India’s $18 Billion Mistake? – by Dhiraj Nayyar (Bloomberg News – April 1, 2015)

A decade ago, Korean steelmaker Posco’s proposed $12 billion investment in the eastern Indian state of Odisha (then still known as Orissa) was hailed as the country’s biggest-ever foreign investment commitment, as well as a vote of confidence in India as a potential manufacturing power. Ten years later, Posco’s reported pullout is a PR debacle and a blow to Prime Minister Narendra Modi’s hopes to convince companies to “make in India.”

Worse, it’s the government’s success rather than its policy failures that appear to have driven out the steelmaker. On the heels of a lucrative auction of telecom spectrum, which garnered bids totaling a record $18 billion last week, the government is set to sell off iron ore and the rights to limestone mines by auction as well. Under the old regime, the state would have allocated these kinds of resources to industry at a nominal price. Now that the government is looking to maximize profits by putting them up for bids instead, Posco has apparently decided that the additional costs make the Odisha project unappealing.

The political logic of auctions is obvious. Under the previous Congress-led government, the opaque process of allocating resources to private companies quickly led to accusations of cronyism and corruption. Anger over the 2G spectrum scandal of 2008 and the coal scandal of 2009 played a huge role in Modi’s landslide victory last year.

Unfortunately, criticism has focused on the idea that the government gave away India’s resources too cheaply. In fact, the criminality never lay in “revenue loss,” although the government’s official auditor gave that impression. The real problem is that the process was too discretionary and easily manipulated, giving rise to favoritism.

Auctions are one way to eliminate the potential for corruption and rent-seeking. But there’s no inherent reason they need to be designed to maximize revenues for the government, as happened with the spectrum auctions. The government deliberately chose to create an artificial scarcity of spectrum by selling off only a limited amount of airwaves. That pumped up bids but has also piled debt onto telecom companies, who will no doubt pass on higher costs to consumers. While insisting any tariff increases should be minimal, the government doesn’t deny they’re inevitable.

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