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Thursday, 10 September 2009

Finance Fundas : Hustling PSU Disinvestment


INDIA’S POLICY-STRIPTEASE
&
PSU DISINVESTMENT




       history may be servitude ,
      history may be freedom…
       -- T. S. Eliot




                    In what used to be called muffusil towns or qasbas which have how been elevated by the likes of Yellow Pages and telecom companies out of hype and hope into “cities”, like Chamoli, or Chhindwara or, Chikkamagalur there are rented buildings hastily and garishly painted, with half-a-dozen flagpoles carrying fading, fluttering flags and signboards saying that these are International Business Management “Institutes”. These 4th or 5th level imitations using English Medium are dong roaring business out of fees paid from borrowings and fervent hopes of parents whose boys and girls flock to these institutes with unformed faces and formed expectations.
                  These parents, like all parents all over the world, do things for their children after factoring in and discounting all available scraps of knowledge and rediscounting these using a bedrock made of pragmatism and deepest dreams; they are not stupid or even ignorant -- they know what’s what. And it is the same in Kansas City, or Karachi, or Kuala Lampur. They have twigged that in the plane of hard    realpolitik an MBA degree, howsoever imitative and diluted, is the key to the best available walk of life in today`s planet : yes, alas, the corporate world of business. Unthinkable now of course , but yes, a generation back it used to be doctors and engineers , even scientists.
                     This is how social ideologies are formed and informed; not through philosophical or academic debates and polemics but through a fastidious and searching diagnosis by anxious parents of the actual family practices of  ruling elites. Newspaper columns, TV channels don’t run expose` programmes on how  top 1000 families of India are grooming their children because it will not do to be so politically incorrect, but actual practicing parents have their own forensically accurate  bush-telegraph channels of observation. The elites send their offspring to Wharton and Stanford, the subalterns to Warangal and Saharranpur; the difference is only of class. It will be a revealing study or a sting operation to find out how many of India’s national and foreign policies are governed by the 35000 per annum H1B US visas; to trace from these visas to the families of men & women writing the shrewdly timed Expert Reports used by government to make new policies. And, this happens not only in India, but all over the “emerging” economies.
                     Idealists may decry this state of affairs; intellectuals, theorists, TV anchors, column writers may cry shame; and the truly wise one’s may shake their heads sorrowfully; but truth is  Big Business  calls the shots , all over the world -- as Obama is learning every passing day. Or as seen in the policy-striptease being played out in India since 1991-92 Budget speech of Manmohan Singh, then Finance Minister when he declared that “……...time has come to unleash the animal spirits in Indian economy” -- the latest act of which has been the sustained hoopla and feverish coyness about disinvestment of govt. state in public sector units. Corporates have been made to know that Barkis is willing.
                          Here is not yet another turgid Budget bashing, but a brief review of this 20 year old national  policy- striptease in Indian Government budgets. 


                          On the day after the Budget speech most newspapers carry a cute graphic of where-the-rupee-came-from-and-where-it-went in nice pie-charts. Till 1991-92 for 40 years the average picture of incoming rupee was roughly like this:     
                           (in paise)
Excise duties       :    45
Customs duties   :    25
Corporate taxes&  
Income tax         :    15                
Borrowings          :    15  
                             100






