Last week, the auction of telecom spectrum by the central government received a lacklustre response
from bidders. On Monday, Reserve Bank of India Governor D. Subbarao deposed in a special court
examining alleged irregularities in allocation of spectrum in 2008.
The first event triggered a confusing debate about the poor response to the auction. Many blamed the Comptroller and Auditor General of India (CAG
) and its 2010 report on alleged irregularities during the 2008 allocation for the tepid response. The second event fuelled the debate, which only got more confusing.
It's simple, really.
No one questions the right of a government to make a policy and subsidise something, if it deems fit. It is when the objective of a policy is not clearly spelt out that doubts arise about the real intent.
In other words, every policy needs to be transparent.
Take what Subbarao told the special court. According to a report in The Hindu
on November 20, he said: "It is correct that while determining policy, the government has to make a balance between welfare maximisation and revenue maximisation. In this case, if there was a sacrifice of some revenue, it cannot be said that the government suffered a loss."
The governor, who headed the bureaucracy in the finance ministry in 2007/08, when the alleged irregularities took place, makes a valid point.
Any government has the right to forego revenue in pursuit of a welfare objective, if it sees it. It simply needs to spell out that objective.
In 2006/07, finance minister P. Chidambaram tried to make revenue foregone through tax breaks more transparent. In a first, he introduced a 'revenue foregone' statement in the union budget. Since then, the revenue foregone statement has been a part of annual union budget documents
The statement tries to calculate subsidies handed out to different categories of tax payers. For instance, in 2011/12, tax breaks or tax preferences resulted in a revenue foregone of Rs 5.29 trillion. This was way over that financial year's explicit subsidies of Rs 2.1 trillion on diesel, cooking gas and food, among other things.
Why does the government give away so much of revenue through tax preferences?
According to the 2012/2013 receipts budget, "Tax preferences may be viewed as subsidy payments to preferred taxpayers." And these subsidies evidence the government's choices.
The receipts budget explains: "They (tax preferences) have an impact on government revenue (i.e., they have a cost) and reflect the policy choices of the government."
In 2011/12, that policy choice included a revenue foregone of Rs 28,371 crore on account of tax breaks to income tax payers - for contributions to provident funds and life insurance policy premiums.
The CAG seems to have no problem with revenue foregone as it is an explicit policy objective of the government and enshrined in legislation.
Thus, if there is a policy choice to under-price a natural resource such as spectrum, it is the government's prerogative. Just be transparent about it and let people know what the subsidy entails.
Blaming the CAG for the current state of the telecom industry is missing the wood for the trees.