Here’s One Thing Modi Govt Should Do in Its Remaining Budgets


The annual budget of the Narendra Modi government will be presented by the finance minister Arun Jaitley on February 29, the last day of this month.

Given this, it is a season where everyone has been advising Jaitley on how to go about the entire thing. Some economists have said that the government should increase the public investment, in order to get the economy growing at a faster pace. Others have said that it is important that the government maintain the fiscal deficit target that it has set for itself and not spend more in the process of increasing public investment. Fiscal deficit is the difference between what a government earns and what it spends.

Regular readers of the Diary will know that I am in the government trying to maintain its fiscal deficit camp. Having said that I am not against the government ramping up public investment as long as it can find the money to do so without increasing the fiscal deficit and borrowing more in the process.

As World Bank chief economist Kaushik Basu writes in his new book An Economist in the Real World—The Art of Policymaking in India: A fiscal stimulus is like an antibiotic. It is very effective when used for a short period of time. But if used repeatedly and over long stretches of time, the side effects tend to outstrip the benefits. In India’s case a large deficit is likely to fuel the inflation rate.”

Given this, it is very important as to how the government goes about increasing public investment. As Basu writes: “Choices have to be made very carefully. The first task to which more effort needs to be directed is raising tax revenue.”

Take a look at the accompanying table. Between 2010-11 and this financial year, the taxes as a proportion of gross domestic product have more or less been similar, and have varied within a narrow range. Interestingly, the taxes as a proportion of GDP have fallen since 2007-08.


YearDirect taxes as a % of GDPIndirect taxes as a % of GDPTaxes as a % of GDP
Source: Reserve Bank of IndiaAverage10.25


One possible explanation for this lies in the fact that both the stock market as well as real estate prices rallied between 2002-03 and 2007-08. This meant that investors would have made a lot of capital gains, on which they would have paid capital gains tax. This would have pushed the total amount of income tax collected by the government.

In 2001-02, the direct taxes amounted to around 2.94% of the GDP. By 2007-08, they had jumped up to 6.26% of the GDP. Another possible explanation for this lies in the fact that the salaried class got very good increments during the period. Also, the wealth effect was at play as well. With stock prices and real estate prices going up, people felt wealthy and in the process indulged in greater consumption. This led to the collection of higher indirect taxes. The collection of indirect taxes fell dramatically after 2007-08. In 2009-10, indirect taxes collected were at 3.76% of the GDP.

Since 2010-11, the collection of direct as well as indirect taxes as a proportion of GDP has been more or less flat. What this means is that the same set of people are essentially financing the Indian government and there seems to have been no effort made to expand the tax base. As Basu puts it: “Not only is India’s tax-to-GDP ratio low, it went down over the last seven years. Global comparison suggests that India can do much better.”

How does India fair in comparison to other countries when it comes to the tax to GDP ratio? A study titled Tax Revenue Mobilisation In Developing Countries: Issues and Challenges points out: “In comparative perspective, developing countries raise substantially less revenue than advanced economies. The ratio of tax to GDP in low-income countries is between 10% and 20% whereas for OECD economies [or developed economies] it is in the range of 30- 40%.”

What this clearly tells us is that India is at the lower end of the spectrum when it comes to collecting taxes and hence, there is tremendous scope to improve. As Basu puts it: “India should aim to reach a tax revenue-to-GDP ratio of 15 percent within two or three years, and then set an even higher target of, for instance, 20 percent over the medium term.

This does not mean that the government has to raise tax rates. As Basu writes: “This can be done almost entirely through plugging of loopholes and prevention of tax evasion, and the implementation of a more rational tax code, without having to raise taxes.”

Interestingly, along with the budget every year, the government releases the statement of revenue foregone. As the statement released with the last budget pointed out: “The aggregate revenue impact of incentives available in respect of direct and indirect taxes (levied by the Central Government) is Rs 5,49,984.1 crore for 2013-14 and is projected to be Rs 5,89,285.2 crore for 2014-15.” The point being if the tax laws did not have a significant number of exemptions, the government would have collected more tax.

As the statement further points out: “The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures.”

Hence, there is a lot to gain for the government if it goes about plugging these loopholes. But then that would mean side-lining corporate lobbies and big business, which finance political parties. Can the Modi government afford to do that?

On that your guess is as good as mine!

The column was originally published in Vivek Kaul’s Diary on February 25, 2016


Mr Jaitley’s Search for a One-Handed Economist

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
Give me a one-handed economist,” quipped the American president Harry Truman, many years back. “All my economists say, ‘on the one hand…on the other’.”

