New Delhi: An accounting rule, opposition by labour unions and ballooning spending threaten to trip up government plans to raise money to plug its widening fiscal deficit by selling state assets and auctioning airwaves to phone firms to roll out so-called 3G, or third-generation, services.
Proceeds from the sale of government stakes in public sector firms are required to be transferred to the National Investment Fund, or NIF, and income earned from investing the money is to be partly used to fund social sector programmes. This accounting rule means the government cannot use the so-called disinvestment route to bridge its fiscal deficit. In 2007-08, the government raised Rs995 crore through an initial public offering (IPO) of Power Grid Corp. of India Ltd, and the money was transferred to NIF.
So, even if the government is able to sell shares in Bharat Sanchar Nigam Ltd, or BSNL, it will not be able to use the sale proceeds to trim the deficit. Complicating the matter further, BSNL employees are opposed to the share sale even though its board of directors recently approved the sale of up to 10% of the phone firm through an IPO.
See: Growing concern
Going by the budget document, the government’s stake in Rural Electrification Corp. and NHPC Ltd could fetch Rs1,165 crore, but the money, too, would go to NIF.
“All proceeds from disinvestment of central public sector enterprises will be channelized into NIF,” a government statement said in October 2007. Finance ministry officials could not be immediately reached to comment on the subject.
According to Sonal Varma, the Mumbai-based India economist at Lehman Brothers Holdings Inc., one-time revenue generation though sale of government assets is “potentially positive”, but nothing is “definite yet”.
“Our estimate of Central government fiscal deficit in 2008-09 is 4.3% of GDP (gross domestic product). Adding off-budget items, the estimate is 6.6% of GDP,” said Varma. The government has budgeted the fiscal deficit at 2.5% of GDP, or Rs1.33 trillion.
Revenue generation through stake sales in public sector firms and auction of spectrum for 3G services are significant against the backdrop of rising government expenditure, which has overshot the budget targets. The government borrows from the market to bridge the gap between its expenditure and revenue.
Typically, large fiscal deficits tend to crowd out private borrowers from the market and pile pressure on interest rates to rise. International credit rating agencies take a dim view of loose fiscal policies and a rating downgrade increases the cost of international borrowing for firms.
In July, Fitch Ratings downgraded India’s credit outlook to “negative” from “stable” because of the deteriorating fiscal situation.
Higher subsidies, interest payments and public wages, along with bonds issued to oil and fertilizer firms, could push up the underlying Central fiscal deficit in 2008-09 to 6.5% of gross domestic product or even higher, Fitch said on 15 July.
The government has announced additional expenses of Rs15,000 crore to partly compensate banks for the waiver of farm loans. A cut in indirect taxes on fuel is expected to result in a shortfall in revenue of Rs22,660 crore. The additional expenses and shortfall in tax collection, along with mounting fertilizer subsidies, could widen the fiscal deficit.
According to Varma, Lehman’s estimate of the fertilizer subsidy is at least Rs85,000 crore. Some of it is likely to be given in the form of off-budget bonds to fertilizer makers but a part has to be brought into the budget, as the market may not be able to absorb such a huge supply of bonds.
The fiscal slippage can potentially be offset by windfall revenue from the sale of spectrum to telecom companies.
The government is keen to raise Rs40,000 crore this fiscal year by auctioning spectrum rights to telecom firms that want to launch 3G mobile phone services, which allows mobile-phone users to surf the Internet or download content, including music and video, at speeds faster than current technologies.
This could cover the additional spending, provided the government is able to go ahead with the auction. Its track record on auctions of public resources is not impressive; an auction in the telecom segment in the 1990s was fraught with litigation.
Taxes provide the largest share of government revenue. The first quarter (April-June) data on direct tax collections—the largest and fastest growing part of tax revenue—showed they were in line with the government’s budget forecast.
Forecasts for the current fiscal year’s economic growth, however, have been marked down in the recent past amid rising inflation and interest rates. “Revenue projections based on growth may slow down,” N.R. Bhanumurthy, associate professor at New Delhi-based think tank Institute of Economic Growth, said.
The Reserve Bank of India’s July monetary review said fiscal developments in the early months of 2008-09 indicate some stress on the financial position of the government.
“In view of growing off-budget liabilities and enhanced expenditures on subsidies, loan waivers and salaries in the rest of the year, fiscal developments warrant close and careful monitoring in view of the configuration of risks both domestically and globally, and, in particular, the implications for inflation and external sector management,” the central bank said.