India’s Supreme Court may have paved the way to erase half of the country’s budget deficit

• If companies pay up the AGR dues as demanded, it may be good enough to erase nearly half the country’s budget deficit of ₹7.2 lakh crore.
  
  
• The net dues on all telecom operators with penalty and interest in the decade-long case -- came to ₹1.47 lakh crore (over $21 billion).
  
  
• DoT asked a state-owned gas company, GAIL, for ₹1.7 lakh crore (over $24 billion) in AGR dues.

On October 24, India's top court ordered that companies will be liable to pay statutory dues even on non-telecom revenue earned using spectrum. The amount of money that the government can make, thanks to this verdict, may be good enough to erase nearly half the country’s budget deficit of ₹7.2 lakh crore.


Fiscal deficit is the amount of money spent by the government over and above its earnings⁠— and that means, higher the fiscal gap, lower the state’s credibility, weaker currency, higher borrowing cost for the exchequer, and a rise in inflation. And India has a problem on this account.


Moody’s has already downgraded India and forecast that the fiscal deficit will be 3.7% of GDP, much higher than the government’s own estimate. But the Supreme Court order may have paved the way for the government to shore up this deficit with its own money.


Telecom operators are choking ⁠— but they are not alone


The net dues on all telecom operators with penalty and interest in the decade-long case -- came to ₹1.47 lakh crore (over $21 billion). Vodafone-Idea and Airtel already filed a review petition against it.


But here is the twist. Even before the order, the debt of the top three companies itself was at around ₹3.9 lakh crore ⁠— which means the telecom troubles of the country are as huge as that of the country.


And, telecom troubles are spreading across sectors too. Based on the same court order, the Department of Telecom has asked a state-owned gas company, GAIL, for ₹1.7 lakh crore (over $24 billion) ⁠— over 3 times the net worth of the company.


That’s not it. Other state owned utilities have also received similar demands from the telecom ministry. Electricity transmission company Power Grid, which had licence for both long-distance calls as well as to provide internet services, also received a notice.


Reports are afoot that dated penalties of dead telecom companies like Tata Teleservices and Videocon too will have to be paid up by companies which acquired it, like Airtel. [hyperlink to your story]





*As per estimates


A case of unintended consequences


“This appears to be the plain reading of the verdict and some companies (telecom operators) have already moved a review petition. The judges may not have factored in the unintended consequences,” Rajan Mathews of an industry body COAI, told Business Insider.


GAIL and Power Grid had IP licences ⁠— VSAT licence, ISP licence etc. ⁠— for internal purposes and may or may not have earned any revenue by holding the rights. These companies had licences to provide assets such as dark fibre, right of way, duct space, and towers. GAIL has a vast network of gas pipelines and it laid optic fibres to provide bandwidth to third parties like telecom service providers.


The statutory dues, based on the SC verdict, will be based on the company’s gross revenue on spectrum usage. For example, companies which could be using spectrum will have to pay a percentage for non-telecom utilities -- and that would be a great deal for companies like GAIL and Power Grid.


Here’s why the Narendra Modi government needs this money


In a hypothetical situation, if all the amount is paid up, then the central government can erase half its fiscal deficit. Like many of its companies, Indian government too is a victim of high debt and many accounts payables. Tax revenue has been much less than what the government had expected as India’s economic growth fell to a six year low.

At least five states where the BJP is not ruling have accused them of unpaid GST dues. Moreover, in a bid to get private enterprise excited, government cut corporate tax rates ⁠— digging itself into a wider and deeper fiscal deficit.


The government’s attempt to extract its pound of flesh at a time when companies are struggling disappointing demand, and therefore earnings, may raise a few eyebrows. The fact that companies like GAIL ⁠— where the government owns around 55% stake ⁠— and Power Grid ⁠— where the government stake is 58% ⁠— are owned by the state leaves them with little capacity to protest this unexpected demand for statutory dues.


Yet, if companies like GAIL and Power Grid are forced to cough up the money, part of the impact will fall on unsuspecting small investors. But a larger impact will still be on the government, which is the majority shareholder in these companies. In essence, transferring money from government entity to the exchequer will amount to accounting jugglery to dress up the state’s financial health.


For example, in the last financial year, ONGC bought 51% stake in HPCL for ₹36,915 crore. Both companies were owned by the government. While it helped shore up the budget deficit on the books, one government arm paid for the other. This year, it seems, may be no different.



SEE ALSO


Three reasons why the Indian telecom sector's troubles went from bad to worse in the last 24 hours


Top three telecom companies’ debt is at ₹3.9 lakh crore — that’s half of India’s fiscal deficit


Airtel and Voda-Idea could pay DoT, but what about ₹38,000 crore from defunct telcos?