Tag: Disinvestment | Page 2

1 March, 2016

Jaitley’s Fiscal Deficit Numbers Don’t Really Add Up

Dear Reader,

By the time you read this piece, you would have been bombarded with a huge amount of analysis on the budget the finance minister Arun Jaitley presented yesterday.

Nevertheless, most such analysis misses out on carefully looking at the fiscal deficit number, which is basically what the budget is all about. Most other things that finance ministers talk about in their budget speeches, they can talk about on any other day of the year as well.

In fact, regular readers would know that I have been sceptical about the ability of the government to meet its fiscal deficit target. Fiscal deficit is the difference between what a government earns and what it spends during the course of any year. The difference is met through borrowing.

While presenting the budget last year, the finance minister Jaitley had said that the government expects to achieve a fiscal deficit target of 3.5% of GDP for 2016-2017 and 3% of GDP for 2017-2018.

In the budget presented yesterday Jaitley said that: “I have weighed the policy options

and decided that prudence lies in adhering to the fiscal targets. Consequently, the fiscal deficit in RE[revised estimate] 2015-16 and BE[budget estimate] 2016-17 have been retained at 3.9% and 3.5% of GDP respectively.”
The question is how realistic is the 3.5% of GDP fiscal deficit target for the next financial year? There are essentially three inputs that go into making the fiscal deficit number. The total receipts of the government, the total expenditure of the government and the nominal GDP number that has been assumed for the next financial year. Nominal GDP is the GDP which hasn’t been adjusted for inflation.

Let’s start with the receipts number. Jaitley has assumed that the government plans to collect Rs 56,500 crore through the disinvestment route. Of this, Rs 36,000 crore will come from the government selling shares in the companies its own and Rs 20,500 crore from the stakes that it has in non-government companies.

The total number assumed to come in through the disinvestment route is more than double of the Rs 25,312 crore that the government collected through the route this financial year. It needs to be pointed out here that a substantial part of this came from the Life Insurance Corporation(LIC) of India picking up stakes in government owned companies. Honestly that can’t be called disinvestment. It is money moving from one arm of the government to another.

Second, last year the government had assumed that Rs 69,500 crore would come in through disinvestment. Ultimately, only Rs 25,312 crore has been collected and that also after LIC had to come to the rescue. One excuse offered for the government going slow on disinvestment was low commodity prices. Commodity prices continue to remain low.

Given this, the Rs 56,500 crore disinvestment number is an overestimate like was the case last year as well.

The government has also assumed that it will earn Rs 98,994.93 crore from the telecom sector. This receipt comes under the entry “other communication services” and is primarily the money the government will earn through telecom spectrum auctions. Again, like is the case with disinvestment receipts, this number is a huge jump from the Rs 57,383.89 crore that the government managed to collect this year.

Given, the past record of the government, these assumptions are clearly looking overoptimistic. Also, they help in under-declaring the fiscal deficit. As per IMF norms, any kind of asset sales by the government needs to be treated as a financing item and not as a receipt as the Indian government does. In the process the government manages to come up with a lower fiscal deficit number.

Now let’s take a look at the expenditure front. There is no clarity on how much allocation the government has made towards implementing the recommendations of the Seventh Pay Commission. As Jaitley said during his speech: “the Seventh Central Pay Commission has submitted its Report. Following the past practice, a Committee has been constituted to examine the Report and give its recommendations. In the meantime, I have made necessary interim provisions in the Budget.”

The finance minister didn’t get into any more details. Nevertheless, one can use the numbers given in the budget and see if the right kind of allocation has been made. During 2015-2016, the government’s salary and pension bill (excluding Railways) is expected to be at Rs 1.85 lakh crore.

In 2016-2017, the government’s salary and pension bill has been budgeted at around Rs 2.25 lakh crore. This is Rs 40,000 crore more than the 2015-2016 number.