                    Excise duty is the tax paid on goods produced in factories. The underlying idea was that in an industrialising country industrial units use a lot of public goods like land, water, air , and infrastructure like educated labour, railways, roads, etc which they do not pay for, but govt. needs to get money to provide these things. There was also a finer point that since the corporates used these implicit subsidies to make profits, the excise tax should be paid out of corporate profits, and not from the consumer prices of the goods -- but this was predictably ignored. Today when private corporates are themselves doing infrastructure projects they are very righteous about “user pays” philosophy! Of course. The idea behind customs duty is that if things are to be imported then foreign exchange has to be earned for this purpose; and to enable govt to arrange for earning foreign exchange the imported things should pay some import tax. Necessities like machinery, technologies, etc were taxed low/nil, while luxuries were taxed higher. Corporate/income tax arose from the fundamental philosophy of taxation that the people who are getting enriched by the nizam of the nation should pay some tax to maintain the nizam. Finally borrowings: nations who have a backlog of development need to accelerate the development process to catch up; and for this objective governments borrow money (nationally and internationally) to finance this development- deficit assuming, reasonably, that the fruits of development harnessed via later taxation would enable governments to repay these borrowings. So far so good.
                   And how was the pre 1991-92 rupee spent?  It was roughly like this:
                                 (in paise)
Plan expenditure        :    55
Non – plan expenditure:   15
Defence                       :  15
Subsidies                     :  5
Repayments                 :  10
                                     100
Starting from the year 1950 the newly independent India , with memories of Great Depression of 1930s quite fresh and the experiences of World Wars I and II -- when civilized-looking nations warred and destroyed on an enormous scale to win markets for their respective corporates -- still ringing in its   ears , decided to consciously plan the national economy and not leave it to purblind  markets. With Indian corporates neither capable nor willing as ever to take such major risks, the government planned and invested  national money in basic national necessities like electricity, irrigation, roads, railways, steel, heavy electricals, chemicals and fertilizers, and so on. These were plan expenditures. Today those very same  risk-shy corporates want to privatize these! Non Plan things were routine revenue expenditures. Defence is obvious ; subsidies were to help the vulnerable; and Repayments is again obvious.
                            Okay. What did the animal spirits of Indian economy, unleashed in 1991 do to the Budget? First, it said that excise duties were too high, particularly compared to foreign countries. Aided and abetted by the IMF`s Structural Adjustment Loan’s conditionalities India was to open up all the doors of the economy. And in order to compete with cheaper imports the Indian products were to be made cheaper by lowering excise duties (even if many of the imported goods were subsidized by their national governments!). Besides, so many excise duties – it was indeed a maze really; on the Budget day all Finance Ministers used to play around with this part or tinker with that part – was messy, and it was streamlined over the next few years to three rates of 8%, 16% & 32%. But what about the loss of tax revenue? Well, there will be other means.
About import duties, there was a similar script. Import duties are a barrier to free trade, and therefore a backward thing. And luxury? These are just the necessary things to be become a modern “World Power” – the distinction between necessity and luxury is a socialist throwback anyway. But what about revenue loss? Well, free trade will make India prosperous and there will be more income/corporate tax collected in near future. Income and corporate tax was also lowered, using the wobbly theory that lower tax rates lead to better tax collection. Never mind that tax/GDP ratio in India at around 10-12% was, and remains, among the lowest in the world – global average was around 36%, in USA it was 28%, in Sweden 56% . Revenue loss? What loss? Just wait and see; tax collections will rise.
Besides, lo and behold, India is already almost a developed country with agriculture and industry together adding up to less that 50% of GDP and service industry is more than 50%. So, a newly introduced service tax will be the main source of revenue to government.
And finally, borrowings. Good god; these lead to fiscal deficit; and fiscal deficit leads to inflation and other, deeper, distortions of the pure market mechanism. New Nobel prizes were thrown at old fashioned budgeteers, and Indian parliament was shamed into passing a Fiscal Responsibility Act to curtail government borrowings. But what about development deficit ? Oh, the market forces will take care of that; outmoded socialistic planning is a distortionist sin; wait and see.
                     This is a rough but accurate summary of the slow policy striptease from 1991 to 2009. To the worrying question as to what would the government do to  make do? it was airily often quoted that “it is not the business of the government to be in business.” Except to bail-out corporates from the self-destructed pure markets – it should be added today; as Obama has just discovered, and the rest of the world, except India.
                       So after all this 20 year         “ reform” what does the incoming rupee in the Budget today look like? Like this:
                                 ( in paise)
Excise duties                  : 9   
Customs duties              : 8   
Service tax                     : 5   
Corporate & Income tax : 31
Dividend & Interest       : 13
Borrowings                   : 34
                                     100






