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Desai’s law PDF Print E-mail
Saturday, 22 January 2011 00:00
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Every time someone in the government wanted to justify a rank bad idea, former Chief Economic Consultant Ashok Desai found, they’d cite the fact that this was the policy in an advanced economy, ergo there’s no reason why India couldn’t adopt the same policy. So, if you want to justify a high fiscal deficit, in recent years, the best example to give is that of the US or other OECD countries. If the US can have such a high fiscal deficit, what’s wrong with India having a high deficit? If the US can have dole, why can’t India? If Europe can protect its farmers, why can’t India? You get the drift.

 

India has had a spate of such examples of Desai’s law in recent months. So, in November last year, you had the Bimal Jalan committee report on stock exchanges, to resolve, at a philosophical level, the issue raised by Sebi on the MCX-SX case: should a stock exchange be allowed to list, should individual shareholders (as opposed to financial institutions like banks that can hold more) of stock exchanges be allowed to hold more than 5% of its equity in the same manner that RBI allows even a 50% individual equity in banks—in any case, how do you grow any business if the principal promoter does not have enough shares to control the company?

Given that many major global markets have followed this practice without it hurting the quality of regulation of stock exchanges, you’d have expected that one of India’s most-respected RBI governors would have recommended this be allowed. Not only did Jalan not allow this—so individual equity is restricted to 5% and listing is not allowed—he even put a cap on the profits that a stock exchange can distribute, said incentive-based salaries linked to the commercial performance of the stock exchange are a bad idea, and fixed different equity ceilings for investments in different parts of stock exchanges—a stock exchange must own at least 51% of the equity of the clearing corporation, but this must be lowered to 24% in the case of depositories.

In the case of the ongoing 2G scam, it was expected that A Raja would defend his policy of giving away licences in 2008 at the prices paid in 2001 on a variety of grounds. So, he said, the licences were given cheap as this lowered consumer tariffs; when it was pointed out that the 3G auctions had fetched nearly 13 times the price he’d given away the 2G licences for, he said 3G was like basmati rice and 2G like PDS rice. All the arguments were specious since there is no evidence that higher licence fees result in higher tariffs—Vodafone bought Hutch for $10.7 bn but has continuously lowered tariffs since that’s the only way to be competitive in a market that has so many players. As for basmati and PDS rice, there’s really no such thing as 2G or 3G spectrum—it’s called that depending on whether the government allows you to offer what are called second-generation (mainly voice) services or third-generation (mainly data) services. Indeed, the Tata and Reliance broadband dongles all of us use for wireless and fast-speed Internet access today are all 3G in nature but are offered on what are essentially 2G licences. In fact, the 2G licences operate on the 800/900/1800 MHz spectrum band which is more efficient than the 2100 MHz that 3G operates on, which is why Trai had recommended the older firms like Bharti, Vodafone and BSNL pay for the ‘extra’ spectrum they had at a rate which was higher than even the 3G rate!

So it came as a big surprise, actually more a let-down, that people of the calibre of a Kapil Sibal and a Montek Singh Ahluwalia should support Raja’s arguments that not having auctions was in the public interest, that it was part of government policy that aimed to keep telephony low-cost. Indeed, they even endorsed Raja’s level-playing-field argument, which said that if Sunil Mittal got the spectrum at a lower price in 2001, it was unfair that Unitech should pay a higher price in 2008! Never mind that Mittal bought it in an auction in 2001. By that logic, all land should be offered at the rates prevalent in, at least, 1947; and that no coal mines ever be auctioned, and so on.

The latest in this good-men-bad-ideas saga is the Malegam committee report on micro-finance institutions, where the Malegam Committee has put a cap on interest rates (24%) and interest rate margins (10%), a cap on the total outstanding loans (Rs 25,000) the borrower can have at any point in time, and even the amount that can be given for non-investment purposes (25% of the total loan).

Many of these recommendations, such as Malegam’s, have been made in a certain context, to address a certain problem. Collectively, however, they will play havoc with the MFI industry. Malegam’s interest rate cap, for instance, is to address the fear raised by politicians that MFIs were ripping off clients (hence the Andhra law on MFIs); or that people were borrowing too much and were getting indebted. But surely experience would have taught them that restricting MFI operations was certain to drive borrowers to moneylenders—after all, if you need to borrow for a medical emergency and the bank/MFI can’t give it, where else do you go? Similarly, both Sibal and Montek had political compulsions, in the sense the government knows the 2G scam is much bigger than Bofors ever was and so needs to pull out all the stops to try and limit the damage—what better way to do this than to trash the CAG estimates of the scam that have captured the popular imagination?

The important lesson for all of us, of course, is a simple one: accept each argument as a good one on its merit, not just because a good man or woman made it. Desai’s law.

 

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