Opinion Too many calculations spoil the truth

For more than a decade,the Chinese yuan has been deeply undervalued. So much so that many contend that this undervaluation was at least partly responsible for the Great Financial Crisis of 2008-09. Today,policymakers around the world and including the IMF (but excluding many Western investment banks,coincidentally speaking the communist party line) forcefully state that the Chinese yuan is deeply undervalued. However,an IMF study in 2005 showed that there was a very high variance in the estimates ranging from 0 per cent undervalued to -50 per cent undervalued. So what did the IMF conclude? That one could not say anything about whether the Chinese yuan was undervalued or not,that is,it was not undervalued at all!

The UPA government and Telecom Minister Kapil Sibal seem to have taken a leaf out of this IMF book. Sprinkle the landscape with so many estimates that no one is able to believe a single figure. Before dissecting Sibal’s innovative analysis,it is important to identify the seeds of the confusion. For this,the UPA owes heartfelt thanks to the CAG report on the 2G scam and its outlandish claims that the loss to the Indian public from the shenanigans of the telecom ministry could have been as high as Rs 1,76,000 crore. The first elementary lesson for all reports claiming to break new ground is to see if the estimates pass the smell or duck test — do the estimates sound (smell) right and/ or if it looks like a duck and walks like a duck,it is a duck. The upper bound estimate of the CAG report is more than 3 per cent of India’s GDP. Could this have been possible? Of course not. The calculations below shows that this outlandish estimate used out-of-the-box assumptions and landed in outer space.

The fact that the upper bound was a soft target probably enthused Sibal to go for overkill. Enthusiastically,he set about demolishing the basis for the Rs 1,76,000 crore estimate. The CAG method used 3G new technology auction results and 700 million subscribers to estimate the fair price for an old 2G technology and 500 million less subscribers. By chipping away at each wrong assumption,Sibal soon arrived at a zero loss figure for the government. In the next edition,Sibal is sure to inform us that the government took away too much money from the auction and that the UPA is soon to organise refund cheques to the firms accused of scam,fraud and worse! It is not clear which estimate — the CAG’s Rs 1,76,000 crore loss or Sibal’s zero or negative loss — is more laughable,though the facts suggest that the vote should go to the latter.

So what was the fair price for the 2G auction held in 2008 by the then telecom minister,A. Raja? Many have emphasised procedural lapses on Raja’s part,and Sibal assures us that the matter is being looked into. But who will or can justify punishment for procedural lapses if the exchequer did not lose any money? This is where the minister gives the game away. His elaborate attempt at showing that there was no loss and only procedural lapses is really a too-clever-by-half attempt to exonerate his own government from any wrongdoing. If there are 15 different estimates for the loss,ranging from Rs 0 to Rs 1,76,000 crore,he can justifiably conclude,like the prestigious IMF,that the best estimate is that there was no loss.

It is correct to assume that the “fair” price for anything that can be auctioned is the auction price. But in 2G allocation there was no auction. Yet,unfortunately for the UPA and Sibal,there were strong elements of an auction within the allocation. For at least two such allocations,there was an auction! Licences were given to two shell companies,Swan Telecom and Unitech telecom subsidiary Uninor. Both companies transferred part of the equity to other firms within a short period of time,short enough not to make a material difference to the market price. Raja allocated licences for 122 circles and received Rs 1,651 crore for the government or Rs. 13.5 crore per licence. Both Uninor and Swan offloaded equity in their shell firms: Uninor’s 22 licences were valued at Rs 9,100 crore and Swan’s 26 licences were valued at Rs 7,773 crore. The synthetic auction price per circle: Rs 352 crore. Loss to the government on each circle: Rs 338.5 crore. Total loss for 122 circles: 338.5×122 or Rs 41,300 crore. (Important note: an “equivalent” calculation is present in the CAG report).

No amount of obfuscation,or appealing to the public good or other creative calculations,can hide the simple fact that this was money lost with no gain to the public good,competition,public welfare or anything else the UPA or Sibal can imagine. Equally,there is no way to reach Rs 1,76,000 crore. The CAG can be wronged for giving a range of estimates — but not for documenting that there was a minimum loss to the government of at least Rs 40,000 crore or more than one-third of India’s personal income tax in 2007-08.

The author is chairman of Oxus Investments,an emerging

market advisory and fund-management firm