Tepid response from spectrum auction upsets govt’s fiscal math

The tepid response to the government’s ambitious spectrum auction is likely to leave a big hole in the government’s fiscal balances. While excise tax collections have risen and recoveries from the income declaration scheme should also help, it will still be a tight rope walk to meet fiscal targets, say economists.

The government had put a record 2,354 MHz of mobile frequencies up for sale, but managed to sell only 40% of it. The spectrum auctions that ended on Thursday will help the government raise Rs 65,789 crore.

However, the government will only get an upfront payment of Rs 32,000 crore this year, while the rest will be paid over a 10-year period. This leaves a gap of about Rs 30,000 crore in government’s finances, since it had budgeted Rs 1 lakh crore to come from telecom services, which included about 65,000 crore from spectrum auctions and rest from license renewals and deferred payments from previous auctions.

“There will be a shortfall of Rs 30,000 crore due to the tepid response in the spectrum auction. While, the government will get around Rs 30,000 from the income declaration scheme, it will still be a tight rope walk. The kind of surpluses that were expected won’t be available and it will again be a case of cutting corners,” said Madan Sabnavis, chief economist at Care Ratings.

Analysts say the spectrum auctions got a tepid response due to high pricing in the 700 MHz band, which saw no buyers at all and expect the government to lower the reserve prices for this band in the next round of auctions.

“The fiscal math is running neck-to-neck between mounting pressures (shortfalls in disinvestments and spectrum sales receipts) and offsetting factors (higher than expected excise collections and income disclosure scheme). There is no space left for any additional spending,” said Pranjul Bhandari, chief economist, India, HSBC Securities..

The government has set an ambitious fiscal deficit target of 3.5% of GDP.

Spectrum sales apart, a lot is also riding on the government’s divestment programme, where the government has set a target to raise Rs 56,500 crore for the year ending March 2017.

So far this year, the government has raised about Rs 20,000 crore from stake sales and share buybacks by a few public sector undertakings. However, economists expect meeting the full year disinvestment target will be an uphill task. Last year, the disinvestment target was cut by 63% to Rs 25,300 crore from budgeted Rs 69,500 crore.

HSBC believes, the government could yet meet its fiscal targets, but investment spending could suffer.

“We anticipated that 2017, may not be a great year for investment demand as the country walks the fine line between macro stability (via meeting fiscal targets) and growth (via higher government capex),” said Bhandari.

Nomura’s economist Sonal Varma, however, there were unlikely to be any slippages in government’s fiscal deficit targets due to better than expected indirect tax collections (27% year-on-year rise over April-August, versus budget target of 10%) and the collections from the income disclosure scheme.