The Manmohan Singh government is digging an even bigger hole for itself by claiming there was no loss of revenue from the sweetheart sale of 2G spectrum to favoured corporate houses.

“Milord,” cunning lawyers have argued in countless Hindi movies, “how can there have been a murder when there is no dead body?” I was reminded of this line when I heard Kapil Sibal — who has been performing as an understudy at the Ministry of Communications and Information Technology ever since A. Raja was ousted on corruption charges — bravely defending the legacy of his predecessor at a press conference. By attacking the Comptroller and Auditor General's 2G spectrum scam report and claiming the government lost no revenue despite the fact that “procedural irregularities in the implementation of the first-come first-served policy” may have occurred, Mr. Sibal has done the political equivalent of removing the “dead body” from the crime scene and then declaring his clients innocent. For if the government lost no money through the sale of spectrum in 2008, it stands to reason that the politicians, bureaucrats and businessmen who are today being investigated could not have made any money either. Illegitimate profits cannot be conjured out of thin air — which is what spectrum essentially is. There is no dead body milord.

Sadly for Prime Minister Manmohan Singh and Congress president Sonia Gandhi, who no doubt prepped Mr. Sibal to make his ill-advised arguments, the CAG report is full of incriminating corpses. And their ghosts are likely to stick around long enough to haunt the ruling party at the time of the next general election.

The central thrust of Mr. Sibal's argument is that the PAC used flawed logic to arrive at the conclusion that the sale of Universal Access Service licenses by the Department of Telecom in 2008 led to a revenue loss of Rs.1,76,000 crore. But here's what he chose not to say. The CAG itself acknowledged in its concluding chapter that the amount of loss could be debated but “the fact that there has been loss to the national exchequer in the allocation of 2G spectrum cannot be denied.”

Indeed, the CAG made separate calculations based on four different methodologies in order to demonstrate the flawed nature of the licensing system the DoT ran. The figure cited by Mr. Sibal came from using the 3G spectrum auction proceeds as a guide to the revenue the government gave up by not auctioning 2G spectrum. Other methods used were looking at the sale of equity by shell-company licensees Swan Telecom and Unitech. Both of these companies sold a chunk of their otherwise worthless equity to established operators, thereby providing a helpful indication of what the licenses they had bought for a song were truly worth. Extrapolating from those sales figures, the CAG estimated that the government short-changed itself by anywhere from Rs.57,666 crore to Rs.69,626 crore.

The CAG report methodically establishes how the great spectrum robbery of 2008 was essentially a scam within a scam. The original scam was designed to benefit the universe of existing and potential telecom operators by selling them a scarce resource — spectrum — on a first come, first served (FCFS) basis at a seven-year-old price that had no bearing on current market conditions. Given the exponential increase in teledensity between 2001 and 2008 — by some estimates, the number of mobile subscribers had already risen from four million to 300 million and was expected to continue to grow at a rapid clip — the failure to use an efficient price discovery mechanism meant the government was prepared to forsake an enormous amount of revenue in order to benefit operators fortunate enough to get hold of new spectrum.

But having scripted super profits for the lucky telecom companies in the spectrum allocation process, it was inevitable that the politicians and bureaucrats running the show would take the next step. The only way to accumulate rent from companies benefiting from a giveaway that is available to all as a matter of policy is to use one's allocative power to favour some over others. This was the genesis of the second scam in which a handful of applicants — many of whom were completely unqualified to be applying for telecom licenses at all — were cherry-picked by the DoT in an arbitrary subversion of the first come, first served process. The CAG report demonstrates how Swan, in which the Anil Dhirubhai Ambani Group had a key stake, and Unitech were among the beneficiaries of this. Bank drafts and guarantees were prepared in advance by some companies who were unofficially tipped off so that their completed applications for spectrum could be submitted literally within minutes and hours of the official call going out.

Mr. Sibal, who tore into the CAG, was sporting enough to admit there may have been some wrongdoing in the manner in which the FCFS policy was implemented. At the same time, he insisted the policy of charging 2001 prices was correct and that a 2G spectrum auction would have led to an increase in the price of telecom services. What he ignores is the fact that the cost of telecom services emerging from the 2G allocation will be a function not of the absurdly low price at which the government sold spectrum but of the prevailing tariff rate in the market and also the higher resale price at which this precious commodity finally enters the system. To paraphrase an argument first made by Sunil Jain in the Financial Express last year, there was indeed an auction for 2G spectrum whether Mr. Sibal approves of auctioning or not. But this auction was conducted not by the government, as it should have been, but by the companies who benefited from the arbitrary manner in which spectrum ended up getting allocated. They simply turned around and resold what they had received to the highest bidder.

Mr. Sibal also sought to argue that the government policy on spectrum allocation — of underpricing it or even giving it away free — was justified in the name of keeping the cost of basic telephony down. He compared the Rs.17 a minute cost of a mobile phone call a decade back with the 30 paise per minute rate today to prove his point but this is a flawed argument. Most technology-driven consumer goods and services experience a declining price curve over time. I paid $1,000 as a graduate student in New York for my first laptop computer in 1990. It was a no-brand, 386 chip, 40MB hard drive heavyweight monster whose battery lasted about an hour if I was lucky. Today, $1,000 will buy you a powerful notebook and decent variants can be bought for as little as $300. It also cost me $2 a minute to call my parents back home (which is why I rarely did so). The last time I was in the U.S., I could call India for eight cents a minute. The drop in call rates has nothing to do with subsidised spectrum as Mr. Sibal would have us believe, but with competition, increases in productivity and the global ebb and flow of technological change and obsolescence which allowed Indian companies to buy 2G network equipment at a relatively inexpensive cost. In any case, even at the supposedly low call rates in India, telecom operators are making serious money. The last thing they need is a free handout in the form of an FCFS spectrum allocation policy, that too one which is rigged.

The government's argument about keeping mobile call rates low may have had some credibility if the logic was applied consistently. But everything in India is contingent on whose asset is being sold to whom. When a public asset like spectrum is to be sold to a private company like Anil Ambani's Swan Telecom, or to Tata or others, we are told the price must be kept low even if there is a revenue loss. When a public asset like food grain is to be sold to the poor under the proposed Right to Food Act, the same people say prices cannot be kept low because this would lead to a revenue loss. When a public resource like Krishna-Godavari (KG) gas comes into the hands of an industrialist like Mukesh Ambani, the price must be kept high even if this means consumers end up paying a higher price for electricity and fertilizers. From 2G to KG to CWG the system's logic and rules will always be designed to allow maximum profits for those with real connections.

The CAG in its report has demonstrated how “the entire process of allocation of UAS licenses lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner … which gave unfair advantage to certain companies over others.” It was this “unfair advantage” which allowed “certain companies” to earn revenue that rightly belonged to the government. So compelling is the charge of corruption on a massive scale in the spectrum licensing matter that the Supreme Court has said it will monitor the progress of investigations by the CBI.

Public disenchantment with the corrupt ways of our political and business establishment is running so high that Prime Minister Manmohan Singh was forced to promise in his New Year greetings a “course correction” that would “cleanse governance” in India. If Mr. Sibal's arguments are any indication, however, Dr. Singh's New Year resolutions have not lasted very long at all. If the UPA government continues to remain in denial, it will pay a heavy political price. At the time of the next general election, when Congress managers scratch their heads and wonder where on earth the seats to form the next government are going to come from, Mr. Sibal's arithmetic will be remembered as the point where the game which was not going the party's way anyway finally slipped out of its hands.