How telecom dues may help reduce India’s fiscal deficit
A package of bank credit extended with a sovereign guarantee could effect a sharp fiscal correction
India, like the rest of the world, is going through a difficult economic situation, with high inflation, a steep depreciation of the Indian rupee and rising interest rates. The seriousness of these should also be seen in the context of the Union Budget for fiscal year 2022-23, whose fiscal deficit at ₹16.61 trillion, representing 6.4% of gross domestic product (GDP), was already higher than desired. To fund this large deficit, the Reserve Bank of India (RBI) announced a plan to raise ₹14.95 trillion through market securities this year, which will further raise the interest rate on such borrowings.
It is obvious that to tackle this situation, government revenue needs to go up significantly with a corresponding decrease in market borrowings. The question is how? Here is a suggestion to help achieve those two objectives.
The government has receivables from various industries by way of licence fee, revenue share and levies payable by different concessionaires over a period of the licence or concession granted. Examples of such industries where the government would have receivables as on date as well as future receivables through concession agreements include road transport, shipping, telecom, mining, oil fields, airports, among others. For telecom, it is public knowledge that the net present value of dues in respect of spectrum and past adjusted gross revenue (AGR) dues are over ₹3 trillion, which are to be received by the government in annual instalments over the next 10-16 years with interest. There will be similar receivables from other industries. One can safely assume that the overall receivables by the government on this account would at least be in the vicinity of ₹5-6 trillion as of now.
The suggestion is for banks to take over the current receivables on the existing terms and conditions applicable for dues to the government, by extending loans to concessionaires and transferring the money to the government. Such payments can be secured by a sovereign guarantee of the government to provide lenders comfort. The interest rate applicable to borrowers should be the rate that banks would charge for lending backed by a sovereign guarantee. It is important to note that providing such backing does not escalate the risk profile of these receivables, as borne by the Union government, since in any case the risk of these receipts already lies with the Centre. Similarly, the security (example: mining rights or spectrum) shall continue to rest with the government in the event of default.
For the further comfort of banks, the amounts so lent by them against a central guarantee would carry the lowest risk weightage, thus reducing their capital requirements and offering improved capital adequacy ratios.
The advantages of the proposed solution to the economy and government are manifold:
One, since the government guarantee will not be treated as part of its borrowing and the amounts received for licence fees or revenue shares from concessions granted are to be accounted on “revenue received basis” for the purpose of the Union Budget, assuming that the current receivables are ₹5 trillion, the deficit projected would come down to ₹11.61 trillion from ₹16.61 trillion. This would be a tightening of the Centre’s fiscal deficit to 4.47% of GDP, as against 6.4% as per this year’s budget.
Two, market borrowings needed by the government this year will reduce by ₹5 trillion, relieving pressure on the yields on government borrowings and reducing overall interest payments by the Centre.
Three, excess liquidity in the Indian banking system, if any, will be sucked out in an orderly and productive manner without disturbing the risk profile of advances made by banks.
Four, in case of default by a concessionaire, banks can invoke the guarantee and transfer the debt back to the Centre along with corresponding securities (like mining rights, rights over oilfields or spectrum).
The extension of guarantees by the government to secure debt to third parties has two recent precedents. First, the Centre used credit guarantees as a tool in various schemes to support and enable economic growth during covid. Such schemes included the Emergency Credit Line Guarantee Scheme, a backstop for credit to micro-finance institutions, a ₹1.1 trillion loan guarantee scheme for covid-affected sectors like health and tourism, etc. Second, the government’s recent extension of a ₹15,000 crore central guarantee to the lending banks of BSNL for continuation of credit to it.
No doubt, the approach suggested is out of the ordinary, but then extraordinary situations do demand extraordinary solutions. I am also conscious that an argument would be raised that this suggestion would only amount to ‘financial engineering’ for 2022-23, as subsequent-year revenues will be lower. My response is that if one can reduce this year’s fiscal deficit by ₹5 trillion in one go and then let it increase by about ₹40-45,000 crore each year for, say, the next 12-15 years (the assumed average period of concessions), it would be worth it. With India’s GDP slated to grow at a high single digit over the next few years, the percentage-wise impact will keep getting lower anyway year after year.
Note that this fiscal suggestion assumes that the current system of a Union Budget being on ‘receipt basis’ will continue for at least the foreseeable future, instead of on an ‘accrual basis’, which is the ideal way forward but is unlikely to be adopted any time soon.
Akhil Gupta is vice chairman, Bharti Enterprises
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First Published:28 Sep 2022, 11:10 PM IST
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