On ‘Strategic Sale’ of the PSUs

Surajit Das
The honourable finance minister has reportedly said that the Air-India, Bharat Petroleum, North-Eastern Electric Power Corporation Limited (NEEPCO), Tehri Hydro Development Corporation India Limited (THDCIL) etc. will be sold within March 2020. In fact, the governments take pride now-a-days in disinvestment of the public sector units (PSUs) rather than feeling proud in increasing the public investment particularly in infrastructure and in other strategic sectors. These are being called ‘strategic sales’ in order to generate larger non-debt capital receipts (NDCRs). What is the ‘strategy’? The ‘strategy’ is nothing but to keep the fiscal deficit to GDP ratio within bounds in a situation of lower tax-revenue.

After implementation of GST in the country in 2016, the expected net tax revenue of the central government was Rs.14 lakh 84 thousand crore (revised estimate) in the financial year 2018-19. The actual tax revenue has been Rs.13 lakh 17 thousand crores. Therefore, there was a deficit in tax collection in the tune of Rs.1 lakh 67 thousand crores in 2018-19. In the first 6 months of the current fiscal year, the net tax revenue has been Rs.6 lakh 7 thousand crores. The budget estimate of central government’s net tax revenue was Rs.16 lakh 50 thousand crores in 2019-20. Last year, 44% tax revenue was collected within first 6 months. If we assume that the tax collected so far is 44% of the estimated tax collection of this year, then the expected net tax revenue of this year would be Rs.13 lakh 72 thousand crore as compared to the budget estimate of Rs.16.5 lakh crore. Therefore, the estimated shortfall would be Rs.2 lakh 77 thousand crores. On top of that the government has recently announced profit tax concessions of Rs.1.45 lakh crore due to slowdown. Therefore, the approximate shortfall in the current fiscal year would be Rs.4 lakh 22 thousand crores, which is more than 2% of expected GDP of 2019-20. 


With Rs.16.5 lakh crore, the estimated fiscal deficit was 3.3% of GDP with a growth assumption of 12% in nominal terms. Now, if the growth rate happens to be lower, the estimated fiscal deficit to GDP ratio would be even higher. If we add the tax revenue shortfall with this, then the fiscal deficit to GDP ratio for the central government alone would touch 5.5%. States’ expected fiscal deficit would be around 3.5% of GDP. Hence, the aggregate fiscal deficit in 2019-20 would become something like 9% of GDP. Then the MOODY’s rating would come down and the international financial investors may not like that. This is the context under which the central government is desperate to sell some of the PSUs before the end of this fiscal year (i.e. before the 31st March 2020) in order to reduce the fiscal deficit to GDP ratio of the central government in the current financial year. In this context, it is important to mention that the RBI has already transferred Rs. 1 lakh 76 thousand crores of its profit (and contingency fund) to the central government in the current financial year for compensating for the lower tax mobilisation.



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Net Tax Revenue of the Central Government in India (in Rupees Crore)
Source: Controller General of Accounts, Ministry of Finance, GoI. http://www.cga.nic.in/MonthlyReport/Published/9/2019-2020.aspx
Selling of government assets for ever is opposite of investment and should be deducted from the capital expenditure of the government. It does not create any additional asset in the economy but, just changes ownership. From the point of view of public finance, it is nothing but a negative capital expenditure. Therefore, if fiscal deficit is reduced by privatisation of the PSUs, it is effectively reduction of fiscal deficit by reducing the government investment. Now, this is suicidal because lower government spending would lead to even lower growth rate and lower tax revenue. The government is also trying for expenditure compression particularly in the social sectors and in infrastructure on the face of a slowdown. Expenditure compression under a demand-constrained situation would actually lead to higher unemployment and also higher fiscal deficit as a proportion of GDP (see Das, 2007). Therefore, it is a bad fiscal management. The solution lies in increasing the tax-GDP ratio not by increasing the tax rates but, by improving the tax compliance, given the tax base.
The tax rates (both direct as well as indirect) are not low in India in international comparison. But, our tax base is relatively smaller because most of the people do not earn enough to pay direct taxes and the indirect tax base is also small because of lower purchasing power of vast majority of masses. Tax base can surely be expanded by imposing wealth tax, property inheritance tax and so on. However, given the size of the tax base and tax rates, our tax compliance is extremely poor. Without increasing the tax rates, it is possible to increase tax revenue by improving the tax information network, by making the tax administration more efficient and by reducing the degree of corruption. The government hardly have information about most the transactions, which is crucial for destination-based taxes like the GST. Tax evasion is rampant in India – lot of poorer countries have better tax-GDP ratio than us.
Instead of seriously trying to increase the tax revenue and enhance expenditure, the government has chosen the easier path of selling the PSUs. The aggregate government expenditure would not be increased by selling these public assets, however, it would be used to plug the revenue shortfall. In fact, the net (of disinvestment) capital expenditure would fall as proportion of GDP under a situation of slower growth rate and increasing unemployment. In addition to that, all these public assets would be privatised for ever. The employees’ benefits would be curtailed, the profit motive would be dominant over the welfare considerations and so on. These assets were built by using tax payers’ money in the past, which would be sold now ultimately to give some relief to some tax-evaders of today. There is not much opposition also visible against this in our largest democracy. Unfortunately, there is not much difference in the economic policy of different political formations in the country. The future is uncertain anyway.
Surajit Das is Assistant Professor, CESP, JNU, New Delhi
Das, Surajit (2007) – “On Bringing Down the Fiscal Deficit”, Economic & Political Weekly, Vol.42, Issue No.18, pp. 1638-1640, May.