New TRAI Chairman Rahul Khullar (Photo: Yasbant Negi) New TRAI Chairman Rahul Khullar (Photo: Yasbant Negi)

At 10.30 a.m. on the morning of May 2, two of India's top telecom entrepreneurs, Sunil Bharti Mittal of Airtel and Kumar Mangalam Birla of Idea, and two CEOs of global telecom giants, Vittorio Collao of Vodafone and Jon Fredrik Baksaas of Telenor, walked into the office of Union Home Minister P. Chidambaram in Delhi's North Block. They expressed grave concern about the recommendations of the Telecom Regulatory Authority of India (TRAI), announced just two days earlier on April 30, which they said would kill the Indian telecom industry. The four businessmen spent the rest of the day, until after 7 p.m., meeting ministers and bureaucrats who could conceivably help an industry that has been repeatedly battered in the past three years. They called on Pranab Mukherjee, Sharad Pawar, M. Veerappa Moily and Montek Singh Ahluwalia, who are members of the Empowered Group of Ministers on spectrum pricing. They met Cabinet Secretary Ajit Seth, the then commerce secretary.

Rahul Khullar and Joint Secretary, Prime Minister's Office, BVR Subrahmanyam. The sight of top businessmen shuttling frantically between Government offices was a revival of the worst excesses of the pre-1991 licence raj. The UPA Government and its top functionaries have resurrected the ghosts of India's Socialist past 20 years on. Said the usually cautious but now agitated Mittal as he traversed New Delhi's corridors of power, "This has been the most destructive period of regulatory environment I have seen in 16 years."

India Inc spent much of 2011 complaining about policy paralysis in the UPA Government. The spectre of corruption, and the prospect of being investigated, had made jittery bureaucrats terribly shy of putting their pen to the paper of Government files. Then in 2012, the empire of Government awoke from its slumber to strike back at its detractors. Large sections of India Inc would no longer suffer from policy paralysis. They would suffer instead from policy action of the most arbitrary, retrograde kind. Evidence suggests that sectors which have a close interface with Government, like infrastructure, mining and natural resources, are struggling. Those at an arms length are doing reasonably well.

An analysis by a leading business daily of the January-March 2012 quarterly financial results of 989 companies that make up 52 per cent of the total market capitalisation of the Bombay Stock Exchange showed that just five sectors were propping up the net profits growth of India Inc. None of these five sectors-banking, it, pharma, fast moving consumer goods, and cement-have extensive interface with Government. With these sectors taken out, the net profits of India Inc actuallydeclined by 9.6 per cent compared with the same quarter last year. Says Adi Godrej, president of apex industry chamber CII, "There is little doubt that all businesses that have a significant direct interface with Government are suffering. Those which don't are still doing okay." Manmohan Singh became famous for ending the licence raj in 1991. He is becoming infamous for reviving it.

PM Manmohan Singh (left) with Pranab Mukherjee (Photo: AP) PM Manmohan Singh (left) with Pranab Mukherjee (Photo: AP)

Recent policy actions in telecom, coal, power, gas and taxation have badly hit businesses. The economy is taking a beating as its engine of growth, the private sector, suffers. The worst is yet to come. On Wednesday, May 16, the rupee hit an all-time low of Rs 54.46 against the dollar. The Sensex has fallen from just under 18,000 on March 15, the day before the Union Budget, to under 16,000 on May 16, two months later. Finance Minister Pranab Mukherjee stepped up to quell the panic and said that the rupee and stock market were suffering because of political uncertainty in crisis-stricken Greece. The real problems lie closer home. Industrial growth in the month of March was negative (-3.5 per cent), economic growth has fallen from 8.4 per cent in 2010-11 to 6.9 per cent in 2011-12. Greece was in trouble when India recorded 8 per cent-plus growth. It is certain that growth in 2012-13 will be nowhere near the Government's prediction of 7-7.5 per cent. Market forecasts predict a number closer to 6 per cent. Some are predicting a number under 6 per cent. The Indian economy is crash-landing just at the time when it should have been taking off to 10 per cent. If growth slows down to 6 per cent or below, there will be fewer jobs, lower salaries, and diminished savings. The middle class may, for the first time in 20 years, experience a serious fall in its standard of living.

