The National Democratic Alliance government’s announcement on Wednesday that it will sell shares in its blue-chip public sector companies – Oil & Natural Gas Corporation, Coal India Ltd and National Hydroelectric Power Corporation – has pleased fiscal hardliners. One projection estimates that the government could earn as much as Rs 45,000 crore through the sale of shares.
Early in July, the government announced that it would be selling 5% of the Steel Authority of India Ltd.
These sales have a number of wider implications.
1) Mounting fiscal deficit
The money earned from the sales will help reduce the widening gap between revenue and expenditure, i.e. what economists call the fiscal deficit. In his budget for this year, Finance Minister Arun Jaitley pencilled in a projected fiscal deficit of 4.1% of the gross domestic product.
With the economy yet to show signs of sustained recovery – though GDP for the April-June 2014 quarter showed an encouraging 5.7% growth over the same period last year – it is premature to expect an immediate jump in tax revenues. At the same time, government expenditure continues to mount. The fiscal deficit at the end of July was already over 61% of the full year’s target.
Rating agencies have already voiced concern over the precarious situation of India’s deficit. They have pointed out that Jaitley’s tax projections are wildly optimistic and there has been a lack of reform in the subsidy regime. So the sale of stakes in these companies immediately gives the government some breathing space.
2) It's a temporary measure
But this is only a temporary measure. The government cannot expect to solve the country’s deep-rooted fiscal problems through a one-off sale. Revenue generated by selling 5% in ONGC, 10% in CIL and 11.36% in NHPC will only meet this year’s expenditure requirements. It will not actually chip away at the economy’s overarching cost structure.
The outgo on major subsidies for 2014-'15, including food, fertiliser and fuel subsidies is estimated at a colossal Rs 250,000 crore. This is higher than last year’s Rs 240,000 crore. And though the subsidy bill has been rising, there are no attempts to curb misuse and leakages. While Modi and Jaitley had both given the impression the government would do something about this, there was no movement on this front in the budget.
Political considerations might have played a part in this. With three important states going to polls later this year, the belt-tightening might have been deferred to Jaitley’s budget for 2015-'16.
The decision to continue with Aadhar, and the provision of budgetary support to expand its reach and efficacy, is likely to curb leakages over time.
3) Side benefits
Sell-offs have side benefits. Stock exchange listing and public shareholding demand a modicum of discipline from the company. For instance, listed company ONGC has already published its annual report, but Bharat Sanchar Nigam Ltd (which is still owned 100% by the government) is yet to do so, though five months have passed since the financial year ended in March.
It is also hoped that disinvestment will help improve productivity and efficiency levels, hasten decision-making and enhance competitiveness. But piecemeal privatisation brings in only partial outcomes.
4) Full-scale privatisation
None of the above attributes can be achieved without full-scale privatisation. But that is a dirty word in India. Trade unions, for instance, are opposed even to disinvestment. A newspaper on Thursday quotes a union leader from Coal India Limited threatening to go on strike if the government sells even a 1% stake.
In contrast, another newspaper ran a story about how the government might have to shut down HMT Ltd, a state-owned company that made its mark in its days as a monopoly watch manufacturer but failed to compete with private enterprise. The reluctance to privatise or sell off a meaningful stake at the right time has turned that company into a ghost organisation.
The government has the right to choose whether it wants to privatise all public sector companies or own a meaningful stake in strategic companies (such as State Bank of India), or even own 100% in some other companies.
Full or partial ownership also allows the government to provide a roost for its well-wishers and supporters. The current BJP-led government has been ousting independent directors from PSU boards that were appointed by the previous Congress government, presumably to appoint its own nominees. And ownership comes with responsibility: companies in key sectors (oil, banking) need massive infusions of capital every year. Given the government’s publicly acknowledged resource crunch, too many competing needs for funding eventually take a toll on the public sector company.
5) Stormy weather
The government has run into stormy weather with some of its divestments. The decision to sell strategic stakes in Balco Ltd and Hindustan Zinc Ltd to Anil Agarwal’s Vedanta Group ran into rough weather: not only did the Comptroller and Auditor General question the Balco deal valuation, but the transaction triggered a court battle between the Centre and the Ajit Jogi-led Chattisgarh government.
There’s more: the previous NDA government’s decision to sell public sector hospitality company ITDC’s Udaipur property has been disinterred by the current government, to probe for alleged malfeasance. In the meantime, as an interim solution, the government keeps selling its shares in dribbles.
On balance, such bits-and-pieces sale do have some benefits, but only for the government. The money raised from such disinvestments goes to the government and not the company, which is usually in dire need of capital for expansion and modernisation.
In addition, the merits are limited: the government almost always uses the proceeds to meet current consumption expenditures – distributing subsidies, repayment of old loans, paying government employee salaries – rather than building productive assets (such as roads or bridges), which increase employment and improve overall systemic productivity.
