India’s telecoms auction: failing to plug the fiscal gap

India’s latest 2G telecoms auction was, as beyondbrics reported, a giant flop – it raised barely a quarter of what the government had forecast, as operators balked at what they felt were sky-high reserve prices.

Ratings agencies Fitch and Standard & Poor’s have both threatened sovereign credit downgrades if India doesn’t get its fiscal house in order, and the $7.3bn the government had been planning to raise through the auction was meant to be, at least partly, a measure of its ability to close up its massive fiscal deficit – estimated to be around 5.9 per cent of GDP.

The recent reforms push which is partly aimed at placating the likes of Fitch and S&P has been greeted as a welcome first step, but needs to be followed up by robust and sustained further reforms. Meanwhile, the finance ministry’s 5.3 per cent of GDP fiscal deficit goal, by the end of March 2013, looks increasingly optimistic as it struggles against an opposition with one eye on the 2014 national elections.

“[Last month's] reforms have largely bought time for the government, say three to six months to put its act together. But time is running out. The agencies won’t be happy with a 5.3 per cent deficit, so I do think the fears of a downgrade are very real,” Saugata Bhattacharya, chief economist at Axis Bank, told the Economic Times.

A Prasanna, economist at ICICI Securities, said that while one failed auction is unlikely to trigger a rating downgrade, one lesson may simply be that the government needs to look at more sustainable revenue streams.

“This will affect the government’s plans to cut down the deficit, but this is just one of many revenue sources and, anyway, this is not a sustainable source,” he said. “It would be a bit hasty based just on one failed auction to downgrade the rating.”

As an editorial in the Economic Times put it, the auction offered a “clear lesson: attempting to maximise government revenue by jacking up spectrum prices is futile”.

Whether that means the government will cut reserve prices in the event of a second auction for the unclaimed spectrum remains to be seen. But telecoms analysts are clear that the main lesson is that high prices doomed this auction from the beginning.

“The results of the auction clearly indicate that the reserve price was completely off the mark,” said Prashant Singhal, of Ernst & Young. “They would now need to go back to the drawing board… to figure out the market driven price. All in all, a big embarrassment for the Indian government, but one could see it coming, and a big disaster that could have been avoided by a more sensible reserve price.”

Related reading:
Muted response to India’s mobile auction
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Telenor: the biggest bidder in Indian telecoms auction
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India: lost connections
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