For
the record, it is now official policy. At the end of
a year of the tenure of the second UPA government, Prime
Minister Manmohan Singh has declared that it is time
to unwind the fiscal stimulus and "return to the path
of fiscal prudence". The Reserve Bank of India too has
been sending out signals that the period of easy money
may have to be brought to an end, as inflation remains
stubbornly high, while GDP growth has recovered smartly
from the dip induced by the global crisis. Thus, both
fiscal and monetary stringency seem to be on the anvil.
India, like Europe and the rest of the world, seems
braced for a retreat from an expansionary interlude.
But matters could turn out to be very different in India,
especially in the light of two major developments. The
first is the runaway success of the auction of 3G and
broadband wireless access (BWA) spectrum, which together
are expected to yield around Rs. 1,00,000 crore of receipts
for the government. The second is the decision of the
government to lock into a disinvestment drive by requiring
all listed companies, including public sector companies,
to reduce the promoters' stake to at least 75 per cent,
by selling 5 per cent of equity every year. This disinvestment
would sit on top of the accelerated privatisation that
UPA II promises to deliver.
The receipts from the spectrum auction alone would temporarily
transform the central government's budget. The approximately
hundred thousand crore rupees the central government
would receive from the sale of airwaves, which it does
not need to share with the state governments, amounts
to 17 per cent of its revenue receipts in financial
year 2009-10 and 24 per cent of the fiscal deficit in
that year. Getting a windfall gain of that magnitude
would obviously considerably increase the spending power
of the government, even if it chooses to significantly
reduce the fiscal deficit to GDP ratio from the 6.7
per cent it is estimated to have touched in 2009-10.
Consider the budget estimates for 2010-11. The hundred
thousand crore windfall amounts to 1.44 per cent of
the projected GDP and 15 per cent of the projected revenue
receipts for that year. It is indeed true that the government
had already provided for an increase in receipts under
the head 'Other Communication Services', which referred
mainly to the licence fees from telecom operators and
receipts on account of spectrum usage charges. Receipts
under this head were to rise from Rs. 13,795.57 crore
in 2009-10 to Rs. 49,799.55 crore in 2010-11 or by around
Rs. 36,000 crore. Even if we assume that all of this
increase was on account of spectrum sale (as opposed
to increases in licence fees paid by existing telecommunication
operators), the extra revenue which the success of the
spectrum auction provides is Rs. 65,000 crore. This
amounts to around 10 per cent of projected revenue receipts
during this financial year and around 1 per cent of
the projected fiscal deficit of Rs. 381,408 crore. The
fiscal deficit for 2010-11 is estimated as equal to
5.5 per cent of GDP, which amounts to a significant
reduction of the deficit from its 6.7 per cent level
in 2009-10. Thus, assuming the projections in the budget
to be correct, the spectrum auction alone would allow
the government either to reduce the deficit sharply
to 4.5 per cent of GDP while keeping all projected expenditures
in place or it would allow an expansion of expenditures
by Rs. 65,000 crore while keeping the deficit at the
projected level. This would mean the sustenance of the
stimulus, without resorting to additional taxation or
deficit financing.
To this we must add the benefit of additional privatisation,
which would now be justified by rule requiring 25 per
cent ownership by the public of equity in listed firms.
The budget had already provided for receipts from disinvestment
of Rs. 40,000 crore in 2010-11, as compared to estimated
receipts of Rs. 25,000 crore in 2009-10. This is likely
to increase substantially, since the government would
have to resort to some equity sale in the case of all
listed public sector companies.
All in all, therefore, there does not seem to be too
much danger of austerity in this financial year at least,
even if the revenue estimates in the budget prove to
be exaggerated. The real issue is the use to which this
additional revenue would be put. Additional outlays
on subsidies are unlikely given the signals that the
government is sending out that it would increasingly
move to producer-determined pricing in the case of petroleum
products and fertiliser. Moreover, the budget had made
clear that the proposed Food Security Bill notwithstanding,
the allocation for food subsidies is not expected to
rise because of adjustments of subsidised quantities
and prices. Finally, since the emphasis is on disinvestment
and privatisation, government participation in productive
activities is not slated to expand substantially.