Rajrishi Singhal is a Mumbai-based journalist and a senior fellow with think tank Gateway House.
Early in July, the government announced that it would be selling 5% of the Steel Authority of India Ltd.
These sales have a number of wider implications.
1) Mounting fiscal deficit
The money earned from the sales will help reduce the widening gap between revenue and expenditure, i.e. what economists call the fiscal deficit. In his budget for this year, Finance Minister Arun Jaitley pencilled in a projected fiscal deficit of 4.1% of the gross domestic product.
With the economy yet to show signs of sustained recovery – though GDP for the April-June 2014 quarter showed an encouraging 5.7% growth over the same period last year – it is premature to expect an immediate jump in tax revenues. At the same time, government expenditure continues to mount. The fiscal deficit at the end of July was already over 61% of the full year’s target.
Rating agencies have already voiced concern over the precarious situation of India’s deficit. They have pointed out that Jaitley’s tax projections are wildly optimistic and there has been a lack of reform in the subsidy regime. So the sale of stakes in these companies immediately gives the government some breathing space.
2) It's a temporary measure
But this is only a temporary measure. The government cannot expect to solve the country’s deep-rooted fiscal problems through a one-off sale. Revenue generated by selling 5% in ONGC, 10% in CIL and 11.36% in NHPC will only meet this year’s expenditure requirements. It will not actually chip away at the economy’s overarching cost structure.
The outgo on major subsidies for 2014-'15, including food, fertiliser and fuel subsidies is estimated at a colossal Rs 250,000 crore. This is higher than last year’s Rs 240,000 crore. And though the subsidy bill has been rising, there are no attempts to curb misuse and leakages. While Modi and Jaitley had both given the impression the government would do something about this, there was no movement on this front in the budget.
Political considerations might have played a part in this. With three important states going to polls later this year, the belt-tightening might have been deferred to Jaitley’s budget for 2015-'16.
The decision to continue with Aadhar, and the provision of budgetary support to expand its reach and efficacy, is likely to curb leakages over time.
3) Side benefits
Sell-offs have side benefits. Stock exchange listing and public shareholding demand a modicum of discipline from the company. For instance, listed company ONGC has already published its annual report, but Bharat Sanchar Nigam Ltd (which is still owned 100% by the government) is yet to do so, though five months have passed since the financial year ended in March.
It is also hoped that disinvestment will help improve productivity and efficiency levels, hasten decision-making and enhance competitiveness. But piecemeal privatisation brings in only partial outcomes.
4) Full-scale privatisation
None of the above attributes can be achieved without full-scale privatisation. But that is a dirty word in India. Trade unions, for instance, are opposed even to disinvestment. A newspaper on Thursday quotes a union leader from Coal India Limited threatening to go on strike if the government sells even a 1% stake.
In contrast, another newspaper ran a story about how the government might have to shut down HMT Ltd, a state-owned company that made its mark in its days as a monopoly watch manufacturer but failed to compete with private enterprise. The reluctance to privatise or sell off a meaningful stake at the right time has turned that company into a ghost organisation.
The government has the right to choose whether it wants to privatise all public sector companies or own a meaningful stake in strategic companies (such as State Bank of India), or even own 100% in some other companies.
Full or partial ownership also allows the government to provide a roost for its well-wishers and supporters. The current BJP-led government has been ousting independent directors from PSU boards that were appointed by the previous Congress government, presumably to appoint its own nominees. And ownership comes with responsibility: companies in key sectors (oil, banking) need massive infusions of capital every year. Given the government’s publicly acknowledged resource crunch, too many competing needs for funding eventually take a toll on the public sector company.
5) Stormy weather
The government has run into stormy weather with some of its divestments. The decision to sell strategic stakes in Balco Ltd and Hindustan Zinc Ltd to Anil Agarwal’s Vedanta Group ran into rough weather: not only did the Comptroller and Auditor General question the Balco deal valuation, but the transaction triggered a court battle between the Centre and the Ajit Jogi-led Chattisgarh government.
There’s more: the previous NDA government’s decision to sell public sector hospitality company ITDC’s Udaipur property has been disinterred by the current government, to probe for alleged malfeasance. In the meantime, as an interim solution, the government keeps selling its shares in dribbles.
On balance, such bits-and-pieces sale do have some benefits, but only for the government. The money raised from such disinvestments goes to the government and not the company, which is usually in dire need of capital for expansion and modernisation.
In addition, the merits are limited: the government almost always uses the proceeds to meet current consumption expenditures – distributing subsidies, repayment of old loans, paying government employee salaries – rather than building productive assets (such as roads or bridges), which increase employment and improve overall systemic productivity.
Rajrishi Singhal is a Mumbai-based journalist and a senior fellow with think tank Gateway House.
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