Friday, February 18, 2011

Aam Aadmi = Raja, Manmohan, Sonia & assorted crooks.

Puppets don't believe in economics!
Consider this:
“As caretaker of my friend’s house I disposed off all her furniture; gave it away to the trade at throw away prices.  I did this because there are several poor people in our country who could then get affordable furniture.”
Ridiculous? But large numbers of gullible Indians swallow this kind of stuff as it is repeated by the eloquent lawyer Sibal, the epitome of probity, Manmohan & the trusted journalists of The Times of India
Kapil Sibal defended A. Raja’s decision to not auction spectrum, suggesting as above that dishing out spectrum on a first cum first served basis was in the interests of the aam admi as the common man was able to afford telecom services owing to Raja’s largesse. This view was never properly challenged & the opposition limited its response to protesting against the impropriety of Sibal contradicting the CAG. Fortunately, his specious argument was generally forgotten. Now, suddenly, he has got support from The Times of India & from one of the accomplices – Manmohan Singh.
When Sibal, as Raja’s advocate makes such statements he is defending a client and the truth is irrelevant & not unexpected, but what if an economist Prime Minister spouts such nonsense?  We need to ask these guys some questions:
1.      Do traders pass on gifts they receive to the aam aadmi?
2.      Do companies price their products on a cost plus reasonable mark-up basis?
3.      Why would they miss an opportunity to charge more if the customer is willing to buy at a higher price?
4.      How come the Sibal statements were defacto debunked by his own Telecom ministry which came out clearly in defense of auctions?
Manmohan Singh is, for much of India’s chateratti, a holy cow who looks the other way but does not have his hand in the cookie jar. He seconded Sibal and equated Raja’s benevolence on spectrum pricing to food subsidies! Yes, there is some equivalence. Much of the subsidy fattens the big cats – big farmers, traders & adulterers, but there is a fundamental difference. In principle the subsidy on food & fuel  is being given in a controlled process where the government regularly intervenes supposedly to ensure food for the poor at affordable prices. Raja showered his blessings on corporate bodies with no assurance that any benefit would accrue to the end user.
Does a company price products lower if their input costs are lower? If a company executive thinks that way he clearly deserves the boot. The price that a company charges has to be based on what the consumer is willing to pay. Of course there is demand elasticity & in most cases (other than in case of a super-luxury product) the lower the price the greater will be the demand but the company will charge what maximizes their contribution or mark-up on variable cost.  So if  I can retain even  a little more than half the customers while charging twice as much as before, I can & probably  will double my price.  There are considerations of market development & expansion dictated by elasticity of demand today & expected tomorrow but that is a different matter. So, price should be as close to willingness to pay as possible & willingness to pay is a function of the price of competitors or of substitute services , not of cost. Cost only determines viability & payback period. . So, charging less fattens the big cats while depriving the nation of vital revenue; unless we have price controls. Fortunately Raja never suggested price control which would have led to an even grander loot. We have tried price controls in several industries  & seen that the only effect they have  is that of corporate bodies  having to share the booty with corrupt  officials.
In this case the lowering of spectrum price lowers  the fixed cost & not the variable/marginal cost. Since the variable cost especially when the service provided is pre-paid  telephony, is close to zero,  a lower fixed cost will lead to a reduction in the incentive to add numbers,  thus excluding mainly the aam admi, so depriving the country of revenue is clearly intended to benefit corporations & the bureaucrats.  No wonder there was massive  bribery and as the whole sordid saga unravels new names and some old supposedly revered names are  surfacing.    
That the new UPA government is a gang of pirates & extortionists is by now obvious to all but the TOI editorial team. Supporting “first come first served” is shocking. While it is true that most journalists are commercially illiterate there is a feeling among some people loyal to grand old lady of Bori Bunder that the Times gets things checked out. This editorial proves either that we have gullible journalists or that every word in the press is paid for.
Of course it is true that the some of the stone throwers live in very fragile houses themselves. There is no viable  defense of Vajpayee’s agreeing to revenue sharing and reduced  fixed  fees after the first auction. He too justified this as being necessary to facilitate the spread of telephony; the same illogical argument.  Actually it was to fatten the initial winners in the bidding process who had deliberately priced services beyond most people's reach so they could shed crocodile tears & request (bribe?) the government to reduce their costs. In those days people said it was poor demand estimation & “the winners curse”. But if companies err they must suffer.
Unfortunately many people still respect Manmohan, the TOI &  Vajpayee & believe they are lily white. This the sad part. Public opinion is not demanding change, not loudly enough anyway.



  1. What is also worrying is that people look at this from political perspective. Its not about the Congress or BJP or CPI(M). Its about the total disregard for the country by its government. The price of democracy is very high, and we are fast approaching where will not be able to pay for it anymore.

    Thank you for this clearly thought out argument.

  2. What was most amusing in this case was the basis on which Raja had given license. He stated that following the auction route would keep the new entrants at a disadvantageous position as compared to existing ones... What is interesting to note is it were the new players (Elisalat & Telenor) who had paid huge premium to (swan & unitech) respectively to grab a portion of the total share, thereby smashing raja's argument on his face.