J.S. Sarma, TRAI's chief from May 13, 2009, to May 13, 2012, damaged an already bruised telecom sector with decisions that are inexplicable. Sarma was appointed in controversial circumstances. He had been Union telecom secretary under A. Raja and was then appointed to head the Telecom Dispute Settlement and Appellate Tribunal, which hears appeals against decisions made by trai. The move to make him TRAI chief after he had held crucial policy and appellate functions in telecom was unusual. He issued far-reaching anti-business recommendations on telecom in April a mere two weeks before he demitted office. In fact, he answered the telecom ministry's queries on his original recommendations on his last day in office, Sunday, May 14, when it would have been proper to leave that task to his successor.

A.Raja after being released from Tihar Jail on May 15 (Photo: Yasbant Negi) A.Raja after being released from Tihar Jail on May 15 (Photo: Yasbant Negi)

Business leaders argue that Sarma went well beyond what the Supreme Court had asked of him. They have a valid point. The Supreme Court had directed TRAI to lay down the guidelines for the re-auction of the 122 licences that A. Raja had doled out in 2008 and which the court had cancelled in February 2012. India has 22 telecom circles, so a total of 122 licences would roughly translate into six pan-India licences. Each pan-India licence would have to be allocated 4.4 MHz of spectrum. A total of 26.6 MHz of spectrum therefore needed to be re-auctioned before the Supreme Court deadline of August 31. Instead, Sarma's recommendations say that only 5 MHz of spectrum will be up for auction. That is enough for just one pan-India licence. In such a scarcity scenario, the bid prices will be driven up. To compound the cost problem, Sarma suggested a reserve price 10 times that of the price Raja doled out the licence for. Sarma suggests that the final bid price will only be 20 per cent higher than the reserve price. That calculation defies experience. In the 3G auctions, it was 80 per cent higher. More bizarrely, by Sarma's own admission, detailed in the trai recommendations, the price of spectrum in India is 70-80 times the spectrum price charged in advanced economies which have much higher income levels.

Former TRAI Chief J.S. Sarma's decisions have damaged an already bruised telecom sector (Photo: Sanjit Sen) Former TRAI Chief J.S. Sarma's decisions have damaged an already bruised telecom sector (Photo: Sanjit Sen)

Sarma has his reasons for withholding spectrum. In a clear overreach, he decided to club the auction of the 122 cancelled licences with a future policy on 'refarming' of spectrum. Under refarming, TRAI will take away the efficient 900 MHz bandwith from Airtel, Vodafone and other operators when their 20-year licence agreements start ending next year, and force them to move to the less efficient 1,800 MHz, which is what the 122 cancelled licensees had. Such a move would require operators to double the number of telecom towers.

By a Vodafone estimate, this refarming could cost Rs 10,000 crore. Idea Cellular put its cost at Rs 17,000 crore. By some estimates, Bharti, Vodafone and Idea may also have to pay up to Rs 45,000-50,000 crore ($9-10 billion) per head at the time of renewing their licences. All put together, such costs could genuinely destroy telecom companies that are already struggling to make money in a brutally competitive market.

According to a senior policy official, the real problem is not the costs-some cost would have to be incurred in renewing licences after 20 years-but the fact that TRAI has not created a level playing field. "Note the conspicuous silence of the dual technology operators like Tata and Reliance Communications," he says. While some of their spectrum will also be refarmed, they will have an opportunity to bid for the more efficient 900 MHz and reduce costs. "At the least, they will lose less than the gsm operators," he says. On May 15, the Cellular Operators Association of India (COAI) issued a statement which said, "coai vehemently rejects the flawed and biased recommendations put forth by trai and disapproves of the discriminatory environment between dual technology operators and gsm operators and the subsequent violations of the level playing field."

TRAI's recommendation to liberalise spectrum use-that is, 2G, 3G and 4G can be used to provide any service-is also problematic, since all were auctioned separately at different prices, thus disturbing a level playing field.

Says former finance minister Yashwant Sinha summing up the disaster in telecom, "The telecom sector, a big growth engine for the nation, has had no growth for almost two years."

Sarma did damage to more than telecom. On his last day in office, he issued a licence raj-era order for television broadcasters-TRAI also regulates broadcasting. He said that no television channel could broadcast advertisements for over 12-and-a-half minutes per hour. That is not the regulator's job. The decision will likely be appealed in the appellate tribunal.

