People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 51

December 20, 2009

Finance Minister�s Specious Defence of Disinvestment


Prasenjit Bose


THE recent decision of the UPA government to divest at least 10 per cent of government equity in all listed public sector undertakings and listing all unlisted profitable PSUs in the stock market was questioned by the Left in the ongoing session of parliament. The matter was discussed on December  1 in the Rajya Sabha and  December 8 in the Lok Sabha, under Calling Attention motions moved by CPI(M) members of parliament. The finance minister provided similar responses, peppered with barbs at the Left in both houses. However, in his response he completely failed to counter any of the substantive points that were made vis-�-vis disinvestment by the Left.




The new catchphrase invented by the Congress to justify disinvestment is �peoples� ownership�. The Left has pointed out that less than 1 per cent of Indian households invest in equities or participate in the stock market. The bulk of the equity of profit-making PSUs that have already been sold by earlier governments is held by big financial institutions and FIIs and not small investors. The invocation of �peoples� ownership� is nothing but a cover to transfer resources, which are already in the hands of the state which represents the entire people, to a miniscule minority of 1 per cent of Indian people who are rich and affluent. The effort is clearly to whet the appetite of the big players in the stock market like the FIIs and domestic financial institutions in the name of the �people�.

Not only did the finance minister have nothing to say in defence of this misleading concept, he tried to give it a new twist. In the Lok Sabha (December 8) he said: �Why we are going for the peoples� ownership. You have ridiculed it. But it is really the peoples� ownership because the actual valuation is taking place. It adds significantly to the enterprise value and the value of the government�s residual equity shares. I will give you one example. Enterprise value of the National Hydroelectric Power Corporation post-listing, increased from Rs 18,280 crore to Rs 37,702 crore. That is a 125 per cent increase in the enterprise value�If we had not listed them, we would not have ascertained these figures. That is the difference between pre-IPO and post-IPO valuation of the shares of public sector enterprises.� 

So now the concept of �peoples� ownership� has got linked with �enterprise value�. But what has this value got to do with either the �people� or their �ownership�? This value is nothing but the value of a company on the basis of prevailing stock prices, which are essentially driven by speculative players. Is the finance minister oblivious of the fickle-mindedness of the stock markets and the fragility of such �enterprise value� derived on the basis of market valuations? If the stock markets crash tomorrow, the 125 per cent increase in NHPC�s market valuation that the minister is citing today may end up as a 225 per cent decline in �enterprise value�. How far can such market valuation be taken seriously, after what we have witnessed in the financial markets across the world since September 2008?

The BSE Sensex in India, which had crossed 21000 points in January 2008, had fallen to below 8000 points by September 2008. Now it has once again risen to above 17000 points, which points towards another bubble in the making. In fact the disinvestment announcements have contributed to this bubble, with several �PSU Equity Funds� being launched almost overnight by big financial players like Religare, Sundaram BNP Paribas and UTI. Rather than being cautious about such bubbles, the finance minister seems to be claiming credit for it. An editorial in the Economic and Political Weekly  (November 14) had pithily stated: �The decision to disinvest is the fulfilment of a tacit commitment to keep the stock market supplied with the raw mate�rial of fresh equity. Punters (and the financial services industry that supports them) can profit from the froth that disinvestment will generate, regardless of the effects on either resource alloca�tion or corporate governance. Notwithstanding the worldwide re�vulsion against the excesses of finance-led capitalism, the more powerful among India�s policymakers are anxious to feed the ap�petite of the large players in the stock market.� What is further revulsive is the cynical use of fraudulent concepts like �peoples� ownership� by the finance minister to conceal the real motivations behind the disinvestment process.




