Why telecom windfall has left states dry

Sandeep Dikshit

Six months before he became Prime Minister, Narendra Modi wanted the 14th Finance Commission to ask the Central government to share the income from spectrum auctions with states.
As the Centre is poised to collect Rs 1.09 lakh crore from this year’s spectrum auctions and having become the Prime Minister, will Modi walk the talk by distributing the income from spectrum to the states?
States do not get a penny from the auction of spectrum that goes on the block every 20 years. This year the bids were higher because existing companies were desperate to win back the spectrum in order to keep their existing services running. It is thanks to the Finance Commission that states get a miniscule share of the service tax every mobile phone owner has to pay.
Modi’s reasoning, till he was Gujarat Chief Minister, was that if states could get the income from the sale of coal blocks, they should also benefit from the selling of spectrum for running mobile phone services — the biggest growth story of post-liberalisation India.
Had the Finance Commission accepted this reasoning, most states in north and west India could have benefitted from the extra money that would have come from the sale of spectrum.
Consider the money that would have come to states now that spectrum auctions that ended this week will net Rs 1.09 lakh crore. Punjab alone saw companies committing to pay over Rs 5,000 crore, Haryana Rs 3,000 crore and even Himachal Pradesh nearly Rs 1,000 crore.
If the Centre had accepted Modi’s argument, a substantial portion of the Rs 5,000 crore would have landed in Punjab’s kitty.
But the Finance Commission went by the UPA government’s reasoning that the Centre needed to keep the entire amount to subsidise telecom services in the hinterland. But after coming to power, Modi also ignored the issue.

Extra income for western India
One reason for not pressing with the demand to share spectrum income could have been the extra income that would anyway come to western India states from petroleum extraction. While the demand to include income from spectrum was ignored, the Finance Commission agreed to give states a share from the royalty or taxes collected from coal, including oil and natural gas.
The logic for giving a portion of income from bids for coal blocks to states flows from Articles 1 and 3 of the Constitution that define India as a union of two entities — states or union territories. This led the Finance Commission to conclude that there is no third entity such as territorial waters or an exclusive economic zone. These are parts of states or union territories under the Indian union and therefore states should get the proceeds for auctions of off-shore oil blocks.

Row over cess, surcharge
The Finance Commission’s stand was helped by states highlighting the fact that the Union government had excluded cess and surcharges from the divisible pool of taxes that are shared between the Centre and the states. Earlier, no one paid much attention to cess and surcharges because they were negligible. They didn’t demand a portion of the Kargil or the education cess because they felt the money would be fully utilised for the purpose for which they were levied.
But the states’ perception changed after the Comptroller and Auditor General (CAG) noted that the Centre was spending this money for other purposes. This led states to demand that cesses and surcharges should either be eliminated or should form part of the divisible pool to be shared with states.
The overriding reason was the increasing component of such income as part of gross tax revenues (GTR), which have now touched 13 per cent. This meant that states were being given a share out of only 87 per cent of the divisible pool of taxes.
The Centre defended the cornering of 13 per cent by contending that this was required to meet its fiscal consolidation roadmap and increasing investment in critical sectors for reviving growth. Therefore, any change in the pattern would be detrimental for the Union government’s fiscal health, it argued, while opposing the transfer of a share of proceeds from spectrum auctions, off-shore oil royalty and disinvestment proceeds to the states.
Technically, the Centre was right. According to the Constitution, the total transfers to states consist of four broad components — tax devolution, non-Plan grants, Plan grants and grants for various Central schemes — while cess and surcharges are excluded from the divisible pool.
Gujarat, then led by Modi, and some other states did not agree. They cited the Chawla Committee’s recommendations on allocation of natural resources in 2011, which had proposed division of income from the sale of all natural resources with states. At that time the suggestion was backed by Subramniam Swamy, an influential voice in the present regime. The Finance Commission was swayed by the logic and asked the Centre to give a higher share of its income from taxes to the states to make up for the loss for being excluded from getting money from cess and royalty.

Centre’s argument based on BSNL
The Centre has resisted sharing the income from spectrum auction because in the past states had no role in running telecom services and framing policies. But this logic was reasonable till the government was running telecom services. After 2000, all government telecom operations were transferred to the public sector undertaking Bharat Sanchar Nigam Limited (BSNL) with an annual profit and loss balance-sheet while the amount given to the Telecom Regulatory Authority of India and the Telecom Dispute Settlement and Appellate Tribunal is miniscule.
Given the fact that states have to pay heavily for loans, in some cases like Punjab to maintain the country’s unity and integrity, they deserve to be compensated for creating the atmosphere that led to a boom in telecom services.
Modi could devise a mechanism to take care of the residual pension obligation (the new scheme does not impose any burden) for BSNL employees and social service obligation. Full compensation to BSNL for its social service obligation is a travesty today because even in the remotest hamlet, people are paying rates equivalent to city dwellers for using mobile services, mostly run by private companies. BSNL’s claim for compensation is actually hiding many of its infirmities, which should be removed. If that is done, the Centre’s genuine claims would amount to Rs  3,000 crore.

What can be done
The Centre could tie up the devolution of income from spectrum with states meeting some part of the social contract with its citizens such as setting up specialty hospitals with a user-pays principle. Back of the envelop calculations show that if Punjab gets its due from spectrum income, it can set up and run at least three mega hospitals in each of its regions. The big question is whether Modi will be willing to implement what he and Madhya Pradesh Chief Minister Shivraj Singh Chauhan had asked for.

Spectrum sold at 68% premium for Rs 1,09,874.91 cr

Aditya Birla group firm Idea Cellular
Bid Rs 30,306.98 cr to buy spectrum in 900 MHz, 1,800 MHz , 2,100 MHz bands

Sunil Bharti Mittal’s Airtel
Bid Rs 29,130.20 cr in same bands as Idea Vodafone Rs 29,959.7 cr

Mukesh Ambani-run Reliance Jio
Bought radiowaves in 800 MHz and 1,800 MHz for Rs 10,077.53 cr

Anil Ambani’s Reliance Communication
Got lesser spectrum in same bands for Rs 4,299.13 cr