See the effect of two decades of animal spirits. Excise and customs duties have shrunk into almost nothing. Service tax, which should have grown dramatically for a supposedly advanced service-sector driven economy has not quite happened. Why? Govt. says it is a new tax and its collection – mechanism is not fully functional. Truth is, in GDP calculations the “service sector” is calculated in one way-- for example, by including the salaries of all national Babus as value – adding services! But when it comes to service – tax collection what we really have is telecom, hotels, transport , and such like.
Corporate and income tax have indeed grown but nowhere in proportion with actual increases in incomes. Tax/GDP ratio remains among the lowest in the world. Interest passed on to govt. by Reserve Bank and dividends from govt. shareholdings in public section units (PSUs) are a good  chunk now.
In such a situation of crunch the govt has been forced to borrow – partly to pay for ongoing revenue expenditure and also for servicing past borrowings, regardless of Fiscal Responsibility Act. Borrowing to repay past borrowings, as every poor man knows, leads to dept- trap and insolvency. Indian govt. is well on the road to that. Wait and see.
                        The desperate situation becomes clearer when we see how the rupee has to be spent:         
                               (in paise)
Plan expenditure        :    27
Non-plan expenditure :    18
Defence                    :     12
Subsidies                  :     10
States share of taxes : 14
Interest payments     :     19
                                     100






