3G Spectram Impact : Fiscal deficit may slide below 5%

Source :Prabhakar Sinha, TNN, May 20, 2010, 03.00am IST

NEW DELHI: It's a huge boost for exchequer. With 3G and Broadband Wireless Access (BWA) spectrum auction revenue likely to touch Rs 80,000 crore and crude price falling to $68 per barrel, the fiscal deficit of the government is expected to come down below 5% in 2010-11, from the projected figure of 5.5%. In the Budget, the government had provided for Rs 36,000 crore from the auction of spectrum.

In the 3G spectrum auction, which closed on Wednesday, the government will receive Rs 67,719 crore. According to market sources, the government is likely to garner an additional Rs 12,000 crore from BWA auction. So, total revenue from the spectrum action will be Rs 44,000 crore more than the amountestimated in the Budget.

At the same time, the fall in oil price will contain off-Budget expenditure substantially. According to one estimate by Citigroup, if the oil price continues to hover around $85 per barrel, the under-recoveries by the oil marketing companies (OMCs) will touch Rs 100,000 crore in 2010-11. As OMCs cannot fund such a huge gap, the government is likely to chip in to meet the deficit, resulting in further increase in the fiscal deficit.

OMCs are facing under-recoveries as high global crude prices push the production cost up. But, the government does not allow OMCs to increase retail prices. Because of this, all the petroleum products are sold at below production cost in the country.

As the crude price has fallen by around 20% from May 3 (at $87 per barrel) to around $68 per barrel on Wednesday — the production cost of final products like petrol, diesel, Kerosene and cooking gas will also come down. However, Prayesh Jain of IIFL said the benefit will be realised only if the price remains at the current level.

It is believed that if crude price remains at the current level for the rest of the year, the under-recoveries would fall to around Rs 30,000 crore. And if crude price falls further, under-recoveries could be wiped out completely.

The main reason behind the fall in crude price is the expected slowdown in the developed economies due to crisis in Eurozone nations, which started from Greece. In fact, a senior global banker said, there is a silver lining for India in the European financial crisis. The best possible solution to contain the crisis is to cut government's expenditure, which will lead to slowdown in the economy, the banker added. And, any slowdown in the economy of Eurozone will bring down the demand for oil and reduce prices.

The positive aspect of this slowdown is that the commodity prices in the international markets will fall.

However, on the other hand, the slowdown in the developed world will also affect the economic growth of India. But, the banker pointed out that if India could continue with the spending in the infrastructure, using cheaper commodities, it can reduce the effect of the crisis on its economy.