The Seventh Pay Commission recommendations come into force from January 1, 2016. The Seventh Finance Commission had said that its recommendations would cost the government Rs 73,650 crore during the first year. To this one would have add the cost of Pay Commission recommendations between January and March 2016, which would be needed to be paid as arrears to the government employees and pensioners.

This works out to Rs 18,412.5 crore (Rs 73,650 crore divided by four). Hence, the total extra allocation towards implementing the recommendations of the Seventh Pay Commission should have been around Rs 92,000 crore (Rs 74,650 crore plus Rs 18,412.5 crore). The actual increase in allocation towards salaries and pensions is only around Rs 40,000 crore.

What does this tell us? The government is probably not in the mood to pass on the entire increase in salaries and pensions during the course of 2016-2017. If it does that, then it will have to pay arrears in the years to come and that will add to the government expenditure and hence, the fiscal deficit. So to that extent the fiscal deficit is being under-declared at this moment.

Also, the implementation of one rank one pension in the defence forces is expected to push the pension bill up, by Rs 10,000 crore. And that will also add to the salary and the pension bill of the government.

Further, as I have pointed out in the past, more than Rs 1,00,000 crore of food and fertilizer subsidy bills remain unpaid. And that is how it continues to be. The allocation to food and fertilizer subsidy has fallen from Rs 2.12 lakh crore in 2015-2016 to Rs 2.05 lakh crore in 2016-2017.

What does this mean? It means that while the government will pay the Rs 1,00,000 lakh crore of pending food and fertilizer subsidy bills, it will then have to postpone paying a large part of the food and fertilizer subsidy expenditure that is incurred during the next financial year.

The government follows the cash accounting system and only acknowledges expenses once payment has been made. This has led to a situation where subsidy payments to Food Corporation of India(FCI) and fertilizer companies remain unpaid. The money has been spent by FCI and the fertilizer companies towards subsidy, but remains unpaid by the government, and hence is not acknowledged as an expenditure.

The question is where does FCI get this money from? It borrows from the financial market. Why does the market lend money to FCI? It does that because it knows that it is effectively lending money to the Indian government. Hence, this subsidy expenditure has already been incurred by the government but has not been accounted for.

This essentially leads to a lower fiscal deficit number. Further, the absolute fiscal deficit number of Rs 5,33,904 crore looks very unrealistic given that the receipts of the government have been overstated while the expenditure has been understated.

Now let’s talk about the denominator in the fiscal deficit number, the nominal GDP. The nominal GDP for 2016-2017 has been assumed to be at Rs 15,065,010 crore assuming 11% growth over the 2015-2016 number. How realistic is this assumption? In 2015-2016, the nominal GDP is expected to grow at 8.6%. Given this, how realistic is an assumption of 11% nominal GDP growth for 2016-2017?

To conclude, it is safe to say that Jaitley’s fiscal deficit number is not believable. As the American professor Aaron Levenstein once said: “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.”

What Jaitley has managed to conceal is vital.

The column originally appeared on the Vivek Kaul Diary on March 1, 2016

3 November, 2015

Disinvestment: The more things change, the more they remain the same

When finance minister Arun Jaitley presented the budget of the Narendra Modi government in February 2015, he set an aggressive disinvestment target of Rs 69,500 crore. Disinvestment refers to the government selling the shares it holds in public sector companies.

In late October, this aggressive disinvestment target was given a quiet burial.

A series of statements have been made in order to justify the slashing of the disinvestment target. “The target of Rs 30,000 crore seems more reasonable for current fiscal given that there is no big stock to sell,” a source told The Economic Times.

The minister of state for finance Jayant Sinha blamed it on the falling and low commodity prices. As he recently said: “One of the reasons why the divestment process is challenging right now is because many of the companies we are considering for divestment are in the commodity industries…Whether it is Coal India or OMCs (Oil Marketing Companies) and so on. They are impacted by global commodity prices.”