Plan expenditure has predictably shrunk while non-plan expenditure, also predictably, has risen; defence and subsidies have maintained their share of claims. During the past two decades the govt. has been abolishing taxes collected by states (sales tax, octroi, etc) on the grounds of leakage ,and inefficiency , and tush, and bosh, and centralising their share of  national tax revenues . But despite  such usurpation it is politically forced to pass on 14 paise of a rupee to the States/UTs. Finally, as expected, interest payments on govt. borrowings have ballooned, and debt trap is looming.
                          Sorry about this longish detour into the thickets of govt’s budgeting exercises. But today, when after other avenues having been successively abandoned the only option left for raising revenues is privatisation of PSUs. This policy nettle being politically tough, it has been deferred again and again for an opportune, politically correct, time. In mid-90s a Disinvestment Commission was set up; it studied PSUs one by one and gave sensible suggestions on each. Therefore it was forgotten. Then a clever idea of a National Investment Fund was set up in which sale proceeds of PSUs – admittedly the family silver – would be credited, and would be used for judicious developmental projects scrutinised by the parliament. This too was too sensible. Now the latest idea is to “share PSU wealth with public” while keeping government shareholdings upto 51% . No National Investment Fund business – it is plainly  for plugging govt’s revenue gap. All Corporates are clamouring for this ; stock markets are swooning over it; ministers and Babus are smirkingly muttering about “timing”. In the next round, maybe next year, they will tackle the next hurdle of below-51% in the spirit of slow striptease, wink wink.
                     And take the basic question : why disinvest in PSUs at all? That 3rd hand  Reaganite self - serving catch phrase – not being government business to be in   business ? Who says so , and on what basis ? This may be provisionally okay for a mature socio - economic ensemble like Sweden, or Denmark ,etc ,  less so even for America, but it is madness for post- colonial struggling entities like most of Afro-Asian nations. In fact , in post – Obama times, it is clear to unbiased people that in matters of public goods like water, electricity, health, education, etc socially-audited, competing government companies are actually the preferred mode in all countries from Sweden to Sudan. Sure, there are defects in PSU firms. So, correct them. Actually reform them; rationalize/retrain staff, remove ministerial feudalism, professionalise management systems, and so on –  in  short ,make them work like an  L&T , not RIL. Do the sensible , hard work ; don’t sell out for greed, graft, and laziness. They should make profits , yes. That is not an issue. Even in communist systems,let alone merely soicialist, companies are supposed to make profits, not losses! Profit is one thing, profiteering is something else which capitalism does . Lenin repeatedly kept distinguishing between profit and profiteering. He should know.
                       None of this is new. Many economists and commentators not tamed by the government or the corporate sector have been highlighting this murky sleight of hand all along since 1991; specifically these:
(a)                  In 1991 it was decided by the ruling elites of India to hand over, as and when politically manageable, all governmental and national assets to the corporate sector, including foreign corporates.             
(b)                 Also, government was to withdraw and efface itself as much as possible while keeping the national borders and social discontent in control.
(c)                   Working people and the poor were to be given only that much resource – support so as to keep them alive, and working, and voting in elections.
(d)                 In foreign policy India is to be slowly and surreptitiously eased into an American subordinate camp-follower, abandoning all dinosaurean notions of independence or non-alignment.
                       If these are enormous and staggering changes in the national policy-architecture, so what? A new millennium has arrived; India will be, vaguely, a “world-power”. Americans are stroking these opiated fantasies ; they have  expertise in this high art , having honed it on scores of 3rd world elites . Folly, on a scale to take one’s breath away. But, as I said, this too has been amply exposed by independent thinkers – and this post is not about that.
                        Like the Bourbons of Europe the Indian elites too have forgotten nothing and learnt nothing. After disinvestment what? For some years selling of government state in PSUs will increase non- tax capital revenues of the govt. but also reduce the dividend income correspondingly. Okay, initially upto 49% but eventually by crafty manipulations and self-serving catch- phrases when govt. sells off even more to the drooling private/foreign corporate sector, what will give revenues to the govt? There will be nothing left . The govt. can’t go back and raise excise and customs duties, now that WTO and suchlike trade regimes have tied down this area . Increasing corporate or income tax is unthinkable – the corporates will see it, correctly, as betrayal. Service tax will never be what it is cranked up to be – it will go the way of earlier sales – tax. Government will scrounge around by levying some sly cess or surcharge on wherever some money is – like it does to petroleum, cars, entertainment, etc but there is nothing of meat left. PSU family silver, like true family silver, is the last valueable thing left with the government. When it is gone, then what?
                       Then India will go the way of many Afro – Asian nations of which Pakistan is the nearest example geographically. Government expenditure will then be met from foreign aid, and in return national policies will be sold off to the donors; national sovereignty will be bartered away piecemeal for day to day government revenues – and India too will join the growing list of failed states. In failed states corporate sector often do better, by aligning more freely with foreign corporate capital. PSU disinvestment is the last shred of garment in India’s policy– striptease. Manmohan Singh`s animal spirits having overthrown Nehru`s scientific spirit, the elites with eyes wide shut might be fantasizing about being a dawning world–power (with 3/4th of its citizen hungry, ill, unhoused, and subcivilised) , but they are treading a much- choreographed and well–trodden path of decline. But even this oft- mentioned warning is not the point of this post.
                       The point is this : many will think that if what an ordinary citizen like this blogger and also many eminent and independent scholars have been crying out is indeed true, then surely this will not be allowed to happen – surely there will be some responsible people on the lookout ! Alas, not  true. Everybody is looking at own private balance sheets -- in this era of rampant privatization. This has been the fate of so many nations. Look at today`s world afresh. Except for perhaps only the so called G-20 countries, the whole planet today consists of nations with lost or, discounted sovereignties – which are being actively recalibrated and renegotiated, even remapped. In some fundamental ways the world has become similar to pre – colonization 1789. In the ever unfolding coils of history actually a new wave of recolonisation has been already kicked off after 1989; a new world order is indeed in the making.           
                        Recently when the British queen was briefed by the London School of Economics about how she lost 25 million pounds of her shares portfolio in the market crash, she understood only as a queen can, and remarked that everybody was expecting others to hold the baby when, in fact, nobody was. History has seen this happen much too often. India is about to see it too.  
 

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