Vodafone Idea default can raise India's fiscal deficit by 40 bps

The social impact of this could be worse as 300 million subscribers may face the annoyance of network shutdown and churn.

A possible default by Vodafone Idea (Voda-Idea) in paying its adjusted gross revenue (AGR) dues and the company shutting down operations will have serious repercussion on the telecom and banking sectors in particular and the economy in general with large magnitude of debt default, job losses and customer annoyance as the telco faces an imminent risk of shutdown.

A default by Voda-Idea and the company shutting shop, analysts say, could increase India’s fiscal deficit by 40 basis points (bps). While presenting the Union Budget for financial year 2020-21 (FY21), the government had pegged the fiscal deficit for FY21 at 3.8 per cent of GDP (gross domestic product) and at 3.5 per cent for FY20.

“Voda-Idea has gross debt of Rs 1.2 trillion, of which around Rs 900 billion is government’s deferred spectrum debt, while around Rs 250 billion is bank debt. A default of such a large scale could increase India’s fiscal deficit by nearly 40 bps, thus having the deepest impact on government receipts despite winning the suit, while creating ripples in the banking sector,” wrote Gautam Duggad, head of research for institutional equities at Motilal Oswal Financial Services (MOFSL) in a recent note.

The social impact of this could be worse as 300 million subscribers may face the annoyance of network shutdown and churn. Reports peg the job loss at Voda-Idea at a staggering 13,500 employees. This is merely the direct impact, while the indirect impact on multiple vendors and other stakeholders could be even worse.

“Ironically, the government, despite winning the suit, could see the biggest impact through deferred spectrum debt default Rs 900 billion. Even with some relief of AGR liability, Voda-Idea would have found it difficult to service debt and capex needs through its operating cash flow,” Duggad says.

The decision to expedite the payment by last week took the companies and the Street by surprise. Most analysts had expected the government to relax the payment timeline and give companies room to secure funding.