The Left�s opposition to disinvestment is based on the fact that mobilising resources by selling government�s assets like equity to finance government expenditure (whether on social sector schemes or otherwise) lacks any economic rationale. Selling off government equity in a profitable PSU is worse than running a budget deficit. While in the case of running a deficit, the government has to make interest payments in the future against a one-time borrowing from the market, in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes. Disinvestment is worse since it involves transferring state-owned assets to private hands, which is not the case when the government borrows from the market. According to the Public Enterprises Survey 2007-08, the central PSUs taken together contributed Rs 19,423 crore to the central exchequer in 2007-08 as dividends, witnessing an increase of over Rs 4000 crore from 2005-06. Considerable divestment of government�s stakes in central PSUs would squeeze this important source of revenue for the government.

The central PSUs also have huge cash surpluses piled up over the years, which are not being put into productive use. The Public Enterprises Survey states that the reserves and surplus of all CPSUs taken together stood at Rs 4.85 lakh crore in 2007-08. While aggregate real investment in CPSUs in 2007-08 increased by 10.16 per cent over 2006-07, reserves and surplus grew by 16.56 per cent. In the absence of managerial autonomy, the CPSUs are unable to utilize these reserves for their own expansion or diversification. If the resources of the CPSUs are to be tapped at all, an eminently better way would be to seek special dividends from them rather than selling off their equity. This way the government would be able to mobilise resources without transferring a single percentage in equity ownership or sacrificing future dividends.

It also needs to be underlined that while the effective tax rate for the CPSUs taken together in 2006-07 was 30.78 per cent, the average effective tax rate for private sector companies in the same year was 19.5 per cent only (as per the statement on revenue forgone, receipts budget, 2008-09). When the private sector�s effective tax rate is way below the scheduled tax rate (33.66 per cent) owing to myriad tax concessions, why can�t more taxes be raised from the private corporate sector by doing away with some of the tax exemptions? That the government lacks the political will to raise resources by taxing the corporates and the rich is borne by the fact that total tax revenues foregone has reached an astronomical figure of Rs 4.18 lakh crore as per the last budget (2009-10).

Current public spending on social welfare programmes can and should be financed by raising more tax revenue from the private corporates and the affluent sections, whose earnings and assets have grown manifold over the past decade. This can be done through better administration of corporate tax and wealth tax and introduction of long-term capital gains tax and inheritance tax. This would be both socially desirable and economically sustainable, compared to the irrational course of selling government�s capital assets like equities in profit making PSUs.




The finance minister�s reponse to the Left�s critique of disinvestment was marked by flip-flops and doublespeak. At one point in his Rajya Sabha speech (December 1) he admitted that financing the budget deficit by selling government�s assets like equity was bad economics: �I do agree that it is bad fiscal management�. When it was pointed out that as the leader of the opposition in Rajya Sabha he had himself said on 27 February, 2001 that: �if the objective of the government is to bridge the resource crunch by disposing of capital assets in order to meet consumption expenditure, it would simply not be permissible under any amount of fiscal prudence�, the finance minister said: �What I said in the House, in 2001, sitting on the other side � I don't change my views simply because of the accident that from that side I have come to this side � was that I should not like to use the proceeds of the disinvestment to meet the normal revenue expenditure. That is really a wastage of the family silver. But if you use the disinvestment proceeds for strengthening the public sector enterprises themselves, enhancing their capacity, their modernisation, upgradation of their schemes and their expansion, what is wrong with it?�

However, in the same speech he contradicted himself and provided a detailed explanation why disinvestment is required precisely to meet the budget deficit: �I know during this period, during the remaining part of the Eleventh Plan, massive investment would be required for social sectors, health and education. The revenue realisation, the revenue buoyancy, which we enjoyed in the previous years from where our tax GDP ratio increased from 8 per cent of GDP in 2003-04 to 12 per cent of GDP, is no longer available�Exports are going down continuously. Imports are going down. Customs duties are going down�On excise duties, realisations are going down. It cannot be made up only from direct taxes�there will not be buoyancy which was witnessed year after year. Therefore, from where will the money come? Is it through borrowed resources! I agree with Shri Rahul Bajaj, and I myself stated in my Budget speech, that this level of fiscal deficit is not sustainable�Therefore, that level of fiscal deficit is not acceptable in our system. This is my most respectful submission. So, some corrective measures have to be taken.�

