Bureaucratic Red Tape Chokes Free Markets in India

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Memo #202

By Subhashish Gupta - sgupta [at] iimb.ernet.in

India auctioned 3G licenses for USD $14.78 billion in 2010, a bonanza for a government staring at a large fiscal deficit and trying to promote inclusive growth through a host of populist social schemes. With new telecom auctions scheduled soon, the government hopes to generate more money to pare its fiscal deficit, and bolster its reformist credentials to foreign and domestic investors.

However, some commentators have argued that the government’s obsession with high rates of return from auctions will stifle the burgeoning telecom industry, as the current slow growth of Indian 3G services suggests. This situation reflects an internal conflict in India’s development: while the government tries to reap the financial benefits of a free market economy and open competition, it is loath to relinquish its powers over selecting beneficiaries for the distribution of “natural resources,” a category including access to the airwaves, according to the Indian Supreme Court. The result is an inefficient resource distribution system.

There is a dual system in place. Sometimes the government relies on free market principles, as in public-private partnership projects, and sometimes on administrative action, as in the allocation of coal blocks, and sometimes a mixture of both, as in telecommunications. This muddle is not conducive to business. India is a notoriously difficult place for business activity. For instance, the International Finance Corporation ranks the country 132nd globally for ease of doing business. In response to the confusion and apparent arbitrariness, opposition parties and civil society members raise cries of crony capitalism.

The end result is a peculiar situation in which a pro-reform government ignores ease of entry into a market, a fundamental condition for competition to thrive. Opposing political parties and civil society members fulminate against the nature of free markets and the inequalities they produce. They equate market reforms with being anti-poor. Lost amid the din are the beneficial effects of competition in lowering prices and in promoting economic equality. To achieve such aims, the government would do well to design auctions to increase competition and focus less on maximizing revenues.

Subhashish Gupta is an associate professor at the Indian Institute of Management, Bangalore. His research interests include antitrust issues, particularly in telecommunications.

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Selling Mobile Phones in India (Source: BBC)

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