Does Chidambaram suffer from a slipped fisc?

The finance minister’s team seems to be on an overdrive to stretch the tax envelope

One of finance minister P Chidambaram’s responsibilities is to maintain fiscal discipline. This is now mandated under the Fiscal Responsibility Act.

Any person trying to make two ends meet knows that there are only two ways of doing so. Either increase the income or curtail the expenditure. The political compulsions of a coalition government make the latter task daunting. PC has thus put his team into overdrive to search innovative ways to stretch the tax envelope, such as by imposing a tax on the cash withdrawn from post-tax saving, surely an immoral way of collecting money. He has now stated that some tough decisions would need to be taken, perhaps in a feeble attempt at rallying political consensus to taking steps that are necessary but unacceptable to politicians with their heads in the sand. A slippage in the fisc would make it difficult for the finance minister, and the Sensex, to stand tall.

PC has stated the obvious when he says that unviable units ought not to be held on simply for ideological or for so-called strategic reasons; the globalised market ensures plenty of opportunities. PSUs are often treated as cash cows to be milked at will by grubby politicians, never mind the interest of minority shareholders. Several of the nine jewels, or ‘navratnas’ have been driven to obscurity and there are only two, ONGC and SAIL, that are in the top ten.

Oil companies have been made to slip; IOC to 35th, HPCL to 39th and BPCL to 40th position. After having killed them, the government now has the temerity to ask why they should not be deprived of their ‘navratna’ status. This status was supposed to have given them more responsibility for investment decisions; but we see that they have too little of it and are asked to bear a subsidy burden that belongs to the Budget.

Selling off units that would, freed of interference, be able to generate a higher return on the capital employed makes eminent good financial sense, but disastrous political sense. Therein lies the rub. If ways to cut expenditure (of which subsidies on petroleum products form a big chunk, but interest on past debt an even bigger one) are not found, then PC would have no option but to raise taxes.

For example, his ministry is talking of a tax on the entry and exit load charged by mutual funds, something that would discourage an industry that needs to be encouraged. The Maharashtra government is seeking to introduce a bill to allow them to take over charitable temple trusts as these are a rich source of funds. This is ridiculous. Why does it not do charity with its own money if it can?

The private sector, in contrast, is doing phenomenally well and is confidently and aggressively expanding. Reliance Communication, for example, is to spend some Rs 8,000 crore in a GSM foray (it has been mainly in CDMA so far). It is likely to sell a minority stake in its wholly owned subsidiary, Reliance Tower, to Temasek of Singapore. Reliance Tower looks after its infrastructure.

Contrast this with the legislative roadblocks thrown in BSNL’s way, because it is a government company subject to writ petitions. The Delhi High Court has stayed, till end-November, progress on its huge Rs 20,000 crore tender, for the world’s biggest cellular rollout of some 45 million lines. Any wonder that PC is having a slipped fisc?

Sterlite is to make an ADR issue on NYSE of over $2 billion to fund an investment of $1.9 billion in a power plant in Orissa. Tata Sons has sold a 0.8% stake in TCS, raising Rs 900 crore, with which it could subscribe to warrants of Tata Steel and so help it fund the Corus acquisition. Citigroup and IBM are making a bid of $3 billion for a quarter stake in China’s Guangdong Development Bank, which has a high level of NPAs. That would value the bank at $12 billion.

Compare this to the $14 billion valuation for the more profitable State Bank of India, which has over 150 years of uninterrupted dividend paying history, a claim less than 10 companies worldwide could make.

Surely, the government does not need to retain majority control over so many PSU banks! Surely India’s financial security would be assured holding on to just one (SBI), may be two (PNB or Canara).

Surely PC would have a stronger fisc disc if the rest were sold, as China has done in the case of Guangdong. Surely our politicians can see all this?

jmulraj@hathway.com