UPFRONT PAYMENT New norms to help meet auction target

Telcos to pay higher tranche for 1 GHz-plus band

Asmart tweaking of the upfront payment norms for spectrum acquired in auctions could see the government meets its budgetary target of R98,994.93 crore from the telecom sector this fiscal. This is without factoring in the sale of highly priced 700 MHz spectrum, expected to be a damp squib.

The change in upfront payment terms, which is also known as deferred payment scheme, by the Telecom Commission, which has now been approved by the Cabinet, will see the government mop up around R93,000 crore from the sale of spectrum in the 1800, 2100, and 2300/2500 MHz bands, as well as from licence fee, spectrum usage charge and the first instalment payment of the 2014 auction.

These bands, which are above 1 GHz, will now require operators to pay upfront 50% of the bid amount against 33% earlier. The balance amount will, as earlier, need to be paid in 10 equal instalments after a two-year moratorium.

For spectrum in sub-1 GHz band — 700, 800 and 900 MHz — the upfront payment continues to be at 25% of the bid amount.

Clearly, the Telecom Commission was aware that the 700 MHz band, which has been priced by the Telecom Regulatory Authority of India (Trai) at Rs 11,485 crore per MHz, will not find enough takers and, therefore, changed the norms of payment for spectrum which is expected to find takers to meet the budget target.

Had the norms not been changed and kept at 33%, the government would have been able to raise only Rs 73,500 crore against Rs 56,000 raised in FY16.

Interestingly, Trai had recommended a relaxation in the existing payment norms: That operators be allowed to pay 10% of the bid upfront for any band of spectrum while the balance could be paid in equal instalments over the next 18 years.

This is how the maths work after the norms have been changed: At reserve price the 2100 and 2300/2500 MHz bands will fetch around Rs 71,000 crore. An upfront payment of 50% of it will yield Rs 35,500 crore. Similarly, 1800 MHz spectrum will fetch around Rs 25,000 crore, 50% of which will be Rs 12,500 crore. Add to these Rs 25,000 crore that the government will get as revenue share licence fee and spectrum usage charge, and Rs 20,000 crore as the first instalment from the deferred payment of the 2014 auction. The amount adds up to Rs 93,000 crore.

Had the upfront payment nor m not been revised upwards, the government would have got only Rs 73,500 crore. At around 33% of Rs 71,000 crore from 2100 and 2300/2500 MHz bands would have fetched 21,000 crore, 1800 MHz would have given Rs 7,500 crore. Add to it 25,000 crore from licence fee and SUC and Rs 20,000 crore as instalment payment. “We believe that these are early signs of a slowdown and industry volumes could weaken significantly if replacement demand comes off, “Kotak Institutional equities commented in a note.

“Excess capacity and high leverage continue to weigh on private-sector business confidence,” economists at Standard Chartered Bank wrote in a note. They pointed out that increased public investment spending in FY16 and the budgeted spends for FY17 has so far failed to ‘crowd in’ privatesector investment. “We think a recovery in private-sector investment will take time, based on our analysis of past cycles, the current challenging environment and fiscal constraints on the gover nment,” they observed.

According to an assessment by Icra, for the cement industry, the capacity utilisation is likely to remain moderate at 71% this year but it is expected to improve to 75% in FY2018, driven both by the pick-up in demand as well as the slowdown in new capacity addition.

The economy is expected to gain momentum on the back of a good monsoon which could boost rural incomes. The pace of growth of real rural wages has been slowing over the past few months. “Rural demand should get a fillip if the sowing months of July-August see 100%+ of the normal rains that the Met has forecast,” economists at Bank of America Merrill Lynch (BofAML) believe. In urban India, consumption should get a boost from the increased salaries of central government employees. Overall, BofA-ML is pencilling in a consumption recovery of 1% of GDP in the second half of FY17 fuelled by lower interest rates, household savings coming from lower oil prices, a rise in support prices for wheat and the increase in salaries for government officials.

CMIE data showed the fourquarter moving average of projects under implementation fell to Rs 1 lakh crore in Q1FY17 (compared with Rs 1.3 lakh crore in FY16) with negligible contribution from the private sector.