A month before the budget, Modi government walks the talk

Pssst…the budget’s coming.
Pssst…the budget’s coming.
Image: Reuters/Anindito Mukherjee
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After the hugs and histrionics of US president Barack Obama’s visit to New Delhi, the Narendra Modi-led Bharatiya Janata Party (BJP) government has swiftly got down to business.

Three seemingly disparate announcements from the Modi government on Wednesday (Jan. 28)—a month before finance minister Arun Jaitley presents the budget—clearly signal its intention to boost investor sentiment and plug India’s yawning fiscal deficit.

Coal India stake sale

It’s been a little over 20 days since more than 500,000 employees of Coal India Limited (CIL) staged one of the largest industrial actions since 1977 to protest against the government’s decision to partly divest its stake in the mining company.

But on Jan. 28, the government announced that it was going to sell 10% stake in the company to raise Rs24,000 crore ($4 billion).

The government owns 90% stake in CIL and this sale alone will meet 40% of the annual disinvestment target—Rs58,425 crore ($10 billion)—that the new government had set for itself in its interim budget in July 2014.

Among the largest coal mining firms globally, CIL accounts for 80% of the coal production in India. Last fiscal, the company posted a net profit of Rs15,008 crore ($2.5 billion).

But the coal sector has been roiled by regulatory issues in recent months, even as demand for the fuel has steadily increased. In Aug. 2014, India’s Supreme Court had cancelled as many as 214 coal block allocations to companies and the government is in the midst of reallocating the blocks.

The government has been talking of divesting in CIL since September last year, but protests by its employees had forced the government to delay the process, which in the meantime eroded the company’s share price by as much as 14%.

3G spectrum sale

On Jan. 28, the Indian government also fixed the base price for selling 3G spectrum in the country.

“The Union Cabinet, chaired by the prime minister, has approved the proposal of the department of telecommunication (DoT) to proceed with auction in 2,100 MHz band along with 800, 900 and 1,800 MHz bands. The reserve price approved for 2,100 MHz band is Rs3,705 crore ($600 million) pan-India per MHz”, the government said in a statement.

The auctions are scheduled for March 4.

The government in January this year also set the reserve price for the auction of 2G spectrum—in 800 MHz, 900 Mhz and 1,800 MHz bands, which is expected to fetch the government Rs64,840 crore ($10.5 billion).

As India’s finance minister looks to bring down the country’s fiscal deficit to 4.1% of the gross domestic product, an additional Rs16,000 crore ($2.6 billion) from 2G spectrum sale and Rs5,793 crore ($900 million) on 3G airwaves is expected to flow in before the end of the financial year. The remaining amount from the sale will come in subsequently.

India’s telecom sector has been in a mess for the past few years with heavy competition and lack of spectrum availability. The government controls the spectrum, which it often auctions out to private telecom operators. In February last year, it had raised over Rs60,000 crore ($9.8 billion).

In Feb. 2012, the Supreme Court had cancelled 122 licences granted to 11 mobile operators, for 2G licences, after it found that the government had incurred massive loss by not auctioning them.

Vodafone tax dispute

The Modi government has also decided not to appeal against a verdict by the Bombay high court, which ruled that the British telecom company Vodafone was not liable to pay tax of Rs3,200 crore ($490 million) in a transfer pricing case.

“I have publicly said I am against adversarial taxation. Currently, I am in the process of making (the) budget and I have seen that I have not earned a single rupee from all those contentious cases. All I have got is bad image and no money,” finance minister Jaitley said in Davos recently.

India’s income tax department had claimed that Vodafone undervalued its shares in its Indian subsidiary while transferring them to the parent company in 2010, and was asked to pay additional income tax in 2012.

“The government, led by the prime minister Narendra Modi, wants to convey a clear message to investors world over that this is a government where the decisions will be fair, transparent and within the four corners of the law,” telecom minister Ravi Shankar Prasad said on Jan. 28.

Last November, the Indian arm of Royal Dutch Shell also won a $1.4 billion (Rs8,656.55 crore) tax dispute at the Bombay high court.

All together, it is an indication that this might be the end of a short-lived but damaging era of “tax terrorism” that began after the previous Manmohan Singh government, in 2012, introduced a retrospective tax amendment, allowing it to scrutinise cross-border deals going back to 1962.