Sinha’s boss Jaitley more or less came up with the same reason when he said: “I don’t think it makes sense divesting at a time when [commodity] prices are low.”

How much sense does this argument make? Did commodity prices start to fall from March 1, 2015, a day after the budget was presented? On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude was $108.05 per barrel. By February 27, 2015, a day before Jaitley presented the budget, the price of the Indian basket of crude oil had fallen by 44.6% to $59.85 per barrel. Hence, the price of oil had already been falling for a while at the time the budget was presented. The price of the Indian basket of crude oil is currently at $44.72 per barrel.

In fact, oil was not the only commodity falling. As an editorial in The Financial Express points out: “Similarly, in the case of copper, prices were $8,061/tonne in February 2013, $7,149 in February 2014 and $5,729 in February 2015—prices are down to $5,142.5 now. In the case of zinc, prices fell from $2,129/tonne in February 2013 to $ 2,034.5 in February 2014 and rose a bit to $2,098 in February 2015—prices are down to $1,687 now.”

So commodity prices were falling even in February when the government presented the budget. Why offer the reason now? Sinha offered another explanation as well: “Obviously, we have to ensure that we get best possible valuation for these valuable enterprises,” he said.

What does he mean here? On February 27, 2015, the BSE Sensex had closed at 29,220.12 points. Since then it has fallen by around 9.1% and closed yesterday (November 2, 2015) at 26,559.15 points. This is not such a big fall in the context of the stock market.

In fact, Jaitley had clearly pointed out in June earlier this year that a fall in the stock market would not lead to the government going slow on the disinvestment programme. As Jaitley had said: “I don’t read too much on daily movements as far as markets are concerned. By and large with the health of economy recovering, I see much greater stability as far as markets are concerned. And therefore, the disinvestment programme of the government will continue as it has been planned.”

So, if Jaitley was not reading too much into daily movements of the stock market in June, why is Sinha (and by that definition Jaitley as well) reading too much into the daily movements of the stock market, now?

Also, when an aggressive disinvestment target of Rs 69,500 crore was set, wasn’t the chance that the stock market will ‘fluctuate’ taken into account?

And why has all the optimism that was being projected on the disinvestment front by the government ‘suddenly’ evaporated now?

The stock market had touched a level of 26,500 points (as it is now) even in June earlier this year. So what has changed between then and now?

The broader point here is that the logic of commodity prices falling offered by the government to go slow on disinvestment now, was valid even at the time of presenting the budget. As The Financial Express edit quoted earlier points out: “If the government still went ahead and set an aggressive target for FY16[ 2015-2016], this implied it planned to be selling shares regularly, irrespective of the price—clearly that was an incorrect perception.”

Up until now the government has managed to disinvest shares worth only Rs 12,700 crore. Of this Rs 8,077 crore has come from the Life Insurance Corporation of India. So, there hasn’t been much disinvestment in the strictest sense of the term, nearly seven months into the financial year. What this tells us is that the government was not serious about disinvestment in the first place.

Given this, it is not surprising that the government has now decided to slash the disinvestment target. In fact, this has been a regular feature with almost all governments since disinvestment of public sector shares came to the fore in the early 1990s.

As AK Bhattacharya writes in a recent column in the Business Standard: “Since disinvestments of government equity in PSUs began in 1991-92, only on two occasions has a government met its target set at the start of the year. In the last year of the Narasimha Rao-led Congress government in 1994-95, total disinvestments of Rs 4,843 crore exceeded the target of Rs 4,000 crore set for that year and in the first year of the Atal Bihari Vajpayee-led government in 1998-99, total disinvestment proceeds were estimated at Rs 5,371 crore, compared with the target of Rs 5,000 crore.”
Of the total disinvestment target of Rs 69,500 crore, the government had budgeted Rs 28,500 crore to come in from the strategic sale of equity, which was basically a euphemism for privatisation. Nearly seven months into the financial year the government has given only given some indication of privatising IDBI Bank.

