Airwave Sale Flop Seen Ruining Deficit Plan: India Credit

Indian Minister of Telecommunications Kapil Sibal
Kapil Sibal, India's minister of telecommunications told reporters in New Delhi on Nov. 14 that India may still offer unsold spectrum before the fiscal year ends March 31 and has yet to decide on lowering costs,. Photographer: Pankaj Nangia/Bloomberg

India’s plan to narrow its budget deficit is seen failing by investors after the government couldn’t raise even 25 percent of its target from an airwaves auction, increasing the chances of a junk rating.

The shortfall will be 5.8 percent of gross domestic product in the year through March, according to the median estimate of six investors surveyed by Bloomberg, exceeding an official goal of 5.3 percent and matching the level in the preceding 12 months. That will force India to expand its record borrowing program by 500 billion rupees ($9.1 billion) to 6.19 trillion rupees, the survey shows. The government raised 94.08 billion rupees selling phone spectrum this week, missing its aim for 400 billion rupees.

“There’ll definitely be a shortage in government revenue and there will be fiscal slippage,” Rajeev Radhakrishnan, who helps manage the equivalent of $9.4 billion in local assets at Mumbai-based SBI Funds Management Pvt., a unit of India’s largest bank, said in an interview yesterday. “The fear now is, if the government’s disinvestment plan also falls short, then you have a problem.”

Any deterioration in public finances will slow gains in the second best-performing Asian bond market, where benchmark yields are headed for the first annual decline since 2008, according to SBI Funds and Nomura Holdings Inc. Standard & Poor’s and Fitch Ratings cited India’s budget gap and slowing growth as they lowered their outlooks for the sovereign rating this year.

India’s deficit was 3.37 trillion rupees in the first six months of this fiscal year, or almost 66 percent of the annual target, according to a statement on the website of the Controller General of Accounts.

Auction Failure

The airwaves auction fell short after the government set prices that were almost nine times the levels in a 2008 offering, Rajan Mathews, director general of industry group Cellular Operators Association of India, said in a telephone interview at the end of the first day of the sale on Nov. 12. India may still offer unsold spectrum before the fiscal year ends March 31 and has yet to decide on lowering costs, Telecommunications Minister Kapil Sibal told reporters in New Delhi on Nov. 14.

The spectrum offer failed just two weeks after Chidambaram unveiled a new plan to narrow the deficit to 3 percent by 2017 by raising funds from sales of wireless phone licenses and shares in state-owned companies.

The government is sticking to its deficit target even after the outcome of airwaves auction, Economic Affairs Secretary Arvind Mayaram said in New Delhi yesterday.

Rating Risk

“The government will exceed its current borrowing plan in the next quarter,” Arvind Chari, a senior fund manager at Quantum Asset Management Co. in Mumbai, said in an interview yesterday. “That will be crucial when the ratings agencies review the country after the budget in March. If they don’t get a comfortable sense of fiscal improvement, they may downgrade.”

India faces at least a one-in-three possibility of losing its investment-grade credit rating within 24 months should the economy and public finances weaken further, Takahira Ogawa and Elena Okorochenko, analysts in Singapore at S&P, said in a report last month. The nation is rated BBB- by S&P, one level above junk and the lowest among the so-called BRIC economies, which also includes Brazil, Russia and China.

“On the other hand, we may revise the outlook back to stable if the government implements initiatives to reduce structural fiscal deficits, improve its investment climate, and increase growth prospects,” S&P said.

Default Swaps

Bond risk for government-controlled State Bank of India, a proxy for the sovereign, has remained higher this year. The cost of insuring the lender’s debt for five years against non-payment using credit-default swaps has averaged 323 basis points so far in 2012, compared with 219 a year earlier, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

The yield on benchmark 10-year government bonds has climbed 15 basis points from a 14-month low of 8.04 percent in June, paring this year’s decline to 38 basis points, according to data compiled by Bloomberg. The extra amount investors seek to hold the notes instead of U.S. Treasuries has widened 31 basis points from a seven-month low of 630 touched last month.

“The drop in yields will be slow from here and will depend on the pattern of extra government borrowing and monetary easing,” Quantum Asset’s Chari said, without giving a forecast.

Nomura Holdings, Japan’s largest brokerage, predicts the 10-year yield will fall to 7.80 percent by mid-February, spurred by an interest-rate reduction by the central bank amid slowing inflation.

Inflation Slows

India’s benchmark wholesale-price index rose 7.45 percent last month from a year earlier after climbing 7.81 percent in September, the Commerce Ministry said yesterday. That’s the slowest pace since February. The Reserve Bank of India has kept the repurchase rate unchanged at 8 percent in the last four policy meetings. At the RBI’s last policy review on Oct. 30, Governor Duvvuri Subbarao said he sees a “reasonable likelihood” of monetary easing in the first quarter of 2013.

Rupee-denominated debt returned 8.6 percent this year, the most after the 11.2 percent earned by Indonesian notes among the biggest Asian local-currency debt markets, according to indexes compiled by HSBC Holdings Plc.

The rupee fell 0.5 percent to 54.975 a dollar today. The currency slid 3.9 percent this quarter, the biggest lost among regional exchange rates.

With the government’s revenue already slowing amid an economic slowdown, the failure of the airwaves auction is a “disappointment,” said Upasna Bhardwaj, an economist in Mumbai at ING Vysya Bank Ltd.

Expansion in Asia’s third-largest economy will decelerate to 4.9 percent in 2012, the least in a decade, the International Monetary Fund said Oct. 9. Quarterly growth slowed to an average of 5.4 percent in the first half of 2012, from 7.5 percent in 2011, according to the most recent government data.

“The finance ministry will have to look at different ways to garner revenue,” said Bhardwaj. “Right now, there’s uncertainty on the fiscal side. They will have to look at extra borrowings.”

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