The Great Indian Mirage

The recent 3G auction has fetched the Government more than 3 times the sum it had imagined it would get. The Government is expressing its happiness by saying that this astronomical amount would greatly reduce its burden of fiscal deficit looming at almost 6% of GDP for quite a while. Sorry, I beg to differ. According to me, this is just an illusion; more like a smoke-mirror installed by the Government that the public is not able to see through. Virtually, the economy is hardly better off, if not worse off, with these biddings. This can be explained by applying some basic principles of economics.

   

    Technically put,

Fiscal deficit = Govt. spending - Tax revenue

  

    To fill this crack, the Government makes use of 2 direct tools:

1. Passing the parcel (borrowing more and pouring into the treasury to cover up the current deficit)
2. Encashing on family gold (selling its assets for liquid money)

 

    Both of these ways alow the Government to reduce the negative balance in its current account with similar effects. It can go either way, whichever is more convenient at a given point of time. However, there is another concept which might have escaped our respected FM Mr. Pranab Mukherjee’s sharp acumen. This identity, a more realistic measure of the country’s financial scenario, is:

 

Networth of Govt. = Assets - Borrowings

 

      The 3G auction was an implementation of the 2nd tool of combating the fiscal deficit. The Government sold bandwidths in return for cash. But hey! What difference did it make to the networth? Nothing! The equation remains exactly the same:

 

New Networth = (Assets - 106k crores) - (Borrowings - 106k crores) = Old Networth

   

    The Government just has the benefit of escaping the embarrassment of seeking funds from domestic sources or fiddling with the balance of payment accounts via foreign credit. Nothing more. The FIIs and HNIs (punters) of the share bazaar seemed to have been tricked too. They have been more than generous in buying enormous bulks of stock and pulling up the Sensex like a rocket just after the auction results. They think that the banks would now have more money to lend to industries rather than to the Government, which will push the economy even further.   In reality, there is no positive effect on the liquidity influx in the system due to less borrowing by the Government from the banks, as many seem to believe. In fact, quite the opposite. Now, the Government has ensured that the telecom companies borrow from the banks to pay for the spectrum, which will be extracted from the customers indirectly through tariff hikes and hidden costs. The Government, either foolishly, or very cunningly, has passed the buck to the telecom companies, who obviously will, in order to retain profits, pass it further to the common man. The Government has just shuffled up the cards on the deck. The pack remains the same.

   

    It’s a similar story with the Government’s decision of selling minority stakes in PSUs to private players. Only if majority stakes were sold so that private companies are given full autonomy, it would have effectively dealt with the evils of corruption and red-tapism that the Government managment is stained with. But our Government seems to think otherwise.

    

    One may ask, “Ok, so what could have been done other than bid for the spectrum? Gifting them to top telecom companies (as done in the case of 2G spectrum) is unfair and capitalistic!” My answer would simply be, “Revenue in the form of a sustainable flow of money over a period of time is always better than a once-for-all jackpot.”

    

    What the Government could have done is conduct auctions at regular intervals for certain percentages of the spectrum every time. Firstly, this would have generated gradual, but steady revenues every year instead of an overwhelming lumpsum amount at one go. Secondly, It would have also provided sufficient time to the telecom companies to test the 3G in the market and break even sooner to further finance the spectrum buys. Thirdly, it would have not put the huge liability on the telecom companies to repay the loans to the banks and the associated interest cost. Fourthly, and most importantly, it would have averted the danger of a liquidity crunch and the fear of bank collapse in case the 3G fails to live up to its expectations.

    

    The broadened tax slabs in the recent budget made has made people happy. But we don’t understand that the money we’ll pay for using the 3G technology is a form of indirect tax to the Gvernment, just in a more capitalisitc way. What the people seem to overlook and the Government doesn’t seem to care about, is the fact that the underlying problem of Government overspending is the villian here. The Government should look to contain the overspending by:

 

• Completing infrastructure projects on time and saving on the interest cost
• Putting a stop to the ever-increasing subsidies
• Dealing strictly with the Government servants and officers and making them more accountable
• Cutting down on administrative and compliance costs by reducing the paperwork and shortening the levels of beaureucracy in the electronic era
• Not diverting the taxpayer’s money to political campaigns illegally

 

    In short, Government overspends knowingly, we overpay unknowingly. But, I suppose, the Government finds fooling us easier and more convenient than bring in the above mentioned reforms.