If existing investors upset, wooing new ones difficult
While the budget is expected to increase public investment levels to try and compensate for low private investment levels, this is at best a temporary solution. At the time when investment levels were at an all-time high of 38% of GDP, in FY08, private corporate investments were 17.3% of GDP, public investments were 8.9% and household investments 10.8%. By FY13 (this is all based on the old GDP series as the new series has no back data), while overall investment levels had fallen to 35% of GDP, this was driven by private investment levels collapsing to 9.2% of GDP while public sector investments were down marginally to 8.1%; household investments had risen to 14.8% of GDP. In other words, getting investment levels back to the FY08 levels is not going to be possible unless corporate sector investments really pick up. That, however, looks very difficult since, apart from private sector balance sheets being very stressed, very large investors are up in arms against the government for a variety of reasons, not all of them to do with the harsh tax treatment meted out to them.
While Reliance Industries Limited (RIL) filed its fifth arbitration case against the government last month, one of Reliance’s partners, Niko Resources of Canada, has just given a mandate to investment firm Jeffries to help find it a buyer for its 10% stake in the venture. Its reason, not surprisingly, is that the natural gas prices announced by the government are lower than what is viable and that there ‘is uncertainty around the long-term natural gas price outlook in India’. And even if the government does decide to offer a generous premium to deep and ultra-deep water wells to take care of this, the wording of the government press release makes it clear the hike will not apply to existing undeveloped discoveries of Reliance, BP and Niko in the D6 and NEC-25 blocks—to put this in Niko’s words, ‘the applicability of the premium … remains to be clarified’. It is a safe bet that getting oil sector investments is going to be a steep uphill climb unless these issues are resolved.
In the case of telecom, where the applications for bidding in the next spectrum round closed yesterday, as FE has reported, there is considerable turmoil with telcos already having approached the courts and others planning to join issue as well. The entry of Reliance Jio in the bidding also makes it clear auction prices will skyrocket in the manner that most feared. Most of the action will take place in the 900 MHz band where incumbents will be defending their existing markets—if they lose the spectrum in these circles, a large part of their existing revenue base also disappears. The figure is 32% for Bharti Airtel, 55% for Vodafone, 79% for Idea Cellular and 38% for RCom; since these circles are also the older ones with a more affluent consumer base, the profit impact will be even higher. It takes just one extra player, like Reliance Jio, with little to lose, to push auction prices to stratospheric levels, leaving the Ideas and Vodafones with little choice but to keep matching bids each step of the way. What the government needs to ponder over is how new investors are expected to come in when the existing ones are being treated so badly?