12/11/2019 - Indian Economy | Mainstorming

IAS Parliament 5 years

KEY POINTS

· The auction of key public goods has emerged as yet another important tool in India for resource mobilisation.

· For example, bids in mineral auctions which require revenue from minerals to be shared with the government have ranged from 2 per cent to more than 200 per cent, with 14 winning bids of more than 100 per cent, suggesting that the winners were willing to part with more than the prescribed value of the resource.

· Hence, while mineral auctions could be considered successful in the short run due to high revenue generation, the loss of jobs and the fall in production levels in the long term may more than offset such gains.

Different approaches

· Alternate auction mechanisms, rather than revenue maximising ones, may be required to balance the short-term financing need of the government with the overall economic benefit.

· The Vickerey-Clarkes-Groves auction mechanism is one such method, where theoretically, the winning bidder has to make transfers to all other bidders to offset their losses.

· Another way might be to practice ‘asset recycling’, which involves commitment from the government to allocate the revenue received from the sale/lease of pre-existing assets into some welfare-generating projects with the view to offset efficiency losses to other stakeholders.

· For instance, the NHAI plans to generate more than Rs85,000 crore through asset recycling, to finance its road construction work.

· However, the efficacy of asset recycling would essentially depend upon the government’s capacity to invest the proceeds into its most productive unit, with the view to maximise public value.

· The need of the hour is a strategic approach that incorporates context-specific application of mechanism design tools for designing auctions that lead to holistic gains.