Monday, February 6, 2012

The descent into a Banana Republic?

The quality of debate surrounding the Supreme Court's decision to cancel 122 2G spectrum licenses with the "stroke of a pen" is a reflection of the standards that prevail in public issue discourses in mainstream media in India.

Stripped off all its sensationalism, the 2G spectrum issue essentially boils down to this. The Government of the day, in its wisdom (or lack of it) and well within its rights, put in place (or inherited) a discretionary telecommunications spectrum allotment policy. However, in its implementation (during the 2008 allotments), there were clear discrepancies and irregularities, atleast in case of some of the bidders, that leave no doubts about malafide intent.

So the Supreme Court - three years after the allotments are made, operators have stabilized their full commercial operations, and a web of contractual obligations involving different market stakeholders have emerged - steps in and examines the evidence on corruption in the allotment process and puts a full-stop by cancelling all the spectrum allotments made during that period. What's more, it goes beyond the malafide intent and questions the government's use of a discretionary allotment policy and effectively seeks to "legislate" an "auction-based" allotment process. A nascent mobile telecommunications market-space, the equivalent of a mid-size European country, is decreed to be wiped out in four months.

Now consider this. A newly elected democratic government of Banana Republic, a war torn and military-ruled country in the continent of Timbuktu, decides to encourage foreign investments to boost its economy. It offers attractive concessions like free land, tax holidays, and so on in mineral exploration and manufacturing sector. Investors flock to Banana Republic, enter into sovereign contracts with its government, and start exploration and manufacuting activities. The economy booms, tax revenues increase, and the country starts its recovery from its war-era devastation. There are the inevitable tales of cronyism and corruption in some of the contracts awarded, all of which have aroused some national indignation. Then disaster strikes and the military takes power. Its first act is one of deep populism. It plays on the national resentment at the corruption in contracts signed with foreign investors and cancels all sovereign commitments of the previous government and expropriate the foreign investments. Banana Republic slips into its normal state of turmoil.

Apart from the different exterior trappings (the cancellation was at the "stroke of a pen" in the former, while it was at the "boom of a gun" in the latter), on substantive terms, is there any difference between the two scenarios? In both cases, sovereign policy commitments made by the respective democratically-elected governments of the day (whatever its flaws) and implemented deficiently (as is the case with any implementation in such societies) are, without any of the legal requirements of fairness and justice, cancelled over-night at the arbitrary discretion of a few individuals. In both cases, apart from moral hazard arising from defaulting on sovereign commitments and the long-term economic damage caused, the decision-makers have clearly over-looked the fact that much water has flowed under the bridge subsequent to the "original sin". The decisions extinguished the multiple economic transactions and contractual commitments - many of them without any malafide intent, based on legally valid legislative and executive decisions, and a consequence of the natural flow of economic activity - that have emerged after the original decisions/allotments.

Not for a moment am I holding any brief for those who violated their constitutional responsibilities or who benefited fraudulently. All of them should be brought to book for their criminal liabilities. The political masters, bureaucrats, and the businessmen who colluded to defraud the exchequer should all be throughly investigated, their criminal intent established and punishment imposed. For example, the public servants who took part in the conspiracy should be punished under the prevailing rules, while the businessmen who benefited from it should be punished under the relevant rules and the amounts defrauded quantified and collected from them and their partners. This should be done in a manner that least disrupts the competitive marketplace (and even its critics would admit that the economic outcomes - technology, business models, consumer surplus etc - of India's telecommunications reforms has been one of its economic and policy success stories) that has emerged from the original decisions.

In any case, the sovereign policy commitments of democratically elected governments, however flawed, should always prevail and not be left at the mercy of flippant individual discretion, howsoever mighty, provided the allotment process is in conformity with the broad constitutional principles. This becomes all the more important if subsequent transactions, in good faith and based on the sanctity of a sovereign commitment, have been executed on the original decision. However, law should take its course and severely punish those who displayed any malafide intent, discrepancies, and wilful omissions in the implementation of the allotment process.

The term "banana republic" is characterized by two features - a country operated as a commercial enterprise for private profit and one where the sanctity of long-term policy commitments of any of its governments is of questionable value. On these grounds, does India qualify to be a "banana republic"?


KP said...

Dear Gulzar,

Reading with keen interest your views on discretionary public policy and this one on the banana republic.

Surprisingly The Economist has viewed the judgement, with a pragmatism that veers towards the primacy of the law rather than veering towards protecting private interests. (below, Can You prepone my 2G spot)

And this is a quick response.

I think there is a clear distinction between use of discretion and the application of this leeway for private profit by politicians /public servants.

Observing the obvious use of discretion for private windfall profit - I think the use of judicial discretion to throw out the entire clutch of transactions may seem like over-reach, but may be the only reasonable way to ensure that we are not discriminating between corruption whose tracks are well covered and those that are not.

This is about the collusion right at the top - between an entire ministry and bureaucrats - and an entire system that is playing along - it has taken external intervention for this scandal to be uncovered, following which the court have taken these steps.

This scam is in a microcosm the modus operandi for all large scams that have extensive networks of vested interests that play along.

