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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Privatisation Holds Key To Budget

If the current fiscal deficit of 3.4 per cent of GDP is to be maintained despite lower tax collections (including GST) and higher subsidy outlays, a serious effort at privatisation is necessary. The fiscal deficit in 2019-20 is likely to be around Rs 7.5 lakh crore

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Expectations from Finance Minister Nirmala Sitharaman’s maiden Union Budget on July 5 have already been dampened by remarks from bureaucrats in the ministry of finance (MoF). Officials were quick to point out that there is no fiscal room to lower taxes. Corporation tax for large companies (with an annual turnover aboveRs 250 crore) will stay at 30 per cent. Personal income tax will not be lowered. Worse, MoF officials say, tax on long term capital gains (LTCG) – currently 10 per cent for assets sold after one year – may be increased.

All of this points to what could be another dreadful Union Budget, in line with the six disappointing Budgets delivered by former Finance Minister Arun Jaitley. Ministry of Finance officials defend a status quo Budget by stating that Prime Minister Narendra Modi is firm on not allowing the fiscal deficit to slip.

There is one silver lining though that could light up the Budget. Modi has recently spoken of the need to privatise Public Sector Units (PSUs) to both improve their efficiency and garner funds for a revenue-starved exchequer. This eureka moment should have struck the MoF in the PM’s first term when “privatisation” was made a mockery of by PSUs buying each other’s shares. The market value of over 85 PSUs listed on the Bombay Stock Exchange (BSE) is around Rs 18 lakh crore.

The government must now set a disinvestment target of Rs 1.50 lakh crore a year. If the current fiscal deficit of 3.4 per cent of GDP is to be maintained despite lower tax collections (including GST) and higher subsidy outlays, a serious effort at privatisation is necessary. The fiscal deficit in 2019-20 (at 3.4 per cent of an estimated nominal GDP of Rs 220 lakh crore in FY 20) is likely to be around Rs 7.5 lakh crore. An enhanced disinvestment target of Rs 1.50 lakh crore would help absorb both a shortfall in taxes and increased subsidies, keeping the fisc in control.

In a signal that the government is finally shedding its aversion to privatisation, it is preparing Air India (AI) for what could be a 100 per cent stake sale. When the initial AI disinvestment document was released over a year ago, it was filled with conditions designed to scupper the sale. Officials in the ministries of civil aviation and finance wanted to cling on to the white elephant that gave them free junkets, jobs to relatives and other perks at the public’s expense. Why spoil a perfectly good arrangement?

With new ministers in place in both the civil aviation and finance ministries (Hardip Singh Puri and Nirmala Sitharaman respectively) and the recent culling of 12 bureaucrats from the MoF, that mindset has changed. Modi has ordered AI to get its 2018-19 balance sheet audited by June 30 so that a new offer document for AI’s privatisation can be prepared. This time around, there will be no built-in conditionalities to sabotage the process as was done in May 2018.  

AI has been crying out for privatisation for years. As its chairman and managing direct Ashwani Lohani wrote in a trenchant oped in The Times of India on June 6, 2019: “Air India had for long been India’s showcase to the world and with some hiccups, it continued to perform reasonably well till such time it and its sister domestic airline continued to fly separately. The beginning of the decline coincided with the governmental interference that this commercial enterprise in a highly competitive sector started facing in right earnest. This has been the sad story of the public sector in India. The Air India-Indian Airlines merger, pushed through without fully appreciating the chemistry of mergers and apparently to satiate ‘synergy’, coupled with other decisions forced down the airline’s throat, initiated its downhill slide.

“For businesses, one loss-making year is enough of a wake-up call to initiate corrective measures. Yet at the national carrier, the debt was allowed to pile up over the years. A turnaround plan that subsequently emerged conveniently avoided addressing issues relating to leadership, human resource processes, delegation and organisational culture, and merely remained confined to equity injection to meet debt service requirements. The plan only helped a sinking ship remain afloat, not ride on the waves. It is a harsh reality that governmental systems are ill suited for running commercial organisations.”

This principle applies to virtually every PSU. Barring sensitive public companies operating in the energy and defence sectors, no PSU should be a holy cow. The MTNL and BSNL, for example, have great last-mile broadband connectivity into millions of  homes that private mobile operators would give an arm and leg to acquire. Awash in losses, MTNL and BSNL must be sold to the highest bidders, improving the abysmal services long-time subscribers have been forced to suffer.

Meanwhile, increasing long term capital gains tax would be tantamount to the government shooting itself in the foot. The current 10 per cent LTCG tax anyway accounts for a relatively small addition to direct tax collections. Tinkering it upwards to 15 or 20 per cent would adversely impact foreign portfolio investment, lower stock prices and diminish the value of the government’s own stakeholding in listed PSUs.

What the sagging economy needs in the Union Budget on July 5 is a booster shot to revive animal spirits, not depress them further. Not only is a lower interest rate regime from the RBI necessary, but private investment must be encouraged. This can only be done by recapitalising banks. Many lenders have metaphorically undergone a fiscal version of a medical seizure due to the Rs 90,000-plus crore Infrastructure Finance & Leasing Services Ltd. (ILFS) scam along with other stressed lenders. To stop the contagion from spreading, the government must infuse liquidity into the banking sector and the wider economy.

With inflation under control, the only objection to a Keynesian stimulus is the need for fiscal prudence. But when the economy needs to be kick-started, too much prudence can be counter-productive. Modi is a fiscal conservative, which is fine. But he should beware of MoF officials who are fiscal fundamentalists. For a growing economy with low inflation, a measure of fiscal elasticity is wise.


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