Friday, December 6, 2013

Zero marks to the Zero Loss Theory

I was glad to come across the news that Shri. Kapil Sibal, Union Minister for Communications & I.T. has joined Twitter.  It is good that India’s political class is slowly but surely taking to the Social Media. This will help the political class and the citizenry to engage fruitfully with each other and bridge the gap between the two. Whether Shri. Sibal likes it or not, his name has been permanently etched in public memory with the Zero Loss Theory. Soon after Shri Sibal came on board, he was confronted with a question on the same: “Sir, please explain the zero loss theory in 140 characters” said a tweet. To this, Shri Sibal replied with the following: “Expenditure – Earnings = Loss, if expenditure is greater than earnings. Have you calculated earnings to calculate loss?”

One may recall that Shri. Chidambaram, the Union Minister of Finance also made a similar statement in the Coal Scam discussion. “…if the coal has not been mined, if coal remains buried in Mother Earth, where is the loss?” he was widely reported to have said. What Shri Sibal or Shri Chidambaram were saying is that since the beneficiaries of the alleged largesse have not monetized the giveaway, the spectrum or the coal mine, there is no loss.

In other words, if your car is stolen, there is no loss until the thief sells the car.

When put this way, the defect in the Zero Loss Theory becomes immediately apparent.

There is another related argument that is often made that needs to be demolished. It goes like this – ‘since government is not a profit making entity, assets need not always be sold to the highest bidder. Cheap spectrum can make cheap telephony available to the masses, and cheap coal can provide cheap electricity.’ This line of argument has even been made by the Prime Minister himself in the past. How far is this thinking valid?

The government owns nothing. It is a Trustee of the assets that belong to the citizens. Every sale of an asset below market price is a loss to the citizens and a net gain to the new asset owner. Once the asset is sold, neither the government nor its people control what the asset owner does with it. Hence selling assets cheap “in public interest” only results in losses that are certain and upfront, while the supposed benefits remain uncertain and in the future. The fallacy of this approach has been amply demonstrated in both the 2G and the Coal Scams.

Does this mean the government should always maximize revenue and profits?

No. Here, one needs to distinguish between selling assets and providing services. For example, the Railways can justifiably run at a loss – anyone who buys a ticket can benefit from the subsidy. The benefits cannot be monopolized. The assets remain with the government while the public benefit from the services. But the same cannot be said about selling spectrum or a coal mine, where neither the government nor the people can control what the asset owner does once the ownership is transferred. However, many a times this crucial point is missed.

I have not checked how many followers Shri. Sibal has acquired over Twitter. Does that mean he has Zero followers. Or does he, really?

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