Fiscal Logic Behind Privatization

Mala Jay

What do you do when there is a big hole in your budget?  Simple answer – sell the family jewels.   What does your government do when the Fiscal Deficit swells and swells like the body of a chronic pulmonary oedema patient?  Easy answer – sell off the crown jewels of the Public Sector.

That’s what the Modi-Shah regime decided to do on Wednesday.   

In a desperate bid to bridge the fiscal gap – which has already bloated by 15 per cent more than it was supposed to – the Union Cabinet approved strategic sale of five PSUs:  MMTC (Minerals and Metals Trading Corporation Ltd),  BHEL (Bharat Heavy Electricals Ltd),  NMDC (National Mineral Development Corp), NINL (Neelachal Ispat Nigam Ltd) and MECON Limited (previously known as Metallurgical & Engineering Consultants Limited). 

The decision to give the green signal for disinvestment of the iconic enterprises was taken (with typically lack of sensitivity to public opinion), on the very day of Bharat Bandh, when more workers, peasant and students (an estimated 25 crore) protested against the Modi’s government’s privatization policies than the total votes polled in favour of the BJP in the last election (approximately 22.8 crore).

Even without factoring in data for the last four months of the financial year (December-January-February-March), the Fiscal Deficit has already crossed the Rs. 8.08 trillion mark (for the April-November period), which is 15 percent more than the budgeted fiscal deficit for the whole year.

Does this explain why the government is frantically embracing the disinvestment option?   How else can revenue be generated?  What other way is there to make the 3.3pc cap on fiscal deficit look less ludicrous?  Incidentally, some economists recommend decontrol instead of disinvestment, but who’s listening?  

The numbers are embarrassing and urgent.  The gross tax revenue that the government had boldly declared it would earn during the fiscal year was Rs. 24.61 trillion.  This earnings target has been proved to be no more than a fanciful over-estimate – ‘achche din’ style.  In reality it could achieve just 48 percent of that in the first eight months.

With the economy having slowed down to a crawl, the prospects of making up some of the ground in the remaining four months would be equally unreal and far-fetched (unless of course the family silver is sold off).  An irksome nightmare on the earnings front has been the unsatisfactory inflow of tax revenue, which is far short of the volume the government had so ardently anticipated.  

The actual gross tax revenue collected during the first eight months of the fiscal was only Rs. 11.74 trillion, barely a percentage point higher than during the same period last year.  The men from the economic ministries know that when tax revenue is so flat, it is time to panic.  They also know that gross tax revenue needs to grow by 18.3 percent over and above last year’s collections for the government to earn what it has projected in the budget.

What the government had hoped to earn in fiscal 2019-2020 was Rs. 24.61 trillion.  So far only half of that has come in to the coffers.  It is highly unlikely that between December 2019 and March 2020 the remaining 52 percent of tax revenues will miraculously materialize.

It is not as if the bureaucrats and perhaps some of the ministers were oblivious of the grave mismatch between projection and performance.  The expenditure statistics indicate a conscious decision to press the brake pedal.   The total expenditure during April to November has been Rs. 18.20 trillion.  This is about 65 percent of the total planned expenditure.  The dilemma now is whether to spend the remaining 35 percent on social sector schemes as envisaged or to divert the bulk of the money towards economic revival projects such as infrastructure.  Any cutback on social welfare could impact the political image of the Modi regime, which is already facing the sting of growing public disenchantment. 

Hence, the decision to go in for sale of PSU enterprises – some of which are profit-earning navratnas and even maharatnas along with some loss-making units.  On paper, there is scope to mop up around one lakh crore of rupees through sale of government equity holding in the public sector undertakings.

But that again could turn out to be a fond hope rather than a certainty.  Distress sales seldom yield a reasonable return, especially when market conditions are as bad as they are. 

Till now, disinvestment has brought in a paltry Rs. 12,357.49 crore.  In order to prevent its fiscal deficit (original target 3.3 percent) from ballooning to unthinkable levels, the government has evidently decided to divest with blinkers on – regardless of the wrath it would ignite among the working classes. 

So let’s swell the coffers by auctioning off BHEL, MMTC, MECOn and the rest. While you are at it expedite the sale of Air India too.  And, of course, Hotel Ashok along with 14 other ITDC hotels.  After all, as someone famously said:  ‘The business of government is not to run hotels but to turn the country into Hindu Rashtra’. 

The best way to achieve the goal is to fast-track privatization.  Which the Union Cabinet did on Bharat Bandh day – by promulgating the Mineral Laws (Amendment) Ordinance 2020 – to opening up the coal mines auction to bidders from all sectors and also to issue tenders for 46 iron ore and other mines before March 31, 2020. 

Why limit the auction only to steel and power companies and coal washeries? Go the whole hog and open up coal mining to all – even including global players.  In any case, the doors had already been thrown open for 100% FDI under the automatic route for coal and lignite mining. 

Now let’s do away with end-use restrictions of the mining blocks, let’s pave the way for no-holds-barred commercialization of coal auctions and above all let’s make sure the hammer falls well before March 31.  We need the money to make the fiscal deficit look good.  That’s what this is all about.

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Frontier
Jan 10, 2020