SPECTRUM AUCTION AND FISCAL DEFICIT - PREMATURE TO BEAT VICTORY DRUMS

By Ruma Dubey

The best piece of news coming from this spectrum auction is that the Govt might actually be able to meet its ambitious Rs.40,000 crore spectrum auction target and this in turn means, the chances of keeping the fiscal deficit to 4.8% of gross domestic product (GDP) in 2013-14 got better but still remains a long way off the wining post.

Based on data from the website of the Department of telecom, the 1,800 MHz band received bids in all 22 circles and the 900 MHz band received bids in all three circles which are up for auction. In the 900 Mhz, demand was highest for Mumbai and in 1800 Mhz, it was Gujarat.

Each round of bidding last one hour and it can be extended upto four hours. The final figures which we see today were after seven rounds. There is no ‘end date’ for these auctions. Last time, the auction held in Nov’12 lasted for two days, that held on March’13 was for one day and before that, the (in)famous 2010 auction lasted for one whole month.  It will go on every week from Monday to Saturday from 9 a.m. to 7.30 p.m. till the time telecom service providers keep bidding. The auctioning of the airwaves is done to obtain a market determined price of the spectrum.

Right now, the total spectrum on offer – 46 MhZ in the 900 Mhz band for only three regions – Mumbai, Delhi and Kolkatta. In the 1800 Mhz, 385 Mhz (more than 295 Mhz in Nov’12) is on auction and this is for all the 22 circles. The minimum or base price for 1 Mhz in the 1800 band is Rs.1765 crore (26% lower than March’13 price) and in the 900 Mhz, the base price is Rs.360 crore for Delhi, Rs.328 crore for Mumbai and Rs.125 crore for Kolkatta (prices are 53% lower than March’13). The response has been fantastic because the price has been lowered and secondly, the spectrum usage charge has been capped at 5%.

Now take a look at the bands. In 900 Mhz, the Govt already stands to gain an assured Rs.16,859 crore and in the 1800 Mhz, based even only on Gujarat, where of the 60 blocks on offer, it received bids for 71, it already stands to gain Rs.25,233 crore.  Simple addition of both the bands (16859 + 25,233) gives us a tally of Rs.42,092 crore.

But what we need to understand here is that the Govt might be able to meet the target of Rs.40,000 crore it hoped to raise from auction of spectrum. This alone is not enough to bring down the fiscal deficit (Govt expenditure exceeding revenues).  The Govt has pegged target for the fiscal deficit  at Rs. 5,42,499 crore, or 4.8% of GDP for FY14. But fiscal deficit in the first nine months of FY14 stood at Rs 5,16,390 crore, which was 95.2% as a proportion of Budget estimates.

The Govt, to restrict fiscal deficit  to 4.8% of GDP in current fiscal, down from 4.9% in FY13 would need to additionally raise Rs.55,000 crore from divestment and it also expects tax mop ups to increase collection to Rs 6.70 lakh crore in FY14, up 19% from FY13 collections.

Well, first the divestments; it has garnered only Rs 3,000 crore from stake sales in seven PSUs, including Power Grid Corporation of India, Hindustan Copper, National Fertilisers and MMTC. But on the tax mop up front, things look a bit better during April-December 2013-14, the net direct tax collection (after refunds) was up 12.53% at Rs 4.15 lakh crore. But indirect tax mop up has been dismal, it grew just 5% at Rs 3.07 lakh crore in the April-November period and this is much lower than the budget estimate of Rs 5.65 lakh crore. It is also estimated that corporate and excise collections are likely to fall short of the budgeted estimate. The last quarter always see’s maximum mop up, so one would have to wait and watch how this collection pans out.

But to bridge the gap left behind by the divestment, the Govt decided to use the cash reserves of 20 PSUs by seeking special dividend. The first to toe the line was Coal India, which declared a Rs.29/share interim dividend and the Govt, which owns 90% stake, stood to gain Rs.16,486 crore plus the dividend distribution tax of Rs.3100 crore which Coal India will pay the Govt. So these cash rich PSUs are now expected to provide the fig leaf to the Govt, diverting precious money from further growth. But to some extent this has got nullified with the hike in LPG cylinders cap from 9 to 12 cylinders and reduction in price of CNG and LPG. Thus if it uses all money raised to win votes by increasing social spends, the fiscal deficit might go for a tailspin.

It is too early to make hasty statements of victory, proclaiming a win on the fiscal deficit front. Spectrum auction was just one aspect; wait for the others to unfold. After all, it’s a election year and anything can happen….