In this reluctance to privatise and continue holding on to companies, Narendra Modi is only following the Congress governments before him. In fact, TN Ninan makes an excellent summary of the way things stand as of now in his book The Hare and the Tortoise—The Challenge and Promise of India’s Future: “It is a matter of regret that Narendra Modi, who got elected on the promise of ‘minimum government, maximum governance’, has shown no taste for radical change or minimizing government…The government system continues to run loss-making airlines and hotels, three-wheeler units and Mahanagar Telephone Nigam, whose sales revenue is less than 40% of expenditure.”

Meanwhile, as I sit writing this column, its one am in the morning and one of the TV channels is replaying Modi’s election speech in Bihar.

As the old saying goes, the more things change, the more they remain the same.

(The column originally appeared on The Daily Reckoning on November 3, 2015)

7 October, 2015

Of Jaitley, black money and much ado about nothing

In May earlier this year, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Act. After the passage of this Act, also known referred to as the black money Act, the government offered a compliance window.

This window allowed those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30%. The window was closed on September 30, 2015.

Taking advantage of the compliance window 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government will be able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues. This means around Rs 3.9 crore of tax and penalty will be collected on an average from every declarant.

For all the hype and hoopla that has happened around black money in the last one year, this is barely peanuts. The tax and the penalty need to be paid to the government by December 31, 2015.

The annual report of the ministry of finance for 2014-15 has some interesting data points that need to be mentioned here. The total number of assesses in 2013-2014 had stood at 4.7 crore. These includes individuals, families, trusts and corporates. What this clearly tells us is that not many Indians pay income tax.

Hence, as a result every year a significant amount of black money on which tax is not paid is generated.

And given this, a collection of Rs 2,488 crore is basically a bad joke especially once you take into account the tremendous amount of political capital that the Narendra Modi government has spent on the black money issue.

Having said that, this should hardly come as a surprise to the government given that the black money recovery skills of the Income Tax department are nothing to write home about. As the ministry of finance annual report points out: “The Income Tax Offices throughout the country continued their drive against tax evaders. During the financial year 2014-15 (upto 30.11.2014), 2068 (provisional) search warrants were executed leading to the seizure of assets worth Rs 538.23 Crore (provisional). During the financial year (upto 30.11.2014), 1174 surveys (provisional) were conducted which yielded a disclosure of undisclosed income of Rs 4673.11Crore (provisional).”

So, once Rs 2,488 crore is looked at from the point of the numbers mentioned in the above paragraph, it doesn’t look so dreadful. The basic point here is that the black money recovery skill of the Income Tax department has been very poor.

There could be several reasons for this. Corruption. Incompetence. Not enough people. Or simply the fact that the crooks are always one step ahead of those who are supposed to catch them.

Long story short—people who have a large amount of black money know fully well the competence level of the income tax department and their ability to recover black money from those who have it.

Once we take this factor into account, the finance minister Arun Jaitley’s comment that those who declared their black money to the government could “sleep well,” can be categorised as an empty rhetoric and nothing more.

In fact, after the flop-show, Jaitley seems to have discovered that the bulk of the black money is within India. “The bulk of black money is still within India,” he wrote on his Facebook page. I have been saying this on various media platforms over the last few months.

A lot of this domestic black money has made its way into real estate over the years. As a report on black money brought out by the business lobby FICCI in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.”

What has this government (or any other for that matter) done to target the black money that has made its way into the real estate sector? Absolutely nothing. In fact, the surprising thing is that sector continues to operate more or less without any regulator despite constituting 11% of the Indian GDP.

A simple explanation for this is the fact that bulk of the ill-gotten wealth of politicians is in the real estate sector. And given that no government wants to disturb the status-quo.

A recent report in The Economic Times points out that: “Doctors, engineers and former senior managers who used to work overseas — these professionals formed the biggest chunk of those who made use of the 90-day grace period for the declaration of unaccounted wealth.” Politicians did not come out of the closet to declare their black money. And politicians, as I pointed out earlier, have their black-money in real estate.

