Investors want a hassle-free entry into any economy where rules are consistent and steady. For long, India had been seen as a difficult place for anyone wanting to do business, a fact that any government can ignore only at its own peril.
India ranks towards the bottom of the scale in the World Bank’s latest ‘Doing Business’ report.
The test of consistency is also critical in allocation of natural resources. Investors need to know that scarce and finite resources, such as coal or telecom spectrum, are allocated in a transparent rule-based structure.
It is not always best to offer the resource to the highest bidder. For instance, the decision on whether or not forest clearance should be granted to a mining project cannot be based on market-driven principles.
This decision is necessarily determined on administrative facts. In certain cases, governments across the world use non-market based processes such as the first-come-first-served (FCFS) policy or lotteries to allocate natural resources. The FCFS policy means the applicant standing first in the queue is offered the resource.
Most recently, it was seen in the 2G spectrum allocation scam. The government allotted licences on the FCFS policy to companies without established credentials on mobile telephony. There are other transparent non-market methods of allocation, such as the lottery method followed by city development authorities to allot residential flats.
The Supreme Court ruling that allotting of coal mines based on the recommendations of a bureaucrats’ panel since 1993 was illegal has raised a more fundamental question: What is the most optimal way to grant rights for use of natural resources?
Public purpose may demand a different use of the resource from what the market may put it to. Auctions sometimes favour large corporations with deep pockets that can lead to monopolies.
There is the other side of the argument that an auction would raise power tariffs and that, not all coal blocks are profitable or commercially viable.
Not all decisions pertaining to allocation of natural resources can be carried out through market processes. But, in the interest of transparency, it is incumbent on the decision-makers to make the process by which decisions are reached clear. In the short term, the transition may be painful.
Consumers could end up paying greater tariffs as companies, which have to buy coal through auction, could charge more to cover for the higher cost of coal.
But, it is not a heavy price to pay for the cause of removing administrative arbitrariness and making India a rule-based business destination.