Selling family silver to fund profligacy

Finance minister Pranab Mukherjee is smiling. He had hoped to get Rs 35,000 crore from auctions of spectrum to telecom companies for 3G and broadband wireless access. In fact, the auctions fetched a whopping Rs 106,000 crore.

Thanks to this bonanza, government sources claim that the fiscal deficit will now be only 4.5% of GDP, against the budget estimate of 5.5%. At a time when fiscal deficits in other countries (notably Greece) constantly exceed budget estimates, the government claims that India is moving, virtuously, in the opposite direction.

Foreign institutional investors (FIIs) have greeted the news by pouring fresh millions into Indian stock markets. In May, FIIs pulled a whopping $2 billion out of the stock markets, sending the sensex crashing. But they are now flooding back, buying more than half-a-billion dollars of stock last week. They feel that the fall in the fiscal deficit will release additional bank funds for borrowing by the private sector, help lower interest rates, and thus boost the economy.

Alas, this apparent improvement in government finances is largely illusory. The fiscal deficit is the difference between the government’s tax revenue and spending. This gap can be met in two ways — by borrowing more, or by selling more of its assets. The net worth of the government — assets minus borrowings — will be exactly the same whether it borrows more or sells more. So, selling more is not superior to borrowing more, as the government — and the stock markets —seem to think.

Seen in this light, the spectrum sales have not really improved the government’s finances. It remains profligate, spending far more than it gets. The fact that a greater share of this overspending will now be financed by selling assets rather than borrowing does not change the underlying reality of overspending.

Spectrum sales are being counted as revenue by the government. In fact, revenues are income streams like taxes that yield money year after year, on a sustainable basis. Selling spectrum provides a one-time gain that cannot be sustained.

So, the spectrum sales of Rs 106,000 crore must not be viewed as a great success. Rather, they represent a big upfront levy on telecom companies — and through them on telecom users — to finance government overspending.

Some readers might think that, with the government borrowing less from banks to fund its deficit, more bank money will be available for productive investment, spurring the economy. Alas, this is not so. Telecom companies have to borrow enormous sums from banks to pay for the spectrum. So, after the spectrum sale, the lower government borrowing requirement will be fully offset by the higher borrowing requirement of telecom companies. No bank funds will be freed for productive uses by the private sector.

Hence there is really no case for celebration or for stock markets to boom. The government has simply sold some family silver to finance its overspending, and its underlying financial situation remains unchanged.

Readers will ask, isn’t it a good thing to auction spectrum rather than gift it to favoured telecom companies, as happened in the case of 2G spectrum? Aren’t auctions necessary to check crony capitalism and corruption?

Yes indeed, we must have auctions to ensure transparency and check crony capitalism. But this auction was wrongly designed. Telecom companies should have been asked to bid not for a one-time purchase of spectrum, but for the percentage of revenue they were willing to share with the government indefinitely. This would have been transparent and fair. It would not fetch an instant bonanza of Rs 106,000 crore, but it would have produced a sustainable stream of revenue in the years to come. The government’s share of telecom revenue would have risen over time with increased telecom use. That was the way to go.

The government also plans to sell equity stakes of up to 10% in several government companies. These sales too are being counted as revenue, and so will appear to reduce the fiscal deficit. In fact, these too will represent a sale of family silver that simply finances overspending rather than reduce it.

Now, if the government sold a majority stake in public sector units, allowing new private sector management to take over, that would hugely improve efficiency. But only minority stakes will be sold.

In sum, asset sales must not mislead readers to think government finances are improving. On the contrary, the government’s unwillingness to decontrol petroleum product prices, and its seeming commitment to ever-rising subsidies, spell danger. We need a more honest presentation of government finances, not the smoke and mirrors that have become standard practice.

4 thoughts on “Selling family silver to fund profligacy”

  1. A good piece of article that explains the ‘complex’ things in simple words and examples. But what I dont understand is that, if you were aware that the auction was wrongly designed, why didn’t this article come in the the beginning of the auction? I know policy makers do give some value to your words. Anyway, a nice eye opening article

  2. Kshitiz Singh Chauhan

    Well Sir the suggestion made was nice that we could have a subsequent flow of economy in the coming years if Government had opted for the system of charging a fixed percentage rather going for a one-time-pay-and get for lifetime phenomenon. Of course this was a long term phenomenon but somewhere down the line in my opinion I think that it would have hampered the growth of companies who participated in the bid and are already divesting their stakes to raise the necessary capital.

  3. as per the guidelines set by government of india for public private partnership,the bid goes to the one who offers maximum revenue per annum to the government which is the product of revenue share offered and the minimum throughput offerred;it is strictly followed in port projects;why is it not followed in telecom,which is also an infrastructure?

  4. Mukund Rajamony

    I am not sure how different is levying taxes from selling spectrum. Both are incomes to the government. One kind of happens every year whereas the other happens once.

    Wouldn’t disinvestment from government companies serve 2 important ends.

    One, create a better management in the companies.

    Two, create a shift in government policies from acting like a business man to serving only crucial areas like defence, education, foreign policy, health etc.

    Can’t we see selling silver as moving out of a “silver-stocking-no-value-adding-business”?

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