Special Report: Will The Government Cover The Fiscal Deficit?

The new government is providing assurances to bring back higher growth with more emphasis on foreign investment, spending on infrastructure, and implementation of the Goods & Services Tax (GST). Further, the implementation of diesel de-regulation pending for a long time has also upped the investors’ expectations. On the politically front too, the markets surged on Prime Minister Narendra Modi’s pro-business stances such as rejuvenating brand India to attract investments, the ‘Make in India’ call to revive domestic manufacturing, implementations of changes in regulatory framework for the ‘ease of doing business’ in the country, etc.

Further, with Modi’s vote-winning abilities as proved by the BJP establishing majority in important states like Haryana and Maharashtra in October and now in Jharkhand, and considerable success in Jammu & Kashmir, the domestic markets are touching new highs every month. The simple reason behind this has been the consistent flow of FIIs and the expected change on the country’s governance front.

To make this growth possible, the government has lined up considerable spending to develop infrastructure and provide for a good business environment to attract foreign funds. In order to boost infrastructure, the government has planned to spend more than USD 1 billion to build 100 ‘smart cities’ apart from its announcements to promote transportation infrastructure in terms of roads, railway and ports. Further, the government is simultaneously strengthening its defense capabilities by modernizing its military capabilities and narrowing the gap with China. India has been the world’s top buyer of arms for the last three years.

However, the fiscal deficit, which is the difference between the government’s earnings and its expenditure, has started causing concern for the Indian economy. As we enter into the last quarter of the current financial year, India has reached almost 99 per cent of its full year fiscal deficit target. According to recently released data, India has already inched up to Rs 5.25 lakh crore against the government’s projected shortfall of Rs 5.31 lakh crore. However, the Modi government has reiterated its commitment to limit the fiscal deficit to its projected level of 4.1 per cent of the GDP.

The government has various plans to bridge this gap. One of the favorite routes is through disinvestment of the government’s stake in various state-owned organisations. Further, the government has already set up a committee to review retrospective tax claims such as the nearly USD 2.2 billion claim against Vodafone in 2012. The Modi government also has the benefit this year of limiting its fiscal deficit through selling the telecom spectrum to operators in this segment. According to Department of Telecommunication (DoT) data, 29 licenses in the 900 MHz band and 15 licenses in the 1,800 MHz band across the country are due for renewal in 2015 and 2016. The government is expected to fetch approximately Rs 80,840 crore to bridge the shortfall in fiscal deficit.

The DoT has issued a notice inviting applications (NIA) for next spectrum auction to be held from February 25, 2015. The Union Cabinet had approved DoT’s proposal and reserve price for the 800, 900 and 1,800 MHz bands. The total spectrum across these bands available for sale is 380.75 MHz. Further, the DoT is planning to auction 5 MHz of 2,100 MHz (3G spectrum) worth an additional 15 MHz if the defense forces agreed to vacate. A total of 380.75 MHz of spectrum in 900 MHz, 1,800 MHz and 800 MHz will be available for auction in which 103.75 MHz will be in 800 MHz band from all circles, 177.8 MHz from 17 circles in 900 MHz band, and 99.2 MHz from 15 circles in 1,800 MHz band. Details for 2,100 MHz 3G band will be announced later as per the NIA.

In the previous telecom spectrum auction conducted in 2010, the 3G and 4G telecom spectrum was auctioned in a very competitive bidding process. The government had managed to earn over Rs 1,06,200 crore from this auction. In 2012, the government auctioned 2G spectrum in both GSM and CDMA bands. A total of 271.25 MHz of spectrum was put on the sale, receiving bids worth Rs 9,407 crore, far below the government’s target of Rs 28,000 crore. In the 2013 spectrum auction, 50 MHz of spectrum in the 1,800 MHz band and 76.25 MHz of spectrum in the 800 MHz band were put on auction by the government. However, only the 800 MHz band auction proceeded on the decided date as no bid was received for the spectrum in the 1,800 MHz due to expensive pricing, as stated by the bidders. In 2014, the government auctioned 2G telecom spectrum in the frequency range of 900 Mhz and 1,800 MHz and earned Rs 61,200 crore from this auction. However, the 1,800 MHz spectrum auctioned was cancelled by the Supreme Court following the 2G spectrum scam. Reliance Jio, the only company to have an all-India 4G license, entered into the voice service domain and won in 14 circles for the 1,800 MHz frequency.

There are six private service providers apart from state-owned companies (MTNL or BSNL) that are providing 3G spectrum in India. However, there is no company except the state-owned telecom company that has pan-India presence as a 3G service provider. For example, only Bharti Airtel, Reliance Communication and Vodafone can provide 3G service in the Delhi circle at present. However, the upcoming spectrum auction will provide a platform to other companies to bid for the 3G spectrum and provide the service in those circles.

Further, the auction of the fresh 2,100 MHz spectrum will prevent congestion in the 900 MHz band as this band is suitable for both 2G and 3G services and is being used by Idea in the Delhi circle. The defense ministry is expected to vacate some spectrum in the 2,100 MHz band as per an agreement signed with the telecom ministry in 2009 and this will further increase the supply of the 3G spectrum. Meanwhile, the DoT is also expected to put on sale the 3G spectrum in three circles held by S Tel which has shut down operations in India. However, there is no clarity on both these issues.

Considering the forthcoming spectrum auction, we feel that Idea Cellular is in a better place to grow at a handsome pace in the listed telecom space. Idea is the only telecom company which has rights to provide 3G services in nine telecom circles. As such, Idea is in a better position to acquire licenses in circles where it has no presence yet. The 3G service in the new telecom circle will strengthen the company’s position in the Indian telecom industry. Investors can take positions in this stock for longer time horizon with a price target of Rs 200.