Selling PSUs to fund employment

It is ironical that the steel minister was flexing his muscles against the steel companies' intended price increase citing inflation worries. Just whose interests was he trying to protect?

The steel intensity in the consumption basket of people below the poverty line must be zero. As far as rural India is concerned, food takes away about 65 per cent of the incomes and the rest is most probably spent on clothes, healthcare, sanitation, education and so on.

The tractor- and tiller-owning varieties should hardly qualify for protection. His action could have only protected the profits of the Marutis, Whirlpools, Telcos and Fords (high steel users) at the cost of the Steel Authority of India Ltd, Tata Iron and Steel Company and other steel companies that have struggled for almost a decade.

Why should the government get into the industrial "zero-sum" game in the name of protecting the poor against inflation?

It is equally funny to find the Communists standing in the way of privatisation of airlines and airports. The richest one per cent of the people use them and they do not count anywhere near being the top employment providers even as they have taken massive resources from the government.

There is a need to call the bluff on these brands of industrial- and urban-socialisms and move on to a more purposeful, poverty-reducing socialism.

Selling public sector undertakings to raise the resources for enabling the Employment Guarantee Scheme seems both a vital and viable necessity now. Selling family silver should be justifiable if it generates greater utility elsewhere.

The total bill for the EGS is touted around Rs 40,000 crore (Rs 400 billion). There are many who doubt these figures, but if we fail to raise even this, we will surely fail if the amount is larger.

A recurring annual expenditure of Rs 40,000 crore is the equivalent of an 8 per cent yield in perpetuity on Rs 5,00,000 crore (Rs 5000 billion). The chances of sustaining the EGS will be brightest if it is taken out of the political and budgetary whimsies and funded by a permanent mechanism like a special fund.

The current frenzied state of the stock market, when Indian stocks are the flavour of the month with foreign institutional investors, offers the best opportunity of raising this "fund".

The market capitalisation of just the listed PSU stocks in the "A" group is more than Rs 6,00,000 crore (Rs 6000 billion). Add to this the unlisted ones and the ones in the non-A group.

It could well be about Rs 10,00,000 crore (Rs 10,000 billion). The price-earnings multiples of these stocks are nowhere near their true potential: ICICI and HDFC bank command 20-plus PE ratios whereas the State Bank of India -- the best among PSU banks -- commands eight and its cousins four and five, despite a much better reach.

It is inconceivable why a Castrol should merit 20 while a Bharat Petroleum Corp and Hindustan Petroleum Corp should merit only seven or eight. If only they could get rid of their PSU tag, these companies would surely move up the PE pecking order.

Even if their PEx move up and close half the gap with their private sector counterparts, there is a significant potential appreciation.

And what better way to signal this than, say, a 20 per cent dilution in PSU stocks. Even at current levels such a step can realise Rs 2,00,000 crore (Rs 2000 billion) and should the PEx upgrade, it may well be Rs 2,50,000 crore (Rs 2500 billion) to Rs 3,00,000 crore (Rs 3000 billion).

There seems to be sufficient appetite. Record-size issues are getting record-size oversubscriptions -- take the National Thermal Power Corporation, for instance. There is a dearth of stocks but a flood of FII funds.

The Indian stock markets have been hibernating for the past four to five years. During the time whatever would normally have found their way to stock markets have gone elsewhere and are now revisiting markets. The market needs good issues to douse too much money chasing too few stocks.

The industrial-socialists entertain needless phobia over dilution of control. If Tatas could run Tisco and Telco with sub-20 per cent holding and many other promoters manage to hold onto their companies with much less than 50 per cent, why should the government be afraid of going below 51 per cent (or whatever), especially when they have the ultimate sovereign powers to legislate whatever suits the nation, should an emergency arise.

The government should sell and create a special fund out of the proceeds realised by selling PSU stocks, the interest earned on which could be earmarked exclusively for EGS.

For far too long the benefit of government investments have been garnered by the industrial PSUs and the minuscule percentage of its employees.

The time is up to release it for the "greatest possible common good", that is, benefit of the poor below the poverty line starving even after 55 years even as we have embarrassingly huge stocks of food in Food Corporation of India godowns.

The government can either issue the yearly quota of "budget deficit" bonds to this "fund" or better still buy back the massive excess quantity of SLRs stuck with the commercial banks and assign it to the "fund".

Banks would most likely be glad to get rid of their excess SLRs now that confidence in lending to industrial entities is returning and SLR values are plunging. This will keep the interest rates in check by improving liquidity for banks.

And with appropriate incentives and directives the money so released to the commercial banks can be funnelled into infrastructure development rather than go with our begging bowl for $150 billion, elsewhere.

We have now a peculiar synergy of circumstances -- the government needs the money, PSUs have the saleable credit worthiness, the market has the money. Hope the opportunity is not wasted in warped ideologies, socialist obstinacy and needless leftist phobias.