Fiscal Debt & Divestment

Fiscal Debt & Divestment



One is the Damsel in Distress (deficit and debt), and the other is the White Knight to the rescue (divestment). It is indeed good and exciting to see early in 2010 that the Government is willing to unlock a little, or (gasp), even a lot, of the tremendous value locked up in the assets and activities of the public sector!

And this, while using a methodology that can’t be faulted for its even-handedness, care for the ordinary investor, the high-net worth investor (HNI) etc….

Forsooth it is a divestment policy that has emerged quietly, mindful of political banana peels arrayed all along its path. But it is both bold and clear-cut. It will make the soon to be partly privatised entities more efficient, lucrative, better funded and globally competitive. And give the most patient foreign investor reason to cheer the increased solidity of our ongoing valuations and future prospects. It will also deepen and widen the market capitalisation of our stock markets.

Watch the unfolding NTPC road-show for the new atmospherics, but really the logic has long been as sound as a temple bell. Turning a proportion of the national wealth and its administration over to its people, the working of its bourses, public scrutiny, financial institutions, both local and foreign, is wholly appropriate.

When Finance Minister Pranab Mukherjee made his Budget Speech at the beginning of UPA II last year, he had most except the most astute fooled. It sounded as if he was nostalgic for the Indira Gandhi slogan-rich years of garibi hatao morphed into Sonia Gandhi’s aam aadmi, with very little care as to how the largesse proposed would be paid for.

Loftily unstated, it looked like the plan was to go in for ever bigger Soviet style deficits and the looming spectre of hyper-inflation it would eventually engender, not to mention the eventual fall of the temple altogether USSR style.

But Pranabbabu did talk a little of divestment, tinkering with minor figures (Rs.1,120 crores for fiscal 2009), to illustrate his seemingly tepid intent.

And now here we are, looking at big ticket divestment of scores of PSUs even before the second budget of UPA II coming up next month. And while very little has happened with regard to the Reforms Agenda over 2009, the Government has engineered a most welcome stabilisation of the economy as a first priority. So, one is much better served to look ahead.

Our GDP growth is looking good, with projections converging at a shade above 7 per cent in 2010. This is good, and illustrates that our modest series of stimulus packages and the reduced impact of the global downturn on our domestic focussed economy has helped us recover faster.

But Mr. Mukherjee has already moved on, and made several statements projecting 9 per cent GDP growth, or more, in two years time, while vowing to reduce the fiscal deficit at the same time. Of course, a higher compounding GDP does reduce percentages of debt but that is probably not what he meant.

Meanwhile, our fiscal deficit hovers at between 10-15 per cent of GDP (when all the culprits are honestly counted), and public debt is at a massive 76 per cent of GDP (Centre plus States) or USD 760 billion! The most of the balance 24 per cent of GDP must go into debt servicing and the only way we can probably retire debt is by taking on fresh debt.

And then there’s the External Debt, at upwards of USD 231 billion with a foreign exchange reserve of just USD 255 billion to support it. Unchecked, all this could turn us into a fiscal/debt burdened basket- case where we owe our entire gross domestic product or a multiple thereof , weakening our eventual ability to repay at all and turning our currency gradually worthless.

That would be true Banana Republic finance management. Or perhaps that description is old hat. Because the 16 nation Eurozone is currently bleating about a looming public debt crisis as its average public debt stands at 84 per cent of GDP!

China’s public debt is estimated by the CIA World Factbook at 16.2 per cent of their GDP on the latest available end 2008 figures. But, it is widely known that China does not include its Local Government liabilities, estimated at USD 680 billion at end 2008. Add in the bail-out of their banking system in 2003 ( USD 260 billion) and the USD 400 billion guarantee to four “policy banks” and it starts looking real at about 62 per cent of GDP or USD 1.7 trillion. Its external debt at USD 380 billion is of course a small proportion of its USD 3 trillion reserves.

But we have a ways to go before the size of our economy bails us out. So what impact will a proper divestment programme have on the Government’s finances? It plans to garner as much as Rs. 28,000 crores in the next three months. And a long line of PSUs await, some 61 in number.

This initial divestment target echoes erstwhile Finance Secretary Ashok Chawla’s Economic Survey 2009, when he called for a minimum divestment programme worth Rs. 25,000 crores per annum for all five years of UPA II.

Chawla was right, but even now, the Government is at pains to state that the monies garnered will be used to finance capital projects for the aam aadmi and not to close the fiscal deficit. This is slightly disingenuous because social sector expenditure, not all of it “productive” in the economic sense, has indeed ballooned the deficit and public debt in recent times.

But that may be aimed at the gallery, because the Government has also announced a fiscal deficit target of 5.5 per cent in 2010 and 4 per cent in 2011. Huh?

Well, you see, they only admit to a 6.8 per cent fiscal deficit at present, but it is more productive to see the positives in the numbers and the plan.

But think of a scenario when the fiscal deficit is cut in half or more by a programme of enlightened and well-managed public sector disinvestment and the Government not only realising the front-end payment for selling some of its stock but the recurring benefit of higher dividends and valuation of its reduced stake in its erstwhile wholly owned companies.

(1,052 words)
Lohri, January 13th, 2010
Gautam Mukherjee