Imagine a listed company. You are analysing it as a potential investment. You are going through its profit and loss account and find that it doesn't make much money. It spends more that it earns and runs up a loss. To fund this yearly revenue gap, it borrows. And that debt slowly accumulates in the balance sheet. What would you make of this company? Not a pretty picture, you would say. Fair enough.
Now let us add a twist to the tale. The company has some valuable assets, some of which don't even appear on its balance sheet. The company owns a territory where it controls the airwaves. Telecom spectrum. It decides to hold an auction for the use of this spectrum. It raises a neat sum of money, which makes the debt on its balance sheet look less threatening than before. Now, what would you make of this company?
If you haven't already guessed it - we are talking about the 3G auctions. It has generated a lot of hype about how it will help meet India's fiscal deficit target. But we are not that enthused about it. Let's go back to the company analogy. Any windfall cash flow helps deal with the existing debt on the balance sheet. But as long as expenses exceed revenues in the profit and loss account, there will be fresh debt on the balance sheet pretty soon. Windfall gains merely ease the symptoms of the malaise. They do not cure the disease. The disease of lower earning power and wasteful expenditure.
The windfall from the sale of spectrum or disinvestment might seem to be the solution to India's fiscal deficit worries. But, in our view it doesn't solve the problem. In fact, such one-time bonanzas reduce the incentive of politicians to curb wasteful expenditure and plug revenue leakage. Instead, such one time gains should be deployed for specific purpose like building infrastructure. The gap in yearly accounts must eventually be solved through everyday effort to shore up tax revenues and running a tight ship. In fact, making a habit of using resources like telecom spectrum to bail itself out could lead the government to keep the resources under its control in a permanent state of short supply. That's the last thing the world's second fastest major economy needs.