Deficit control through deception – Virendra Parekh

Virendra Parekh“The UPA government is following the scorched earth policy to make life harder for the successor government. It has already introduced populist laws like on food security and land acquisition, which no party can dare oppose in an election year. Then there is a series of executive actions with the same intentions. … These measures may not fetch too many extra votes for the ruling party, but will make life tough for the next government which will have to implement them.” – Virendra Parekh

P. ChidambaramIf finance minister Mr. P. Chidambaram were in charge of preparing accounts of a corporate entity, his own officers would possibly have charged him with malicious manipulation and misrepresentation. High handedness, sleight of hand, deception, plain unfairness—anything goes if only he can get that magic figure for fiscal deficit.

The finance minister has made it clear time and again that he would not allow fiscal deficit to cross the budgetary limit of 4.8 per cent of the GDP, defining it as a red line that would not be crossed. Such a commitment to fiscal discipline would ordinarily merit commendation, but the manner Mr. Chidambaram is going about it can only create disgust and misgivings.

Now he is a man in a hurry. Somewhere in the middle of February, the government would be presenting a Vote on Account, which will contain a rough estimate of the government revenue, expenditure and deficit for the current fiscal year. Investors domestic and foreign, financial markets and credit rating agencies are keeping a close watch on government’s finances. Overshooting the deficit limit would undermine the government’s and finance minister’s credibility, which they can ill afford with elections ahead.

As things stand today, there is little hope of respecting the red line. Three quarters of the financial year have gone, and the tax revenue is way below the budget estimates. At the end of December 2013, the gross tax revenue, before allocation to states, was Rs 7.7 lakh crore, about 62 per cent of the budgeted Rs 12.36 lakh crore. Amid slowing economy, total collection of indirect taxes – excise, customs and service tax – stood at about Rs. 355,003 crore during the first nine months (April-December) of 2013-14 as against the target of Rs. 5.65 lakh crore for the whole year. The net direct tax collections after refunds were Rs. 4.15 lakh crore in April-December 2013 as against the budget estimate of Rs. 6.7 lakh crore for the whole year. In fact, by November 2013 the government had exhausted 94 per cent of the fiscal deficit limit it had set for the whole year.

Realising that it is impossible to meet the deficit target in the ordinary course of things, the government is looking for shortcuts. Squeezing cash rich public sector companies is one such option. Coal India owned 90 per cent by the government has announced an interim dividend of Rs. 29 per share or 290 per cent. The company will pay out a total of Rs. 18,317 crore; Rs. 16,489 crore of that will go to the government – which will also levy a dividend distribution tax of 17 per cent, meaning that its total revenue from the transaction is around Rs. 19,600 crore. CIL is sitting on cash reserves of Rs. 67,000 crore.

Now, the government as majority shareholder certainly has the prerogative to raise the dividend payout. But is the decision in the long-term interests of the company? Coal, which literally powers the Indian economy, is in short supply. It has to be imported in large quantities at a huge cost although the country is sitting on billions of tonnes of reserves. Coal shortage has impacted production of power and hit industrial growth. Coal India as India’s monopoly coal miner has responsibilities for the future. Its primary job is to increase production of coal and productivity by bringing new mines under operations and investing in more efficient technologies. Coal India has signed several fuel supply agreements and some environmental clearances have just come through. If it has to scale up its operations or alternatively, buy coal abroad to meet guarantees, it would need cash.

It is now likely that other cash-rich PSUs – the National Mineral Development Corporation, for example, which had cash reserves of Rs 22,500 crore as on 30 September – might be subject to the same pressures to disburse cash to the government.

Even more objectionable is the decision to sell 10 per cent equity stake of Indian Oil to ONGC and Oil India Limited. Since both ONGC and Oil India are government-owned, this merely means siphoning off their cash balances into the government’s coffers. This is in addition to the huge direct subsidies that ONGC and Oil India pay to Indian Oil for selling diesel, kerosene and cooking gas well below cost to consumers. This government-sanctioned cheating of investors in ONGC and Oil India constitutes corporate mis-governance of the highest order.

There is scant regard for the fact that cash resources and other assets of public sector enterprises are meant to fund their own growth and capital requirements, and not to bridge the budget deficit.

Finance ministry officials are reportedly asking companies to pay higher advances tax in March 2013 and claim refund later. The ministry plans to defer payment of oil subsidies worth Rs. 60,000 crore to the next fiscal year. There is also a move to withhold big income tax refunds payable to high net worth individuals and corporations. All this will serve the twin purpose: It will help the present government to show a lower fiscal deficit, whereas the next government will be burdened with the old baggage.

Still, Mr. Chidambaram cannot be able meet his fiscal target unless he cuts capital spending. There finance ministry has ordered large spending cuts, amounting to as much as 30 per cent in some cases, for several ministries. The burden will be borne by ministries of rural development, power, water resources and HRD. In other words, the axe will fall on plan or development or capital expenditure, essential to fuel growth.

In short, additional expenditure is being rolled over to the next financial year, while tax and dividend income to accrue next year is being brought forward into this year’s books. Cash balances of public sector companies are siphoned off to the government’s coffer as revenues from disinvestment. Future growth is sacrificed for current expediency. Is this deficit control or deception?

There is method in this madness. The UPA government is following the scorched earth policy to make life harder for the successor government. It has already introduced populist laws like on food security and land acquisition, which no party can dare oppose in an election year. Then there is a series of executive actions with the same intentions. The rural development ministry is planning to hike NREGA wages even more than what was previously planned. It has also sought to increase pensions paid under the social welfare schemes, especially under the National Social Assistance Scheme. These measures may not fetch too many extra votes for the ruling party, but will make life tough for the next government which will have to implement them. The sooner this government leaves the better for the country.

» Virendra Parekh is the executive editor of Corporate India magazine and lives in Mumbai.

One Response

  1. Reblogged this on Amaruvi's Aphorisms and commented:
    Loot of India – the task that has been in progress for the last 10 years has reached its crescendo. And here is how it is done. A great eye opener article on the state of the nation under P.Chidambaram’ expertise.

    Like

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