Themes > Current Issues
17.06.2010
Money Illusion
C.P. Chandrasekhar
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.
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.
© MACROSCAN 2010