The subsequent sale of some of the licences and the bundled spectrum, at several times the ‘official’ price, led to investigations of impropriety in the allocation process. These findings raise several vital questions that have far-reaching implications, not only in regard to the future assignment of airwave spectrum for telecoms but also for many other public resources.

There is little doubt that judicial intervention became necessary given the sector’s serious institutional failures. Even before the Supreme Court’s decision, the Telecom Regulatory Authority of India (TRAI), the sector’s regulatory body, had separately recommended to the DoT that it cancel a majority of the 122 licences because the companies had violated roll-out obligations. The DoT’s failure to act in response to these recommendations is part of a broader weakness connected to India’s institutional malaise. The TRAI, for example, has often been accused of surrendering its independence to the DoT — upon which it is wholly dependent for financial support.

Confidence in the sector’s regulatory apparatus has undoubtedly been eroded, but the Supreme Court’s decision provides an opportunity for the sector to redeem itself. True, the banks, tower companies and vendors that signed contracts with firms whose licences have been cancelled will be adversely affected in the short term. But in the long term, pressure to improve sectoral governance will increase and could well lead to institutional reform. And given the wealth of opportunity for India in telecoms, the sector’s long-term outlook still remains positive.

While pronouncing the judgement, the Supreme Court was conscious of its intrusion into the policy domain, and recognised that such judicial interventions should be made only in exceptional circumstances. The Court maintained that the policy of allocating airwave spectrum, a renewable natural resource, on a first-come, first-serve basis — as opposed to an auction — was deliberately devised to confer largesse on a chosen few, and therefore violated the public interest. It was also contrary to principles enshrined in the Indian Constitution, and in these exceptional circumstances an exercise of judicial authority in the larger public interest was justified.

Few have objected to the Supreme Court’s assessment or their unstated position that institutional failure stretches well beyond the telecoms sector. While ‘crony capitalism’ in India has declined since the economy liberalised in 1991, it would be naïve to suggest that the practice has been eradicated. The allocation of land to real estate developers and mining rights to private interests are but two examples in a long list of public resources being furtively distributed for private benefit. In fact, the economist Raghuram Rajan recently stated that many of India’s billionaires have made money through their proximity to government.

Evidence of corruption in allocating public resources and frustration at the inability of the sector’s institutional framework to resolve this issue may have resulted in the Supreme Court’s conclusion that all natural resources should be assigned by auction. This effectively plugs the fountainhead of all corruption linked to government contracts — but is it also throwing the baby out with the bathwater? By eliminating the discretionary power of the government to issue licences and contracts in areas like electricity, coal, minerals, mines and land, the Supreme Court has undoubtedly addressed one problem but unwittingly created others. Admittedly, Article 39(b) of the Indian Constitution asserts that natural resources should be distributed so as to best serve the common good. But it is not altogether clear that the common good can only be served through auctions. They can become instruments of exclusion and often conflict with the inclusion agenda that many developing countries, like India, have increasingly favoured.

The verdict must be seen in the context of a deep sense of resentment at the collective failure of India’s institutions. But exclusively picking a market mechanism over a first-come, first-serve allocation mechanism is an extreme reaction to institutional failure. The high-powered Committee on Allocation of Natural Resources has already submitted its report on the matter. And although the report’s contents are not public, its main recommendation is ostensibly at odds with the Supreme Court’s verdict: since public policy can have vastly different objectives, contexts and uses, a ‘one-size-fits-all’ straitjacket must not be the only solution. There can be no substitute for strengthening regulatory institutions and recognising that building credible institutions in sectors with little or no regulatory tradition is an arduous and slow task.

Rajat Kathuria is Professor of Economics at the International Management Institute, New Delhi.