The finance minister was more explicit in the Lok Sabha, when he said: �I cannot afford to have the fiscal deficit to the extent which I left last year, that is, at 6.8 per cent. Fiscal prudence tells me, tells anyone sensible that you come back to the FRBM as quickly as possible...That is why one time exception that this money will be utilised in these three years up to March 31, 2012. The disinvestment proceeds will be utilised for the capital expenditure of socially targeted projects.�

Thus, the basic reasoning of the finance minister is that the fiscal deficit is unsustainable and the money for social sector expenditure has to come from disinvestment of stakes in profit-making PSUs. But then what about the �bad fiscal management� that the minister spoke about in the Rajya Sabha speech? What about �I should not like to use the proceeds of the disinvestment to meet the normal revenue expenditure�? What about �wastage of the family silver�? The finance minister�s intellectual gymnastics about what he considers �fiscal prudence� is indeed mind-boggling.




The simple truth, which the finance minister is loath to accept, is that he lacks political will to mobilise resources through taxation. If the deficit has indeed become such a big problem, why has he been doling out huge tax concessions to the corporates through the stimulus packages? In fact he has justified it in an extremely dubious manner. Attacking the Left in the Lok Sabha he said: �The total value of the stimulus packages given - including the third one of mine and the earlier two of prime minister � in terms of money is Rs 1,86,000 crore. And you come out with a fancy figure and say that Rs 4 lakh crore of concessions have been given to the corporate sector! Where are these figures coming from?...There is no concession to the extent of Rs 4 lakh crore as tax concession.�

Where is the figure Rs 4 lakh crore coming from? From the budget documents presented by the finance minister himself in July 2009. The Statement of Revenue Foregone, which is a part of the receipts budget, contains the following table (in page 58).

This clearly shows that the total revenue foregone in 2008-09 was Rs 418095 crore, which was almost 69 per cent of aggregate tax collection in 2008-09. The reason why revenue foregone in 2008-09 jumped up to Rs 4.18 lakh crore from Rs 2.85 lakh crore in 2007-08 (an increase of Rs 1.33 lakh crore) was obviously because of the slew of tax concessions announced in the stimulus packages. Rather than ranting against the Left, the finance minister should read his own documents more carefully.

Moreover, the finance minister�s �fiscal prudence� was not at all evident when he unveiled the Direct Taxes Code Bill in August 2009. The tax slabs contained in the new code proposes to levy income tax at 10 per cent up to Rs 10 lakh, 20 per cent between Rs 10 lakh to Rs 25 lakh and 30 per cent above Rs 25 lakh. It is estimated that over 97 per cent of the 3 crore odd taxpayers in India will be paying income tax at just 10 per cent, in case the code is adopted. The tax code also proposes to bring down the wealth tax rate from 1 per cent to a miniscule 0.25 per cent, while raising the tax slab from the current limit of Rs 30 lakh to a net wealth exceeding Rs 50 crore. Corporate tax rate is also proposed to be cut from 30 per cent to 25 per cent and the Securities Transactions Tax on financial market transactions abolished.

Thus the finance minister is not content with the humongous tax concessions already doled out to the corporates and the rich and wants to �stimulate� them further with more tax cuts. But these tax cuts will substantially erode the tax base and lead to huge loss of tax revenues, widening the fiscal deficit further! Why invoke the fiscal deficit in justifying disinvestment, while blissfully forgetting it while giving tax breaks? Underlying this preference towards disinvestment in order to bridge the deficit while handing out generous tax largesse to the big corporates and affluent sections is nothing but the finance minister�s class bias.


The inconsistency and dishonesty underlying the finance minister�s responses to the debate on disinvestment were combined with unwarranted superciliousness. Being short on logic, the minister tried to make up through arrogant assertions of commanding majority support. This is perhaps symptomatic of the economic irrationality of disinvestment itself, besides the powerful vested interests that drive the process. Reason, however, always catches up and there is no reason why the people of our country will tolerate such class-biased policies for long.