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How-To-Spend-It Question...

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But before the government accelerates the process, it must decide how to use the proceeds from the selloff.

The Congress manifesto had said the money would be used to fund social schemes. It must now decide whether all of the money should be funnelled into the National Investment Fund (NIF) — which has a rigid set of rules on funds deployment — or be used to bridge a part of the Rs 4-trillion fiscal deficit. NIF rules now mandate that only interest earnings can be shovelled into social sector schemes.

A note is being prepared which will be placed before the cabinet committee on economic affairs (CCEA) to decide the use of the selloff proceeds.

Government officials expect the stake sale to generate a lot more than has been projected in the budget documents. Some reckoned it could be more than 10 times the projected sum.

“The proceeds from share sale in the NHPC and Oil India Ltd (two PSUs in which the government has indicated it will sell small stakes) for the government alone should be more than Rs 3,000 crore,” finance secretary Ashok Chawla told a group of journalists here today. “The amount that could be earned from disinvestment in PSUs would depend on which companies are permitted to come out with share flotations and when.”

Some officials said that at least nine PSUs could offer shares to the public by the end of the financial year next March but the collections would be reflected in next year’s budget. Others believe that the government could raise at least Rs 10,000 crore this year itself.

Chawla said a road map for divestment would be drawn up after consultation with the other ministries. The government plans to list all unlisted but profitable PSUs and also “encourage people’s participation in divestment” by selling small stakes in other state-run companies. But it will ensure that majority control remains with the government.

The finance secretary said a proposal would be placed before the CCEA to decide whether the proceeds would be ploughed into the NIF or be partly or fully appropriated for direct spending in the social sector.

Under the existing rules, money raised from stake sale has to be parked in the NIF which now has a corpus of Rs 994 crore.

The CCEA has two choices: it could allow the government to directly pump the funds into social sector projects; alternatively, it could treat the NIF as a pass-through fund that could route money into social projects. Either way, it will help the government balance its books somewhat better.

If the government taps into the divestment proceeds of nearly Rs 10,000 crore, it could help lower the government’s borrowings and, thereby, bring down its fiscal deficit which is projected to balloon to Rs 400,996 crore, or 6.8 per cent of the GDP.

The government is committed to reducing the fiscal deficit to 5.5 per cent by 2010-2011 and to 4 per cent by 2011-2012. Higher expectations of earnings from divestment would ease pressure on tax authorities to collect revenues and give the government greater scope to experiment with a new goods and services tax system.

Chawla said the finance ministry had projected earnings of Rs 35,000 crore from the auction of third-generation spectrum or airwaves, based on a decision to fix a minimum reserve price of Rs 4,040 crore. However, the government could raise a lot more from a fiercely contested auction and this could also lower the fiscal deficit.

(The Telegraph)