Black money has also made its way into the stock market through the anonymous p-note route. P-notes are derivative instruments issued by foreign institutional investors (FIIs) to investors to invest in the stock market as well as the debt market without registering with the regulator i.e. the Securities and Exchange Board of India.

What this means is that FIIs issue p-notes to investors whose identities are not known to the Indian regulator. Now compare this to the KYC that any Indian has to carry out in order to invest in a mutual fund, open a bank account or get a credit card. The world is definitely not a fair place.

The investments coming into India through the p-note route were at Rs 2.72 lakh crore as on February 2015. A major portion of this money came in through Cayman Islands, Mauritius and Bermuda. As a recent report in Business Today magazine points out: “Cayman Island with a population of less than 55,000 routed investment worth Rs 85,000 crore.”

Hence, p-notes are possibly being used to re-route black money generated in India into the Indian stock as well as debt market.

The last time government tried banning p-notes in 2007, the decision did not go down well with the FIIs. The government had to withdraw the ban. Having said that, as the Business Today report points out: “since 2007, the market regulator tightened the noose, and their share in FII investments came down from 50 per cent in 2007 to 11 per cent in February 2015.”

Nevertheless, even 11% is a big number. The question is will the government ban p-notes? The answer is no. The stock markets are anyway edgy these days and the government needs to raise Rs 69,500 crore during the course of this year. And for that it needs a strong stock market.

Over and above this, there are operators running “black ka white” schemes as well, points out columnist Debashis Basu in a recent column in the Business Standard. Basu writes that not much has been done on this front either.

To conclude, people in decision making positions know what the problem is. They also know what the solutions are. They choose to talk a lot about it, without doing much about it.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on SwarajyaMag on October 7, 2015

1 September, 2015

Of LIC and the great Indian disinvestment farce

I should have written this column around a week back, nevertheless it’s still not too late to make the point that I want to make.

On August 24, 2015, the BSE Sensex fell by 1624.51 points or a whopping 5.94% to close at 25,741.56 points. This was the biggest drop that India’s premier stock market index had seen since January 7, 2009.

In all the hungama that followed around the Sensex fall another important story got buried. On the same day, the government was trying to sell 24.28 crore shares or 10% stake in the Indian Oil Corporation (IOC) at Rs 387 per share. The government was hoping to raise around Rs 9,400 crore through this disinvestment.

In the budget presented in February earlier this year, the government had set a disinvestment target of Rs 69,500 crore. Of this amount it hopes to raise Rs 28,500 crore through what it calls strategic disinvestment.

On a day when stock markets all over the world fell it was hardly surprising that there were almost no takers for the government’s share sale. The retail portion of the IOC disinvestment issue was subscribed only 0.18 times i.e. only about one-fifth of the shares that were offer.

The fact that the government had no idea of what was about to hit it, can be made out by the disinvestment secretary Aradhana Johri’s comment on August 21, 2015. She said that the stock market had an “excellent appetite” for the IOC offering. As it turned out, her definition of the stock market included only one investor. In the end, the Modi government, like the governments before it, had to call on the Life Insurance Corporation (LIC) of India to come to its rescue.
LIC picked up 20.87 crore shares or 8.59 per cent of IOC and thus bailed out the government. This would have cost LIC around Rs 8,087 crore. There are multiple points that need to be made here.

The government treats LIC as a sovereign wealth fund, which keeps coming to its rescue whenever required. But the money LIC has and manages is not the government’s money. The LIC manages the hard earned savings of the people of India and given that these savings need to be treated with a little more respect.

A filing made on the Bombay Stock Exchange website points out that LIC now owns 11.11% of IOC. SEBI rules do not allow mutual funds to own more than 10% of a company. This is to prevent concentration of risk on the overall investment portfolio. But this does not apply to LIC, given that it is an insurance company.
The question is why is the government allowing this concentration of risk in LIC’s investment portfolio to happen? Why are rules different for the private sector and the public sector? Ultimately like mutual funds, LIC is also basically managing money.

