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|February 16, 1999
'PSU crossholdings is a dangerous and dirty trick'
Revenue, interest and divestment
The government's bane is the fall in revenue, while expenditure continues to soar. The fall in revenue is only a reflection of the economic recession and the extremely narrow tax base of the country. It is estimated that only 1.5 per cent of all Indians pay taxes, about 15 million of a population of nearly a billion.
"India's growth this year is placed at around 5.8 per cent, which is really quite good. But the growth comes from agriculture while manufacturing is in decline. And India's revenue base is almost entirely dependent on manufacturing, from taxes and imports. With industry doing badly, capital imports, sales tax, and excise collections are low. This has led to a steep fall in revenue collection," said the government economist.
The second tragedy is that a huge portion of the revenue earned goes on interest. According to one estimate, over 60 per cent of revenue earned goes to pay the interest on the huge public debt that the government has run up. Another estimate states that 94 paise of every rupee borrowed goes to pay the interest.
Hence, simply increasing revenue alone will not solve the government's difficulties. It will have to seriously work at reducing the interest by retiring as much of the debt as possible. And the best method of doing that is to privatise the public sector units.
However, privatisation of the PSUs is an extremely touchy subject and one that has even united the extreme Right and Left parties of the nation. "The government must seek to educate the labour force in the country, make them understand the implications. And for privatisation to succeed, the labour market will have to be reformed," said the government economist.
Perhaps it is the fear of upsetting the country's powerful trade unions that rather than privatising, the government is going in for cross holdings, that is, getting one PSU to buy shares in another PSU.
"This is most dangerous and a dirty trick to show higher earnings to reduce the deficit," warns Professor Gangopadhyay, "because the profits of good PSU are being wasted by forcing it to buy the shares of a bad PSU. In the end, even the good PSU will suffer."
"Crossholding was suggested first by Bimal Jalan and between companies in different sectors to increase efficiency. However, the government is going in for crossholding between PSUs in the same sector just to raise money to curb the deficit. This will not help in the long run," said Professor Chattopadhyay.
"What is needed desperately is for the government to sell off the PSUs and use the proceeds to retire the debt. This will immediately lower the high interest burden," he added, "but what we have right now is an apology for the divestment process."
Professor Tendulkar suggested that to push the divestment process, the government must put Maruti, India's leading automobile maker, on the block. "With competition, the value of Maruti will decline, and hence right now is the best time for the government to sell off its 50 per cent holding and use the money to retire the public debt," he said. However, the DSE professor added that it may well be impossible. "Certainly selling Maruti will create a furore," he admitted.
The fiscal deficit too is closely linked with the divestment process. "The deficit can be controlled only by privatising the PSU," said the government economist, adding, "unless divestment occurs, reducing the deficit will imply cutting on the social sector and on infrastructure. This in turn will affect our economy's growth in the future."
Economic growth is the result of all the above ills. But strangely, the Central Statistical Organisation has pegged the growth rate at 5.8 per cent of the GDP for 1997-98. The figure has kicked up a ruckus since the CSO has not explained its methodology and has anyway changed the base year of computing. "The figure does seem to be on the higher side," said Professor Chattopadhyay.
"I personally would say that India's growth is less than 5 per cent," he added.
Professor Gangopadhyay too was sceptical, especially since, according to him, India has been in a recession since October-December 1996.
Yet, in spite of the recession, the rather 'good' growth, considering the economic disasters all over the world and in the Asian neighbourhood, is primarily due to the agriculture sector. And the farmers, in turn, have to thank the rain gods for the 11th consecutive normal monsoon. Every good monsoon, however, increases the probability of a following bad monsoon, which can only hurt the Indian economy.
The National Centre for Applied Economic Research has stated that if India has a normal monsoon, then the financial year 1999-2000 should see a growth of 5.5 per cent.
"It is the tragedy of India that even 50 years after Independence, our farmers still depend on the rains to see a good harvest," said the government economist.
To add to the farmers' woes is the total lack of rural infrastructure such as roads linking villages to towns and markets, storage space, and weak irrigation facilities. "The recent onion crisis in north India could have been totally avoided if the country had a proper rural infrastructure in place," said Professor Chattopadhyay.
"To generate and ensure future growth, we have to create the needed infrastructure, especially in the rural areas. Otherwise, growth will always face a bottleneck," added the government economist.
Gangopadhyay offers a glimmer of hope. "One reason for the current economic slowdown is because some of India's leading corporations are in the middle of massive restructuring, preparing for the global competition. Once this is done, hopefully by next year the results will be seen as these companies then put India back on the road to high growth," he said.
However, beyond the economic sphere lies the political, which also has a role as far as foreign and domestic investments are concerned.
"The Budget is not independent of the BJP's ability to get its political act together," declared Professor Tendulkar, "because investors are holding back their money until this government improves its act."
Said Professor Gangopadhyay: "Investors, both foreign and domestic, make investments keeping the next five to six years in mind. And today, the situation looks extremely unstable for anyone to risk his money."
This is particularly important in light of the statements by various affiliates of the BJP who seem intent on opposing every effort of the government to push ahead the reform process, leaving investors wary. In that sense, regardless of what Finance Minister Yashwant Sinha says, more will depend on the words and actions of the BJP and its ability to deal with its temperamental allies and affiliates.
"In India, politicians are still in the driver's seat to push through economic reforms," concluded Professor Tendulkar.
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