The finance minister Arun Jaitley is currently probably going through the one-handed economist phase as well. There has been a huge debate going on, in the media, whether the government should relax the fiscal deficit target of 3.5% of gross domestic product for the next financial year i.e. 2016-2017, when it presents its budget later this month. Fiscal deficit is the difference between what a government earns and what it spends.

Economists, as usual, are divided on it. Some like the idea of government spending more in order to revive the slow economic growth (or so they like to believe). Others have been highlighting the negative consequences of the government spending more.

This has left Jaitley, who has no background in either finance or economics, and was a part-time politician and a full-time layer, until few years back, confused. As he recently said: “I’ve been consulting all shades of opinion. This is the first time I’ve come across people holding sharply divided views. Each one has a strong argument in his favour.”

The Chief Economic Adviser to the finance ministry, Arvind Subramanian, has been in favour of the government spending more. In the Mid-Year Economic Analysis released in December 2015, Subrmanian had suggested that in a scenario of lower than expected economic growth (as measured by the real/nominal GDP growth) “if the government sticks to the path for fiscal consolidation, that would further detract from demand.” Further, “consolidation of the magnitude contemplated by the government… could weaken a softening economy”. Fiscal consolidation is essentially the reduction of fiscal deficit.

The finance minister Arun Jaitley had talked about fiscal consolidation in the two budget speeches he has made till date in July 2014 and February 2015. In the first speech he said that the government is aiming to achieve a fiscal deficit target of 3% of gross domestic product(GDP) in 2016-2017.

In the speech he made in February 2015, he postponed this target by a year and said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.  Now there is pressure on the finance minister to abandon the fiscal deficit target of 3.5% of the GDP set for 2016-2017, from one set of economists and the industry.

The trouble is another set of economists does not agree with this. Economist Arvind Panagariya, who happens to be the vice chairman of the NITI Aayog said in January 2016: “I personally don’t think we should be tinkering with the deficit as a percentage of GDP.”
Raghuram Rajan, the governor of the Reserve Bank of India, has also been an advocate of the government sticking to a path of fiscal consolidation. He reiterated the same in a recent speech as well as the monetary policy statement released last week.

One of the interesting points that Rajan made was that India’s overall fiscal deficit position has deteriorated. As he said: “The consolidated fiscal deficit of the state and centre in India is by far the largest among countries we like to compare ourselves with; presently only Brazil, a country in difficulty, rivals us on this measure. According to IMF estimates (which is what the global investor sees), our consolidated fiscal deficit went up from 7 percent in 2014 to 7.2 percent in 2015. So we actually expanded the aggregate deficit in the last calendar year. With UDAY, the scheme to revive state power distribution companies, coming into operation in the next fiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on the centre to adjust more.”

One reason why government’s numbers are different from IMF numbers is because the government of India under-declares its fiscal deficit. How does it do it? The government recognises the disinvestment of shares in public sector units as a revenue rather than as a financing item.

As economist Rajeev Malik of CLSA put it in a recent column in the Mint: “India tends to under-report its fiscal deficit because it counts divestment and other asset sales as revenue rather than a financing item, as is practised by the International Monetary Fund (IMF). Thus, the FY16 budget deficit target—adjusted for divestment—was actually 4.4% of GDP, not 3.9% as officially reported.”

Rating agencies remain strangely silent on this self-serving approach,” Malik validly points out.

What complicates the situation further is that 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 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.

As economist M Govinda Rao put it in a recent column in The Financial Express: “In fact, the cash accounting system hides the real fiscal deficit which is much higher as substantial subsidy payments to Food Corporation of India and fertiliser companies are yet to be disbursed.”

While Jaitley may keep debating whether or not to abandon the fiscal deficit target that he set previously, he needs to tell us clearly what is India’s real fiscal deficit. If that means that he doesn’t get around to meeting the target.

Getting back to Rajan, the RBI governor also raised the question, whether the extra economic growth that will come in because of the government abandoning its fiscal deficit target and spending more, be worth it.

As Rajan said: “Perhaps Brazil offers a salutary lesson. Only a few years ago, the world was applauding the country’s thriving democracy, its robust economic growth, and the enormous strides it was making in reducing inequality. It grew at 7.6 percent in 2010…Paradoxical as it may seem, Brazil tried to grow too fast. The 7.6 percent growth came on the back of substantial stimulus after the global financial crisis.”

In fact, India tried the same strategy in the aftermath of the financial crisis, with the government coming up with a substantial economic stimulus. While this lifted the economic growth for the next few years, it led to a huge increase in corporate debt and high inflation, the aftermaths of which the country is still facing.