Too often under the cover of property rights and the cost of ensuing disruption we have refused to clawback obvious corruption - because of our fear of upsetting status - quo.

Corruption is almost always entirely discreet and inferenced rather than obvious - and the judiciary in this case, in my opinion, has made a reasonable extrapolation of the situation.

Since the law as applied, intuitively takes into account the transaction cost of its implementation - the ruling in effect is a reflection of the degree to which the system has been swamped by corruption that it is impossible to differentiate what is clean and what is not - and it is reasonable and effective to make a broader judgement.

If the argument is that in India it is impossible to transact with the government because of the very obvious need to make significant payoffs - and if it is then the responsibility of the courts to make sufficient 'leeway' for the 'pragmatic' nature of these transactions - the result will be 'banana' justice.

The price finding mechanism between a nascent market and a well defined market is very different - and the obvious use of arbitrary discretion, using the FCFS principle as a fig-leaf has also been well documented.

It may be a sweeping judgement, but to cleanse an entire ministry enveloped by corruption, under the overarching influence of vested interests - there is little option but to resort to the use of drastic measures.

There is nitty-gritty in the ruling that may come in for some quibbling - but we should appreciate that this rulng did not upset some perfect state of being -it is the drastic response to correct a wholly and visibly compromised state (of affairs).

Justice is a deliberative mechanism - in some cases it must uphold the philosophical ideal, but, it can also be a pragmatic means to an end.


gulzar said...

Thanks so much KP for that. I appreciate the viewpoint and agree with you. the deterrent effect due to the enormity of the potential losses by indulging in corrupt practices can be a powerful disciplining force for corporate India.

But my point is that the same effect could be achieved with the existing rules, if properly enforced. you write about "corruption whose tracks are well covered". From what I read, it does not appear to be so. It is just that, as you write, the entire establishment was so badly compromised that such blatant irregularities easily passed through.

Regular and impartial administrative enquiry would be enough to bring them out. Exemplary punishments on public servants and criminal punishments coupled with large enough financial penalties on the corporate offenders would serve enough deterrent.

Such judicial populism has several dangers. For one, does it not set a precedent to over-turn sovereign decisions? Two, let nobody be under any illusion that this wing of our governance system is any less corrupt than the bureaucracy and politicians.

I am just wondering that given the availability of stringent enough rules, why the need for this extreme step. If it wanted, the judiciary could have conducted the administrative enquiry under its own watch and completed the punishment process in a few months.

gulzar said...

and KP, we have not yet fully grapsed the longer-term consequences of this on market competition. how will the exit of the smaller players who may have played some role in keeping the big players honest, affect cellphone tariffs?

KP said...

Dear Gulzar,

No disagreement at all with what you suggest may be the slippery slope of judicial 'populism' - only that the judiciary in this case is exerting its authority appropriately over a system that has nearly veered off the rails.

I used the "tracks are covered" argument to suggest that the cost of uncovering complex collusion and gaming of the system is so deleterious - that if by design a politician were to judiciously use selective transactions to exploit -we will be so tied down by such an exercise in uncoverng corruption, as to swamp the capacity of any institution. Which I suspect is the case.

This broad based generic ruling - is a step in the rght direction - a shock that creates a judicial precedent where, when large scale corruption is strongly inferenced -a sweeping action can be forced by the judiciary on the executive.

Some responses to specific comments :

1. "But my point is that the same effect could be achieved with the existing rules, if properly enforced. you write about "corruption whose tracks are well covered"."

'if properly enforced' is really the loaded question.

If the price finding / searching mechanism of such resources is the question (and the perversion in the use of FCFS as a fig leaf is the problem) - the judiciary could have issued general guidelines - and maybe that is what the ruling is - illustrated for full effect.

2. "'Regular and impartial administrative enquiry' would be enough to bring them out."

This is the crux of the issue over which the various rulings cover obfuscation and foot dragging at the highest level (PMO) - and a ministerial clean chit through the theory of 'zero-loss' - 'regular and impartial enquiry' - a reasonable expectation ?

3. "we have not yet fully grapsed the longer-term consequences of this on market competition"

- No, but, we can expect subsequent rulings and immediate correctives will at least be transparently conducted - for example in the case of some of the affected parties going to court to seek remedy.

The question of whether bidding alone will stifle competition by creating large barriers to entry for new players - and if new licenses can be given at a floor price to stimulate competition - all reasonable policy questions.

All these can be answered clearly through transparent policy making/ execution, without the kind of shameful subversion of intent to aid windfall private profit.

4. "Such judicial populism has several dangers. For one, does it not set a precedent to over-turn sovereign decisions? Two, let nobody be under any illusion that this wing of our governance system is any less corrupt than the bureaucracy and politicians."

- Completely agree, the slippery slope is always near - not by the act of overturning sovereign decisions per se, but that under close scrutiny the judiciary's recent past has been just as murky and needs to be closely monitored -at all levels.

What prompts me to write this justification is - there is a stronger case to feel we are a 'banana republic' on the basis of how our policy making is subverted by rent seeking and serving private interests - and lesser reason to derive such a conclusion from the verdict that seeks to correct the situation.

regards, KP.