The LIC chairman SK Roy has said in the past that “every investment decision happens after due diligence.” What due diligence leads to an investment corporation (which LIC basically is) to buy a share at Rs 387, when the weighted average price of the stock during the course of the day was around Rs 380?

Roy told The Indian Express in an interview in July 2015: “If you see the OFS (offer for sale) of last 14 months, we have never got more than 50 per cent of the offered amount…So the question of bailing out doesn’t arise. A bailout happens when the entire 100 per cent is taken by us. There’s no data to support this.”

In the IOC disinvestment last week, LIC bought 20.87 crore shares of the 24.28 crore shares that were on sale. This amounts to 86% of the total shares that were being sold by the government. This makes it clear that the LIC bailed out the government and what Roy had claimed in July is no longer true. Further, Roy’s claim about following “due diligence” doesn’t really hold. Like previous LIC chairmen he also followed instructions from Delhi though he can’t admit to doing the same.

Also, if IOC is a good buy, why was LIC bringing down its stake in the company since June? As on June 30, 2015, LIC’s holding in IOC was 2.83%. Before the August 24 purchase, this holding was down to 2.52%. Hence, over a period of nearly seven weeks, LIC had sold a substantial stake in the company.

Also, as an LIC official told Business Standard on the condition of anonymity: “LIC is a long-term investor and we looked at the offer quality and subscribed for it. A call was made to us since as there was a crisis-like situation with the markets. We have not set aside any funds for disinvestment. We take a call based on the merit of every offer.” So, if IOC was such a good buy why had not LIC set aside any money for it?

Further, any ‘real’ disinvestment happens when shares are bought by the private sector (be it retail or institutional investors). But what seems to be happening with the Modi government’s disinvestment programme is that the LIC is taking over from the government. One arm of the government is being replaced by another government. This is nothing but a farce.

In fact, the disinvestment secretary Ardhana Johri made a good joke when she told PTI that the sale was “highly successful given the market conditions” and “with this the government has managed the best-ever first half disinvestment collections in seven years.” The government has managed to raise around Rs

Hence, on this front the Modi government has been no different from the earlier Manmohan Singh government, which also used to get LIC to rescue its disinvestment share sales.

Also, what is the point of going through this elaborate farce anyway? If shares are to be bought by LIC, why does the insurance behemoth have to buy shares from the market? Why can’t the government allocate shares to LIC directly and at a discount, so that LIC investors can also gain, given that it is their hard earned money that is being put to such risk?

To conclude, the government also plans to raise Rs 28,500 crore through strategic disinvestment. This is essentially a euphemism for the government selling its stakes in loss making companies. Further, the Cabinet has already approved sales of shares of such companies’ worth around Rs 50,000 crore.

I sincerely hope that if the stock market investors do not buy these shares, LIC is not forced to take them on.

