Sucheta Dalal :Will the 3G windfall disinvestment help rein in fiscal deficit?
Sucheta Dalal

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Will the 3G windfall, disinvestment help rein in fiscal deficit?  

May 6, 2010

The robust response to the Indian government's plan to auction the 3G spectrum and broadband wireless access (BWA) and disinvestment is likely to help the government to rein in the rising fiscal deficit. India commenced the auction for 3G and BWA on 9th April and set itself a target of Rs35,000 crore as the spectrum licensing fees. On Wednesday, the provisional all-India 3G bid price reached Rs11,047 crore, an increase of 213% over the base price of Rs3,500 crore at the end of the 128th round.

With no excess demand in any of the total 22 circles and the activity level set to reach 100% in round 132, the auction may end on Thursday itself. With the provisional figures, the government is set to garner a minimum of Rs45,000 crore as against its target of Rs35,000 crore. This is just from the 3G auction. With the 3G auction bid crossing Rs11,000 crore, the government may receive about Rs15,000 crore from the auction for BWA, which will begin in two days after the close of the 3G auction. In short, the government may earn about Rs60,000 crore from the 3G and BWA auctions alone.

Similarly, the government can earn about Rs40,000 crore by selling its stake in 10 more units this year including Indian Oil Corp (IOC), MMTC Ltd, Coal India Ltd, Steel Authority of India Ltd (SAIL), Rashtriya Ispat Nigam Ltd (RINL) and Shipping Corp of India Ltd (SCI).

According to a PTI report, Sidhartha Pradhan, joint secretary in the disinvestment ministry, had said, "Engineers India is likely to be disinvested in June; Coal India in August; Hindustan Copper in August-September; SAIL in September and Power Grid in November this year."

This would be followed by disinvestment in IOC and Manganese Ore India Ltd in December, RINL in January 2011, MMTC Ltd in February and SCI in March next year, he added.

The government expects to earn Rs40,000 crore by selling its stake in the State-run companies. During FY10, the government earned Rs25,000 crore by divesting its stake in Oil India Ltd, iron ore miner NMDC Ltd, Rural Electrification Corp Ltd (REC) and power producer NTPC Ltd.

Together, the government may earn Rs1 lakh crore, from the 3G+BWA auction and disinvestment. For FY11, the government needs to borrow about Rs4.57 lakh crore from the domestic markets to fund the fiscal deficit at a time when the credit needs from the private sector are rising.

During FY10, India's fiscal deficit that measures excess expenditure of the government over its revenues rose to 6.7% of gross domestic product (GDP). This was mainly due to the stimulus provided by the government to reduce the impact of the global slowdown. India has already started withdrawing the stimulus by increasing excise duty and duties on fuels.

Prime minister Dr Manmohan Singh, while speaking at the platinum jubilee celebrations of the Reserve Bank of India (RBI) in Mumbai had said, “We allowed a large increase in the fiscal deficit in the past two years as we responded to the global economic crisis. This must now be reversed. We are therefore, firmly committed to bring the economy back to a fiscally sustainable path. This involves a reduction in the fiscal deficit to 5.5% in 2010-11 from 6.8% of GDP in 2009-10 with a further reduction in the next two years reaching 4.1% in 2012-13.”

Dharmakirti Joshi, chief economist, CRISIL said," Divestment and 3G revenues are one time gain. To bring lasting fiscal benefits, the government will have to initiate steps such as decontrol of fuel prices, gradually withdraw stimulus and implement general sales tax (GST) as soon as possible."

Earlier, ratings agency Standard & Poor’s, while revising India’s outlook to ‘stable’ from ‘negative’, had said that the revision reflects its view that the country’s fiscal position could now begin to recover and the economy will remain on a strong path.
S&P also affirmed 'BBB-' long term and 'A-3' short-term sovereign credit ratings on India. The ratings continue to be constrained by the high government debt burden and deficit, and India's weak fiscal profile, the ratings agency said.

“For the moment, the rub of the green seems to be going the government’s way: The ongoing 3G+BWA telecom auctions indicate that the government should be able to garner about Rs8,000 crore to Rs10,000 crore more than its target of Rs35,000 crore, which would help alleviate some of the resource crunch. Also, the IMD has forecast that the monsoon will be normal, helping tame food inflation which at present is at 17%,” said Enam Securities Pvt Ltd, in a note.

Inflation has remained a major concern for the RBI. The central bank, in its annual monetary policy review, hiked the repo, reverse repo and cash reserve ratio (CRR) by 25 basis points each. By increasing the key rates and CRR, the RBI has reinforced its stance of containing inflation and anchoring inflationary expectations.

"If government gets the resources from 3G and divestment as expected, fiscal deficit and hence government borrowings will remain within target. This will lower the pressure on government bond yields and make RBI's task of smoothly conducting government program easier," Mr Joshi added.

With the government set to garner more revenues than expected from the 3G and BWA auction and its disinvestment programme, it may be able to rein in the fiscal deficit to 5.5%, a level not seen after FY07. Yogesh Sapkale


-- Sucheta Dalal