Mr Ratan Tata, tear down this barrier

A few years ago, Ratan Tata claimed that spectrum is a scarce resource and hence must not be given free to the people of India. In recent months, in the wake of the spectrum scandal, he has reiterated this claim. This is a flawed position.

Charging hefty fees for permission to operate businesses grants an unfair monopoly to established business houses by erecting a barrier for the smaller players while the control exercised by the government is one of the main causes of corruption.

An error is the claim that spectrum is a scarce resource. Technology allows us to slice the frequency spectrum into a number of channels that outnumber the typical number of players in the market. Even if the frequencies in the spectrum were scarce resources, Tata’s demand is erroneous as government interference is hardly the solution to the problem of scarcity.

Empirical evidence shows that government interference typically results in a scarce resource becoming scarcer and/or is the root cause of scarcity of a resource that is available in plenty.

The claim that spectrum must not be given free to Indians assumes that businesses pay for the spectrum. In reality, the concepts of corporate taxes and corporate fees are myths as businesses pass on all costs to consumers.

The end result then is that the corporations pay no fees but gain a monopoly as most of the competition is eliminated. Charging hefty fees is a barrier for the smaller players; this is also one of the main causes of corruption in the country.

A comparison between the computer software industry and the internet service provider industry highlights the ill-effects of fees imposed on businesses. Although the two are related fields, there is a stark difference in the type of people who run the two kinds of businesses.

The computer software industry had no barriers to entry, and ordinary Indians with entrepreneurial skills were able to unleash their potential by setting up businesses.

On the other hand, the internet service provider industry is operated exclusively by established business houses as the government mandated huge amounts of money as bank guarantees, thus keeping out small players from entering the arena.

The radio broadcasting industry is another example in which a prohibitively high fee system had the effect of forbidding all except the very wealthy Indians from operating businesses.

Thus, it is clear that the real loss to the nation is not in terms of revenue for the government but in terms of the lost opportunity to allow entrepreneurs to realise their potential, the services their new businesses would have provided, the innovations they would have brought with them, and the many jobs that they would have created. All the new economic activity due to the new businesses would have also generated revenue for the government.

A combination of monopolies due to regulations and artificial scarcity is a sure recipe for corruption. It is no surprise that one of the biggest corruption scandals in recent times involved cabinet ministers cutting deals with businessmen seeking control of broadcast frequencies.

Restrictions on economic activity and access to resources with only a small set of privileged people given permission to either indulge in economic activity or use the restricted resources is the foundation upon which the edifice of crony-capitalism is built.

Thus, barriers in the form of license fees and government regulations must be removed if we want to avoid a system rampant with corruption and crony-capitalism.

While politicians have been rightly blamed for creating entry barriers, businessmen too have played a crucial role in its creation by influencing politicians to pass laws that seek to keep out competition and help them gain control over resources.

Whether it is the appropriation of prime real estate or any other form of resource, it is always the well-entrenched business houses that are favored by the government.

In most cases, the distortion of the markets through the erection of barriers is by intent rather than by accident. Businessmen and politicians have effectively constructed a wall that has prevented a few generations of Indians from becoming entrepreneurs.

Many years ago, the Berlin Wall restricted the freedoms of East Germans while benefiting only a few people. Today, the wall constructed by politicians and a few business houses restricts the freedom of Indians while benefiting a few.

The then US president Ronald Reagan famously asked his Soviet counterpart Mikhail Gorbachev to tear down the Berlin Wall if he was serious about prosperity and liberalisation.

Today, Reagan’s message would ring true in the context of the wall that restricts Indian entrepreneurs: If you seek prosperity for India and if you seek liberalisation, Mr Tata, tear down this wall.

Arvind Kumar is an energy trader and may be reached at arvind@classical-liberal.net.

Arun Narendhranath is an energy consultant and may be reached at narenarun@gmail.com

The views expressed by the authors are personal
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