neither could generate fresh loans in the absence of repayment of past loans.
In many ways, the roots of this crisis lie in Vinod Rai’s assessment of the
presumptive loss. In this context, it would be relevant to discuss and decode
what presumptive loss actually means.
Towards
understanding presumptive loss, one needs to understand pricing theory in
economics. Economics posits pricing to be contingent on the willingness to pay.
The maximum price an agent is willing to pay for a resource is called the buyer
reservation price. Similarly there is a reservation price from the seller’s
perspective which is the minimum price the producer is willing to sell. To any
agent on either side, understanding the reservation price of the other party is
paramount. There actually would be a bargain which would result in the final
price being settled. The difference between the reservation price and the price
at which it was actually purchased is called the consumer surplus. Similarly
from the seller’s perspective, the difference between the price at which it was
actually sold and the seller reservation price is called the producer surplus. The
buyers would like to appropriate the entire of producer surplus while the seller
would seek to appropriate the entire consumer surplus. All their strategies are
in pursuit of the capture of this surplus. There are multiple ways of capturing
this surplus which is captured in economics as theory of price discrimination.
Price discrimination can be perfect wherein it is possible to identify each
agent’s surplus, can be through self-selection wherein the agent is made to reveal
through his or her actions their consumer or producer surplus and finally the
group discrimination wherein the group surplus is sought to be identified or
approximated.
This is where
the entire dynamics of the 2G scam begins. As with any other resource, the
government would allot spectrum for telecom firms to offer 2G network. It might
look little odd and archaic to talk about 2G when the whole world is debating
5G and beyond, the world was very different hardly a decade and half ago. The telecom
firms would have calculated certain revenue streams from 2G networks. They would
have anticipated certain growth in the 2G system and the prospects of the next
generation spectrum emerging. While 3G and 4G would have been the talk of the
town as futuristic, the telecom firms had bid on acquiring these licenses for
2G. The government meanwhile was the custodian of the resource, the 2G
spectrum. They too were calculating the prospective willingness of the telecom
players to bid for the spectrum. There are many ways of allocating the
resources so that the economic surplus is maximised. The methods could be
auctions, first cum first served, lots or other things. The government of the
day decided on a certain mechanism and allotted the spectrum to the selected
players at the certain price. The question that arose out of this transaction
was whether the government could have earned more from the transaction. While this
would be a matter of debate, the corollary could be was the government
interested in appropriating the consumer surplus. The question was whether the
government was deliberately under-pricing the resources. If it was under-pricing,
what was the quantum that was being under-priced became the next question. The audit
of CAG took cognizance of this question and began calculating the figures.
The figures took
into account what would have been their willingness to pay. The willingness to
pay would have been contingent on their valuations. The valuations of course
would depend on the free cash flows they anticipate in the coming years. Since
the accounting expenses allow for factoring spreading out the expenses incurred
setting it out against the future revenues, this would have been easy. Based on
this calculations, the CAG arrived at a figure for their reservation price. There
was something that they actually paid. The difference was the consumer surplus.
While in normal course, this would not have been an issue, the question that
whether government deliberately sold it at lower prices made this amount of
consumer surplus relevant. In normal circumstances, even if the license fee was
not set at the reservation price, the CAG felt that the government could have
appropriated some more consumer surplus. The gap between the price at which it
should have been licensed and the price at which it was actually licensed is
termed the presumptive loss. It is the loss of producer surplus owing the government
allegedly favouring certain parties to get the spectrum at the lower prices.
Thus the economics angle of surplus becomes critical to understand this
presumptive loss theory.
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