A government official said the Russian conglomerate's Indian mobile phone unit was the only bidder for the auction, due to take place next month, dealing a blow to the sale of airwaves worth at least $7.9 billion.
Selling airwaves, along with sales of stakes in state-run companies, is a crucial part of government plans to curb the deficit. An airwave auction in November raised less than a quarter of a $7.4 billion target set in the last budget.
One economist said it would be tough for the government to meet its target to contain the fiscal deficit at under 5.3 percent of gross domestic product for the year ending in March, with no bidder for the bulk of the airwave auction.
"This is a big disappointment for the (money) market," said Rupa Rege Nitsure, chief economist at state-run Bank of Baroda.
Monday was the deadline for carriers to submit bids for the three frequency bands that were to be auctioned starting March 11. On Thursday, India is due to unveil its budget for the next fiscal year, beginning in April.
The auction of airwaves in two key frequency bands, which are used by operators on the popular GSM technology and account for about 85 percent of the total value of the airwaves, will have to be scrapped as no company has applied to bid for those, the government official told reporters on Monday.
The government will need to further cut the minimum bid price for the 1800 megahertz frequency in the Delhi, Mumbai, Karnataka and Rajasthan zones on the top of the 30 percent cut it approved in December to revive interest in the zones that found no takers in November, analysts said.
The government official declined to comment on a possible cut in the reserve price, saying that would be decided by a ministerial panel and the federal cabinet.
He said the telecommunications ministry would start auctioning airwaves in the 800 megahertz band, where the Sistema unit will win airwaves at the minimum bid price - already cut by about half after no company bid for the band in November.
Sistema Shyam TeleServices, which saw its permits revoked in 21 service areas after an Indian Supreme Court ruling on a massive licensing scam, last week said it would cease operations in 10 of those zones and bid in select areas.
The company has not specified how many licences it would bid for, but if it did bid for the maximum remaining airwaves in all 11 remaining areas, it would have to pay about $1 billion at the reserve price, and would be allowed to offset about $300 million it paid for earlier permits.
Leading carriers Bharti Airtel Ltd
Both companies declined to comment.
The high price as well as the legal issues led to the carriers shunning the auctions, Rajan Mathews, director general of industry lobby Cellular Association of India, said. (Addional reporting by Suvashree Dey Choudhury; Editing by Helen Massy-Beresford)