The spectrum auction was in competition with Diwali lights this week. Its outcome will be at least one measure of how optimistic the math underpinning the fiscal consolidation road map is.
The government wants to contain the deficit at 5.3% of gross domestic product (GDP) in 2012-13, as against the budgeted 5.1%. %. Non-tax revenues from spectrum sales and divestment of public shareholdings are expected to contribute the major share as tax receipts falter, while political compulsions offer little room to reduce discretionary expenditures. Analysts, who are sceptical that the revised fiscal targets will be met, will therefore watch the auction for its foretelling properties. Among other things, it will portend where India is likely to figure on the rating agencies’ metrics.
The unfolding of events in the recent past has been anything but inspiring with respect to these matters. First the Rashtriya Ispat Nigam Ltd (RINL) public issue was postponed as the steel ministry felt the suggested issue price fell short of the book value. This was followed by the deferment of a 12.5% stake sale in National Aluminium Co. Ltd (Nalco), again on valuation concerns. Then, the CDMA airwaves’ auction might not even see the light of the day as the two participants, Tata Teleservices and Videocon, have withdrawn their applications, reportedly because of high starting prices amid an increasingly uncertain environment for telecom business.
All this betrays a lack of confidence and appetite for these resources at offered prices. Such developments also explain the vast gap between government and analysts expectations where realization of non-tax receipts is concerned: Five analysts surveyed by Bloomberg had pegged the expected auction amount at Rs.21,000 crore, half of what the government expected (Rs.40,000 crore). The tepid response on the opening day of the auction, 12 November, supports this. Likewise, the government hopes to raise Rs.30,000 by March 2013 from disinvestments, but the fact that the process is yet to begin seven months into the current fiscal year is telling: Market players expect the government to borrow at least Rs.45,000 crore more than the budgeted gross issuance.
The desperate dependence upon markets for raising non-tax resources is compelling the government to frequent mood-booster announcements and short-term measures as well. This includes encouraging overseas borrowing to spur capital inflows and aid the currency in the hope that an appreciating currency comes to the rescue. Several recent statements indicate a stronger rupee at Rs.51-52 would help moderate the subsidy bill; this would facilitate expenditure adjustments with no effective cuts. Earlier, it was hoped that the central bank’s interest rate decision on 30 October would assist through a mood-lifting cut.
All in all, the planned consolidation to restrict the deficit rests heavily upon hope, much like the overoptimistic budgetary projections at the start of this year. Barring rollover of this year’s expenditures into 2013-14, it is hard to see how the revised target is met. The spectrum auction result will be a pointer to how the fiscal scenario unfolds over the next few months.
Renu Kohli is a New Delhi-based macroeconomist; she is a former staff member of the International Monetary Fund and the Reserve Bank of India.