Despite his lopsided decision-making, Sarma was strongly supported by Telecom Minister Kapil Sibal for a second term in office. The Prime Minister salvaged the situation by appointing Commerce Secretary Rahul Khullar to the job. On taking charge on May 15, Khullar, a straight-talking officer who has a reputation of being absolutely fair and unbiased in decision-making, said, "It is an onerous responsibility." For Khullar to play a role, the Government will have to reject Sarma's recommendations or refer them back to trai once again. The Government must do so urgently. If the Government needed a reminder about the mess it has created in telecom, it got one when Raja walked out of jail, after 15 months, on bail on the evening of May 15.

Sarma isn't the only bureaucrat who has damaged business in recent months. Finance Secretary R.S. Gujral, who holds charge of the revenue department, managed to scare away foreign investors through two retrograde announcements-the retrospective tax amendment on Vodafone and the General Anti-Avoidance Rule (GAAR) for foreign investors-in the Union Budget on March 16. According to sources in the finance ministry, Gujral and the Income Tax bureaucracy kept their colleagues in the Department of Economic Affairs (DEA), including Chief Economic Adviser Kaushik Basu, in the dark about these proposals. dea is in charge of all matters related to foreign investment, capital markets and the macroeconomy. Gujral's revenue department inserted the tax proposals into the Budget document, but not in the finance minister's speech, which is vetted by dea. According to sources, Gujral and the tax bureaucracy persuaded the finance minister that these were reasonable ways of raising revenue which could help reduce the fiscal deficit of 5.9 per cent. The retrospective tax amendment was widely condemned. Even the usually mild-mannered Adi Godrej was outraged. "Some of the decisions (in the Budget) were very poor. I think the retrospective tax amendment was a very negative step," he said shortly after Mukherjee's speech. Vodafone had won its case in the Supreme Court and retrospective policy changes indicate that there is no sanctity of the prevailing law.

Gujral went into an overdrive. He made it clear that the Government was not going to restrict its tax collection to the original liability of Rs 11,000 crore. Speaking to a television channel on May 9, he said that the Government would add penalty and interest to the claim. Gujral tried to underplay the impact, "Once the delayed interest is updated, the tax demand would rise by a few hundred crores," he said. It actually rises by a few thousand crore to Rs 20,000 crore. Gujral ruled out any compromise. "There is no question of the Government negotiating with any company," he said.

Not all bureaucrats are supportive of Gujral. "Gujral is either ignorant of the macroeconomic implications or he is trying to please his political masters by suggesting crude ways to raise revenue to finance populist programmes," says a senior economic policy official. In late April, the finance secretary was summoned by C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council. Rangarajan had taught Gujral while he was at IIM, Ahmedabad. He admonished his former student for pushing through gaar at a time when the Government was battling a current account deficit (the excess of imports over exports) of 4 per cent of GDP. It needed foreign institutional investors to bring dollars to finance the deficit rather than run away. Under gaar, foreign investors have to prove that they have genuine businesses in zero tax countries and they are not routing their investments into India from, say, Mauritius simply to avoid tax. Under Gujral's formulation, the burden of proof lay with the investor and the taxman had complete discretion to investigate.

Rangarajan, a rare pro-business voice in Government, went to the finance minister and persuaded him to postpone implementation by one year. He also persuaded him to transfer the burden of proof to the taxman rather than investor. Mukherjee, realising he may have been advised badly, corrected course in his reply on the Finance Bill in Parliament.

Still, industry is worried about the Government's intentions. Says Rajiv Kumar, secretary-general of FICCI, "The Government is pushing back the private sector and making space for itself." Kumar believes that the Government must curtail its populism, especially its excessive spending which is cornering precious resources and crowding out the more productive private sector. Others believe that is impossible as long as the instinctively anti-business Congress party is calling the shots. Speaking at the launch of a book to honour the Prime Minister in April, a senior editor of a leading business daily, a well-known supporter of reform, said with sarcasm, "India is still a Communist state. The party rules over the Government."

With Lok Sabha elections due in less than two years, it is only reasonable to expect an expansion of populism and the might of the state at the expense of the private sector. Reformist legislation has been shelved. On May 10, the Cabinet deferred a decision on the relatively non-controversial insurance bill which simply seeks to raise FDI limit from 26 per cent to 49 per cent.