This leaves four areas to which the additional revenues
would possibly be directed: additional current government
expenditures, expenditures on infrastructure either
directly or through public-private partnerships, direct
and indirect tax concessions to the private sector and
further reductions of the fiscal deficit. In the receipts
budget for 2010-11, the government has sought to justify
privatisation by claiming that the funds so garnered
will be credited to a National Investment Fund (NIF),
and those monies will be "withdrawn and used for part
funding the Social Sector schemes". In practice, how
much of the additional money would go in this direction
and how much to the other areas noted would depend on
the ways in which politics within and outside the Congress
and the UPA plays out over the coming months and years.
What is clear is that the UPA has decided to use receipts
from the sale of public assets and scarce national resources
(including spectrum) for meeting a part of its expenditures.
While this may help trigger growth, the more liberal
tax regime would limit the degree to which that growth
leads to enhanced tax revenues for the government. In
sum, this is a spending strategy that is not sustainable
since both resources and public assets are limited.
Since revenues from their sale are of a "once-for-all"
kind, the government in future years would be hard put
to make up for the erosion of these revenue sources
and be forced to go in for substantial expenditure reduction.
It hardly bears stating that selling assets to meet
expenditures that are unlikely to generate significant
revenues makes little economic sense.
What is more, the government's support for the private
sector in at least some of these areas may have to increase
substantially in the future. A typical example is the
telecom industry where there is reason to believe that
the huge sums which private players have bid to win
in the auction of scarce resources are irrational. While
telecom use in India is rising sharply, the average
revenue per user is falling sharply partly because of
the kind of users entering the universe of subscribers,
and partly because of the collapse in tariffs resulting
from excess capacities and competition in the sector.
Thus, future revenues may not justify the price paid
for spectrum. The collapse of a number of operators,
as happened in the telecom industry elsewhere in the
world, is a real possibility. Hence, just as the irrational
licence fee bids made by early entrants into the cellular
telephony business necessitated migration out of a licence
fee to a revenue sharing regime at considerable loss
to the government, the current round of bidding may
also play out in ways that renders state support for
the industry necessary.
Such support may also be unavoidable because of the
way in which many of the private players are financing
their purchases of spectrum at these extremely high
and unexpected rates. Most of them are meeting their
post-auction commitments with short-term borrowing at
relatively high interest rates from public sector banks.
In fact, the Reserve Bank of India has opened a new
borrowing window for the banks and pumped in additional
liquidity to meet demands from those buying spectrum.
Speculation has it that they would in time replace these
loans with cheaper borrowing from abroad. But if these
bids prove irrational and they are unable to garner
the revenues that warrant those high bids, the expected
foreign credit may not materialise and the firms concerned
may find it difficult to meet their interest and amortisation
commitments on borrowing from domestic banks. Hence,
support from the government to the telecom firms may
also become necessary in order to protect bank balance
sheets. This could be the price to be paid for getting
public banks to finance private players to buy up public
assets. A similar story could unfold in other areas
when the accelerated privatisation drive gathers steam.
Thus the message is clear. There is a perception in
and outside government created by the spectrum auction
that there is much money in its coffers to pursue a
social agenda. That perception is an illusion for two
reasons. First, whatever money appears to be at hand
is not available in the long term, which is a problem
because while governments come and go, social agendas
remain. Second, the new receipts from the private sector
that create this illusion could be substantially matched
by reduced government receipts in other areas or reverse
flows to the private sector. One arm of the government
may be giving out what the other is receiving. These,
of course, are processes that unfold over the medium
or long term. They could well be ignored by the "technocrats"
who frame economic policy today.
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