The great Indian 3G auction

Government of India has settled for a reserve price of Rs.4040 crore for the long-overdue auction of third-generation (3G) spectrum. The minimum bid amount for pan-India spectrum is double of that recommended by the telecom department and aligns with the finance ministry's proposal, as the government tries to maximise the revenue it can earn from the auction. It has been decided that up to seven operators (with one slot being reserved for state-owned telcos BSNL & MTNL) will be allowed to offer 3G services across the country. The department of telecom (DoT) wanted a total of five operators. Executives with major telecom operators said the Cellular Operators Association of India (COAI) - the industry body representing companies that provide mobile services based on the GSM standard - would protest against the decision on the reserve price. Telcos are readying to lobby hard with the government to reduce the base price to at least Rs 3,540 crore per player, as most of them had factored this number in their calculations as both DoT and the finance ministry were close to reaching an agreement on this price. The government would get Rs 24,240 crore from auctioning 3G spectrum to six licencees. While the money would help the government lower the fiscal deficit, he added that the base price of Rs 4,040 crore would be on the higher side.

Is the Government killing the proverbial golden goose out here just to shore in money to lower fiscal deficits (Increased by the magnamity of populist policies)?

Telcos may restrict their 3G offerings to metros and category A circles which has a faster time to break even on investments
It will increase the entry barrier for operators
It will also increase the service costs for customers
It could restrict bidding to the six big Indian telecom operators
It will be quite difficult for new operators to participate in the auction, as they would need to invest an additional $1 billion for the 3G licences, over and above the investments they are making in rolling out their new 2G networks
The higher base price could lead to a scenario similar to Europe where telcos could not recover the costs they paid for 3G spectrum.
The higher the base price, the higher the tariffs, as telcos will have to make a business case of it

The government gains on two fronts: Increasing the Base reserve price by 500 crores per player (Rs.4040 crores against Rs.3540 crores) and increasing the number of operators from five to seven.

In a related development, GSM operators said the government must resolve all issues with allotting 2G spectrum before deciding on the 3G auction.The telecom ministry has decided that it will take a call on all issues related to second-generation spectrum - the airwaves on which all mobile services are offered at present, including the methodology for future allocations, the pricing for this scarce resource and the usage charges for utilising these airwaves only after the upcoming auction of 3G spectrum. Any ambiguity on issues related to 2G, especially in the current business and economic environment, could seriously dampen investor interest and adversely affect revenues that would be raised by the government through the auction process