The appointment of Sonia Gandhi-confidant Pulok Chatterjee as Principal Secretary to the prime minister in October 2011 aroused great expectations from both the bureaucracy and business. It was expected he would get things done. More than seven months on, he has failed in the one major task he set himself-to sort out coal supply bottlenecks which have paralysed the power sector. The public sector coal monopoly Coal India has simply refused to follow instructions issued by Chatterjee.

In February this year, Chatterjee asked Coal India to sign, before March 31, 2012, fuel supply agreements with all power plants that had entered into long-term power purchase agreements with power distribution companies and that will be commissioned by March 31, 2015. Under these fuel supply agreements, Coal India would guarantee 80 per cent of the coal requirements of power plants. Coal India's then acting chairman Zohra Chatterji, an additional secretary in the Ministry of Coal, ignored the instructions of India's most powerful bureaucrat. On April 3, the Government had to issue a rare presidential directive to Coal India to sign the fuel supply agreements. Coal India insists it does not have the coal to supply to power producers. Its domestic production has been hampered by the environment ministry's no-go areas for mining and land acquisition problems.

Rajiv Kumar of FICCI rubbishes Coal India's claim. "This is a company sitting on cash reserves of Rs 56,000 crore and has 200 million tonnes of coal reserves in environmentally clear areas," he says. The current shortage of coal is around 85 million tonnes. "If anyone has a problem with no-go areas, it is private power producers who were promised captive mines but have not been able to mine at all," says Kumar. Imports are the obvious alternative for power producers, but they are more expensive, raising costs by 60 per cent. For imports to be viable, producers have to renegotiate tariffs with distribution companies. Most distribution companies are unwilling or financially unable to do so.

There is a solution that has been suggested to Coal India by Pulok Chatterjee and his advisers. Under this plan, Coal India would import coal in bulk, blend it with their domestic output and then supply it to power producers. The price would be higher than plain domestic coal, but only at a rate of 15 per cent as opposed to 60 per cent if all was imported. Coal India has refused to act on this suggestion so far.

"The Government has power producers in a corner. You will not let them mine privately. And you are unable to persuade Coal India to help," says a senior secretary to the Government. Power companies are suffering. Adani Power, to take just one example, has recorded a loss of nearly Rs 300 crore in the quarter between January and March 2012 compared to a profit of over Rs 170 crore at the same time last year. Consumers will suffer in the peak of summer as the demand for power will comfortably exceed its supply.

There isn't much hope for the near future. In a Cabinet meeting on May 11, Environment Minister Jayanthi Natarajan refused to give her nod to a new Coal Regulatory Bill that would have imposed checks on Coal India's monopoly. She says the new bill takes away discretion on mining from her ministry.

The oil and gas sector is caught in a battle between Reliance and Petroleum ministry (Photo: AP) The oil and gas sector is caught in a battle between Reliance and Petroleum ministry (Photo: AP)

The crisis in resources isn't restricted to coal. The oil and gas sector is caught in a bitter battle between Mukesh Ambani's Reliance Industries (ril) and S. Jaipal Reddy's petroleum ministry. The Director-General of Hydrocarbons, the ministry's apex regulator, has asked the ministry to disallow RIL from recovering Rs 6,000 crore out of its Rs 26,000 crore total cost in developing the KG-D6 basin because the output has fallen largely because RIL has only drilled 18 wells instead of the 31 it had committed to. According to the production-sharing contract signed by ril and the Government, any dispute between the two parties must be resolved by an arbitration. Reliance has already appointed its arbitrator and counsel. The Government has stalled.

On April 18, Reliance filed a petition in Supreme Court asking it to direct the Government to appoint an arbitrator. The Government may well have a case against Reliance-Mukesh Ambani believes it doesn't-but it cannot avoid following due process signed into contract. Investment in the oil and gas sector, barring BP's $7 billion (Rs 3,500 crore) investment in Reliance in 2011, has been negligible in recent years. A protracted dispute over KG-D6 will not help.

It is, of course, remarkable to see the well-connected Mukesh Ambani being harassed by the Government, unable even to persuade Government to follow due process. If that is the fate of Mukesh Ambani, India Inc ought to be very scared.

- With Shravya Jain, Shantanu Guha Ray, Uday Mahurkar and Rajesh Sharma