What next for the fisc after 2G yields peanuts?

The government has failed to raise even a quarter of the Rs40,000 crore revenue it was targeting from sale of second generation (2G) spectrum.

The two-day auction of 1800 MHz GSM spectrum, which concluded Wednesday, yielded only Rs9,408 crore.

Earlier last week, the auction of 1800 MHz CDMA spectrum, too, had flopped after all the players pulled out of the race.

Finance minister P Chidambaram was betting on these auction proceeds to help bring down the fiscal deficit to 5.3% this fiscal from 5.8% in the last and avoid a possible sovereign downgrade. Earlier this calendar, S&P and Fitch had cut the outlook on India’s credit rating to negative from stable.

“Not more than Rs9,400 crore would be coming in and only a part of that would be coming in in the current financial year. This means there is going to be a major slippage as far as auctions are concerned,” said Madan Sabnavis, chief economist at CARE Ratings.

To be sure, the winners in the telecom auction have the option of making a third of the payment upfront and the balance over 12 years. 
That queers the pitch further.

“Definitely, it is a disappointment and the finance ministry will have to look at different ways to garner revenue,” said Upasna Bhardwaj, an economist at ING Vysya Bank.

Dharmakirti Joshi, chief economist at Crisil Ltd, the Indian unit of S&P, appeared to concur. “In terms of raising revenue and meeting the fiscal deficit target, the auction is a disappointment.”

The focus then devolves upon disinvestment of public sector enterprises. The government hopes to raise as much as Rs30,000 crore through this route. Yet, with less than five months remaining this fiscal, the disinvestment programme is yet to roll.

“If they want to contain the fiscal deficit to any reasonable level, meeting disinvestment target will be important,” said Siddhartha Sanyal, chief India economist at Barclays Capital.

Experts say the capital markets right now are not conducive to disinvestment now.
Liquidity constraints in the system are also an issue.

To top it all, the rupee is weak. Over the past month, the local currency has shed more than 3% versus the dollar.

“Weaker rupee makes thing worse for the government. A weaker rupee typically means a weaker equity market, which is a disincentive for divestment,” said Saugata Bhattacharya, chief economist at Axis Bank.

Reducing expenditure could help, say experts. “The government could think of cutting down on capital expenditure. It will affect growth but they have very few choices there,” Sabnavis said.

But containing the deficit, aiding growth and being politically correct – all at the same time – is easier said than done, said Sujan Hajra, chief economist at Anand Rathi Securities. “It can also cut down on capital expenditure in infrastructure and agriculture but further reduction in subsidies will be politically difficult.”