I dream of Sibal

Note: Read Mr. Sibal's article on TOI by clicking here, for a better read.

My dream, a few nights back:

Me: Good evening Mr. Sibal. So glad you could join us for the ‘Tonight Show’ !

Kapil Sibal: I’m happy to be here.

Me: Lets get right into it, sir. Don’t you think that the Supreme Court and the CAG are clearly overstepping their mandate? What is their business deciding policy for the government?

Kapil Sibal: Well it is arguable. What you say is valid, but one must also question why these bodies have begun doing this now? The malpractices in the allocations have become evident, both from the CAG report and the CBI investigations. When the executives leave such a gap in their work, it’s only natural that the other wings will fill up the vacuum. Thus is the nature of democracy.

Me: That is interesting. You seem to be defending them while much of the newspapers and politicians are attacking them.

Kapil Sibal: This is a failure of the media and our leaders. How is it that the scandal is being side-stepped and the mandate of the CAG is being discussed more frequently? Even if CAG has overstepped the mandate, what affects our country more, their supposed marginal invasion, or the fact that private enterprises, politicians and their relatives are minting money? It is a clear failure in prioritising.

Me: But saying that auctions must be held for all natural resource distribution is absurd! What if they start demanding that your Aakash tablet should be auctioned as well?

Kapil Sibal: Don’t be silly! The Supreme Court’s judgement clearly said natural resources. Is Aakash a natural resource? But even more importantly, I think there is a fundamental difference between when the government is dealing with the end consumer directly, and when they are dealing with an intermediary. When we are executing the former, we have a target population with clearly defined characteristics (such as wage, location etc) to whom we provide the goods in a non-discriminatory fashion. However, in the latter case, we are selecting some people out of a many and allowing them to use it for commercial purposes. How can you compare these two things?

Me: You make a fair point, sir. But still, isn’t the Supreme Court’s verdict to extreme? They say always use auction. Surely there is a need to leave some room for discretionary allocation..?

Kapil Sibal: Your two statements are not mutually exclusive. All the Supreme Court has said is that the method of auctions should be utilised. The design of the auction is left at the discretion of the Government and its executives. The government can put up clearly defined criteria that all prospective bidders must meet to take part in the auction or they could set-up conditions that all parties must accept after winning the bid. The point is that these guidelines should be clear and standardised so that all members in society, who qualify, get an equal opportunity to win the bid. This will ensure that the best candidate wins.

The fact is that auction is the only method, maybe besides a lucky draw system, that enables a completely non-arbitrary and fair allocation. Adding any form of arbitrariness will inevitably lead to corruption as the potential to make money in these industries are huge.

Me: But what happens when the prices increase for the end consumer due to the auctioning of the natural resources?

Kapil Sibal: That is a fair concern. However it is not being addressed correctly. We should not be saying, “the prices may rise, hence auction is not the right way.” Instead we should be asking, “how can we ensure the welfare of the consumer while keeping auctions, the most appropriate allocation mechanism.” Unfortunately no one seems to be asking that.

Me: Well let me be the first. How can we ensure the welfare of the consumer when using auctions?

Kapil Sibal: There are numerous ways. But let's start with the basics.

Prices rise when there is less competition in the industry. A monopoly can set whatever price it may choose, as it knows that the consumers have no other option but to go to them. By increasing competition we give the consumers a choice and will force companies, which are trying to increase their market share, to decrease their prices.

If enough competition can be generated, by that I mean perfect competition, then the marginal cost of producing the service or good will be the price that the consumer will pay. However this is an ideal scenario and highly unlikely. But the closer we can get to this, the better it will be for consumers.

Me: But how will the investors cover up the money they have invested then?

Kapil Sibal: In a perfect competition, they cannot. But as I said, that is highly impractical. The companies will differentiate their products and try to keep some margins for profits. All competition will do is reduce those margins.

Me: But won’t this kill the industry? Who will want to enter when they cannot make any profits?

Kapil Sibal: No it won’t. Bidders must compute what margins they will be able to maintain, and thus the profits they will make over the marginal cost. Keeping this figure in mind they must bid for the natural resource. People who overpay will eventually have to change their business model and swallow the loss, or sell the resource to someone else who can sustain a business. These are standard market dynamics.

Me: So you are saying it is all about making sure there is competition. But what happens when such competition cannot be generated? Like in telecom for example, there are only a few players out there.

Kapil Sibal: Yes, that can be an issue. But tell me, where is the money going? It is going to the government. If the government is concerned about the welfare of the telecom consumers, they can provide subsidies to lessen the burden for the consumer. In fact, using this approach, you can target the subsidy for those who most need it.

Me: But why create this elongated process of money first being given to the government and then being transferred to the public, when instead the same result can be achieved by handing out the spectrum for free?

Kapil Sibal: If you hand out the spectrum for free, how do you decide who deserves to get it? You have once again come back to the arbitrary mechanism which simply won’t work.

As far as the need for the elongated process is concern, let us see who benefits how much from the ‘free allocation’ as you suggest.

A rich man will use his phone excessively and will be benefitted by the low prices more than a poor man. And what about the people who do not use phones at all? They are as much citizens of this country but do not benefit from the use of natural resources at all!

Now the two alternative methods are targeted subsidies or direct cash transfers. The tar- get subsidy approach ensures that the poor receive the benefit, while direct cash transfers will include the people who do not use mobiles.

Me: So you’re saying auction is the way forward?

Kapil Sibal: Churchill once said: “it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.” The same principles apply here. Although auctions have their short comings too, it is the best mechanism we have for now.

And then I woke up on the 15th of September to read Mr. Kapil Sibal's article in the Times of India....