New Delhi: The government’s first attempt to auction second-generation (2G) spectrum faltered as it managed to attract bids worth just Rs.9,240 crore, less than one-third of its Rs.30,000 crore target, after the completion of six rounds of bidding on Monday. A high reserve price and slowing consumer demand seemed to deter bidders.
Only in four of the nation’s 22 telecom zones was the demand for spectrum higher than that available, resulting in the price exceeding the base price set by the government. The four were Bihar, Gujarat, Uttar Pradesh (East) and Uttar Pradesh (West). Delhi, Mumbai, Karnataka and Rajasthan remained unsold on Monday.
The seventh round of the auction will resume on Wednesday.
“This is because these circles are considered saturated and unviable for a new operator and the older operators have enough spectrum in these circles,” said a Mumbai-based telecom analyst working with a foreign brokerage. He requested anonymity as company policy bars him from speaking to reporters.
Analysts cited the high reserve prices for the spectrum and slowing demand for phones in cities such as Mumbai and New Delhi for the tepid response to the auction. The government had set a minimum price of Rs.14,000 crore for a new telecom operator to get 5 megahertz (MHz) of spectrum across the nation as it sought to raise funds to meet its ambitious fiscal deficit target of 5.3% of gross domestic product (GDP) in the year to 31 March.
The high price discouraged phone companies with just five, or less than half of India’s wireless operators, applying to participate in the auction that was necessitated after the Supreme court cancelled licences of nine operators allocated 122 licences and spectrum in the 22 circles.
“In hindsight, one can say that the reserve price is very high. There were indications of that prior to the auction beginning, but it was set at a time when the government needed the revenue,” Rajat Kathuria, director and chief executive, Indian Council for Research on International Economic Relations, said. “They tried to set the market and that has led to this result.”
Bharti Airtel Ltd, Vodafone India Ltd, Idea Cellular Ltd, Videocon Industries Ltd and Telewings Communications Pvt. Ltd partcipated in Monday’s auction, but none bid for all the 22 licence areas.
At the end of bidding on Monday, spectrum in the Bihar circle drew the maximum interest from operators, according to a department of telecommunications (DoT) official. Most of the other telecom circles saw at least one slot of 1.25MHz spectrum getting sold, a DoT press statement said.
Even though the auction has stretched to Wednesday, the government will most likely fall short of its estimated earnings from the sale of spectrum by a wide margin. The government had expected to generate about Rs.40,000 crore from the auction, but received an initial setback as applications for the 800MHz spectrum were withdrawn, leading to cancellation of that auction.
The revenue estimates were then pared to Rs.30,000 crore. The 800MHz auction was to start two days after the 1800MHz auction concluded.
In 2010, the government raised Rs.1.06 trillion—more than three times the sum it had targeted—by auctioning airwaves for third-generation spectrum and broadband wireless access technology-based services.
The fifth round of the current auction garnered bids for 98 blocks of spectrum in a total of 18 designated telecom areas.
The lack of demand in the Delhi circle is being seen as a positive for Tata Teleservices Ltd, which will get spectrum in Delhi as the company has been demanding for a number of years now. Last week, the cabinet had cleared the proposal to give start-up airwaves to Tata Teleservices in the National Capital Region without any additional charge.
The government is looking to sell eight blocks of 1.25MHz each for a total of 10MHz in all service areas with a provision of up to three additional blocks (3.75MHz total) as top-up for the new operators that need a minimum of four blocks to start operations. There are, however, no top-up blocks in Delhi and Mumbai circles.
However, the disappointing auction result may not affect the government’s earnings from the one-time fee as the price for that spectrum has been linked to the reserve price, which remains unchanged. But the fairness of the price is being questioned.
“An auction serves two objectives—maximize revenue and transparency in allocation of a resource. If this price is linked to the excess spectrum, then it acts as an incentive for the bidders to keep the price low and underbid,” Kathuria said, adding that the government may have overestimated the reserve price and therefore hasn’t got the response it expected.
Last week, the cabinet had decided that telecom operators will pay for spectrum they hold above 4.4MHz at the auction-determined price, while operators with more than 6.2MHz of spectrum will pay retrospectively for the spectrum from July 2008 till end of this calendar year.
This move is expected to get the government around Rs.25,000 crore. Still, the auction results may impact the government’s fiscal targets.
Analysts said the lower accrual to the government from the 2G auction will make it more difficult to achieve the revised fiscal deficit target. Releasing a fiscal consolidation roadmap on 29 October, finance minister P. Chidambaram had revised the fiscal deficit target to 5.3% from 5.1%.
Another source of non-tax revenue is the sale of stakes in state-run companies: the process has also failed to make much headway so far this year although the government has targeted raising Rs.30,000 crore. Though the cabinet has cleared a host of public sector unit stake sales for the current fiscal, the government has failed to move ahead with any barring a sale of shares in National Buildings Construction Corp. Ltd through an initial public offer of Rs.124.97 crore.
The government’s net tax revenue in the first seven months of the fiscal (April-October) is Rs..2.5 trillion, or just 44% of the year-end target of Rs.5.7 trillion because of a shortfall in corporate tax collection.
N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, said with the spectrum auction not taking off as expected, it will be difficult for the government to achieve the revised fiscal deficit target.
“Achieving the 5.3% of GDP fiscal deficit target was conditional upon collecting the budgeted amount on spectrum sale and disinvestment. With no possibility of reduction in expenditure, fiscal deficit may not be less than 5.5% of GDP this fiscal,” he said.
Asit Ranjan Mishra contributed to this story.