|»5 Minute Wrap Up by Equitymaster|
On This Day - 16 NOVEMBER 2012
Common sense is so uncommon
In this issue:
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In 2012, the Supreme Court of India finally cancelled all the disputed licenses. Now the telecom regulators and ministry had to decide the price at which these cancelled licenses would be auctioned. So what did they do? They went back to CAG's estimate of loss and decided to price the spectrum at the price taken by CAG in its report. It would be good to remember here that the telecom ministry was the one that had argued that CAG's estimate of loss was too high. Nevertheless the ministry had a task at hand. The task was to rake in as much money as possible as the government needed to bridge its fiscal deficit. So they decided to auction the spectrum at a ridiculously high price despite the industry pleading them to not do so. The result is what we all know. The auction was a flop.
The operators refused to bid aggressively. They in fact avoided the circles where the reserve price was set too high. The result is that the top 3 bidders will end up not paying the government a single rupee for the next 3 years but will walk away with new spectrum. Why? Because the fee that these operators had paid way back in 2008, which the apex court had stated will be refunded to them, will cover the amount that they have to pay right now. The operators were given the option to stagger their payments for 3 years. If they take this option, which they ought to, the top 3 will not pay anything right now. The others would also end up paying only a part of the amount due. Result being that the government may end up getting just Rs 3.8 bn from this auction. This is not even comparable to their estimate of getting a minimum of Rs 140 bn from the auction. So obviously their plans for bridging the fiscal deficit with the spectrum money have gone for a toss.
Now the blame game has started all over again. The telecom minster blames CAG for unrealistic estimates. Fingers are also being pointed towards the telecom regulator for setting the price too high which led the auction to fail. But the thing is all these ministers and regulators together had decided on these high prices. There was an EGoM that had agreed to set the reserve price at what it was set at. Why didn't they just set the price at sensible levels at that time? Today it is easy to start a blame game and point fingers. But the bottom line is the government allowed its need and greed for money to overpower its own senses. It has no one else to blame for this fiasco but itself. Hopefully the policymakers would learn from this mistake and start pricing other auctions for resources at sensible levels. Otherwise all their estimates and plans to control the fiscal deficit would remain on paper.
Marc Faber, the famed writer of The Gloom, Boom and Doom report has voiced a similar view. He expects the US stock markets to tank by about 20%. The reason he cites is neither the US fiscal cliff nor the Greek debt woes. The sole reason according to him is bleak corporate earnings. Investors must remember that though the market tend to react to short term news, in the long run, the stock price is determined by earnings and earnings alone.
In an interview to Economic Times, renowned economist Professor Jagdish Bhagwati drew a parallel between India's and Russia's political system during the latter's communist rule. He believes that Mr Singh's hands are tied because he is merely a political figure head. The professor of economics and law at Columbia University believes that the 'political tragedy' in India is taking a huge toll on its economic prospects. We hope Indian voters take cognizance of this. It is time we look for political heads who know more than vote bank politics.
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