The column was originally published on The Daily Reckoning on Sep 1, 2015

29 January, 2015

The govt needs to think out of the box to finance public investment

Vivek Kaul

There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 column in the Financial Times that “the case for investment applies almost everywhere”.
And given that private investment is slowing down, the government needs to increase public investment seems to be the prevailing view. This becomes even more important with the International Monetary Fund recently deciding to revise global growth downward by 0.3% in 2015 and 2016 to 3.5% and 3.7% respectively.
The Indian government seems to be thinking of giving a push to public investment. The finance minister Arun Jaitely said so a few days back: “I think we have to take some special steps as far as public investments is concerned.” In yesterday’s column I had argued that the government needs to be careful about how it goes about financing the public investment programme that it may unleash in the next budget.
The recent evidence in favour of a public investment programme is not very strong. Many emerging market countries tried increasing public spending in the aftermath of the financial crisis in the hope of creating economic growth, only to see it not work and lead to other major problems.
As Ruchir Sharma author of Breakout Nations explained in a recent column in the Wall Street Journal: “Before anyone rushes to spend, however, it is worth noting that the big emerging nations, including China, Russia and Brazil just tried a full-throttle experiment in stimulus spending, and it failed. The average growth rate for emerging economies excluding China has fallen to 2.5% today, from more than 7 % at the height of the spending campaign. That is the lowest growth rate in four decades, outside of a global recession. For leaders in these countries, stimulus is now a bad word.” The Chinese growth also recently touched a 24 year low of 7.4%.
So what went wrong? “Emerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red, from an aggregate surplus equal to 1.5% of GDP in 2007 to a deficit equal to 2% of GDP in 2014. To pay for this deficit spending, public debt has risen significantly, throwing the books out of balance,” wrote Sharma. This is a point that Jaitley in particular and the Indian government in general should keep in mind, before they go on to take “special steps as far as public investments is concerned”.
The rating agencies and the foreign investors are watching India closely after Jaitley said in his maiden budget speech that “my roadmap for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” In the current financial year the government is aiming for a fiscal deficit of 4.1% of the GDP.
Given this, it is important that the government has a clear idea of how it will go about financing the “special steps” for public investment. One way out is to resort to asset sales. Asset sales does not just refer to the government disinvesting its shares in public sector units as well as other companies.
Take the case of Indian Railways, which owns huge tracts of land all around the country. Some of this land can be sold to generate revenue for revitalization of the Railways. Given the shortage of land in cities, this move can garner a good amount of revenue. Also, it is important to carry out some sort of an exercise which tells the government clearly how much land does the Railways actually own.
Over and above this, the Railways can also look at raising money by branding trains and stations. This is a move that has been tried in the past at least with Mumbai local trains. Also, stations on the Rapid Metro route in Gurgaon are sponsored by corporates. This can be one way of raising some “easy money” for the revitalization of Indian Railways. Also, it is worth pointing out that Railways is not the only department sitting on a huge amount of land.
If the government puts its bureaucrats and advisers to some use, such out of the box ideas will come out. Further, there is some low hanging fruit that the government can easily cash in on. One such low hanging fruit is the shares that the government owns through Specified Undertaking of Unit Trust of India (SUUTI) in ITC and Larsen and Toubro which as of January 28, 2015, were together worth Rs 45,386.86 crore (Rs 32,497.29 crore for ITC and Rs 12,889.57 crore for Larsen and Toubro and based on the shareholding pattern as on December 31, 2014). For reasons which can be best explained only by the government this holding hasn’t been sold till date.
These asset sales can directly finance public investment. As economist Sajjid Chinoy writes in the Business Standard: “So what the government needs is a predictable plan – say of 0.8-1 per cent of GDP for the next 2-3 years of asset sales that are directly ploughed into public investment such as highways, roads, bridges, ports, airports – to offset the private sector’s inability to finance this infrastructure.”
Further, the government needs to sort out the mess that it has made of the disinvestment programme over the last few years (I mean the government in general and not the Narendra Modi government which took over only in May 2014).
Over the last few years, the government has assumed that disinvestment of its holdings in public sector units will bring in a lot of money. But that hasn’t turned out to be the case. Take the case of the last financial year when it was assumed that the government will raise Rs 54,000 crore through disinvestment. It actually managed to raise only Rs 19,027 crore.
For this financial year, Jaitley has projected that the government will raise Rs 58,425 crore through disinvestment. But only Rs 1,700 crore has been raised so far, with only around a little over eight weeks left for the financial year to end.
News-reports now suggest that the government is really trying hard to push disinvestment through. Instead of waking up at the end of the financial year, the government along with a big disinvestment target also needs to have an annual plan where it goes about disinvesting shares all through the year. This is a better way of approaching the issue and Jaitley should look at it seriously in the next budget.

(The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Jan 29, 2015)