The column originally appeared in the Vivek Kaul Diary on Equitymaster on February 8, 2016

Of Jaitley, Fiscal Deficit and a 19th Century French Economist

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
Lawyers who become politicians are extremely eloquent speakers. But do they ‘really’ mean what they say? Or is it just something that sounds good at a given point of time, like a film dialogue?

The finance minister Arun Jaitley in his maiden budget speech in July 2014 had said: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date.”

Most governments spend more than what they earn. In order to bridge the gap, they borrow money by selling governments bonds. These bonds are repaid in the years to come. If the government borrows more today, the more it has to repay in the years to come.

This repayment is carried out of the money the government earns from taxing the future generations. This means that the benefits of borrowing are received by one generation but the debt is repaid by another. And this is why Jaitley talked about “considerations of inter-generational equity”. Or so it seemed.

The only way of respecting inter-generational equity is to borrow less today, so that the future generations don’t have to repay it, in the days to come. Borrowing less is only possible if the government is spending less today.

In his July 2014 budget speech Jaitley had talked about precisely this. He had said: “Difficult, as it may appear, I have decided to accept this target as a challenge. One fails only when one stops trying. My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent [of the gross domestic product (GDP)] for 2015-16 and 3 per cent for 2016-17.”

Fiscal deficit is the difference between what a government earns and what it spends. This difference is made up through borrowing money by selling government bonds. Hence, a lower fiscal deficit means lower borrowing and in the process the “considerations of inter-generational” equity is take into account.

In the budget speech Jaitley made in February 2015, the considerations of inter-generational equity took a slight backseat. He postponed the achievement of the fiscal deficit target of 3% of the GDP for 2016-2017, by a year.

As he said on that occasion: “Rushing into, or insisting on, a pre-set time-table for fiscal consolidation pro-cyclically would, in my opinion, not be pro-growth.  With the economy improving, the pressure for accelerated fiscal consolidation too has decreased.  In these circumstances, I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously.  Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.  The additional fiscal space will go towards funding infrastructure investment.”

What the government had set out to achieve in a period of two financial years, Jaitley said would now be achieved in three years. This was in February 2015, when the budget for the current financial year 2015-2016 was presented.

In the recent past, there have been news-reports as well as statements which suggest that the government will again postpone, the fiscal deficit targets it had set for itself. “I am not particularly worried about the fiscal deficit target,” Jaitley said in early December.

A Reuters news-report quotes a senior finance ministry official as saying that the “the minister[i.e. Jaitley] has been advised to increase its fiscal deficit target to 3.7 or 3.9 per cent of gross domestic product (GDP) from 3.5 per cent.” “The economy is still suffering from slack demand…It needs a conducive fiscal and monetary policy,” the official added.

The industrial as well as consumer demand are seeing slow-growth and hence the government should be spending more, and in the process incurring a higher expenditure and a higher fiscal deficit. The higher government expenditure will push up economic growth. This is what the senior finance ministry official meant.

This is something Jaitley has also said recently: “Public investment has been stepped up in the last year and it will continue to remain stepped up… When you fight a global slowdown, public investment has to lead the way.”

In a year when the government will have to incur significantly extra expenditure to implement the recommendations of the Seventh Pay Commission, implement one rank one pension for the armed forces and pay pending, fertilizer and food subsidies, where is the money for public investment going to come from?

It is worth recounting here what the French economist Frédéric Bastiat had said in his 1874 book That Which is Seen, and That Which is Not Seen. “In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause–it is seen. The others unfold in succession—they are not seen. It is well for us if they are foreseen.”

When we talk about the government abandoning the fiscal deficit target and spending more, this is precisely how things are playing out. The immediate effect or that which is seen is that higher government expenditure will create economic growth in an environment where industrial and consumer demand growth continues to remain slow. This is the effect that is being ‘seen’.

But there are other effects which are not being seen. The entire issue about inter-generational equity that Jaitley had talked about in his July 2014, seems to have taken a backseat.

Let’s go back a few years in order to understand this point. In 2008-2009, the government spent 51% of what it earned in paying interest on its existing debt and repaying the debt that was maturing. In the aftermath of the financial crisis that started in September 2008, the government increased its expenditure and its fiscal deficit. When the government talked about increased government spending it was only in the context of economic growth. This effect was seen.

Nevertheless, increased government spending meant more borrowing. In 2015-2016, the government will spend around 60% of what it earns in paying interest on existing debt and repaying the debt that matures. The higher borrowing of 2008-2009 and the years that followed is now having an impact. This was the effect which was unseen or wasn’t foreseen in 2008-2009, when the government decided to spend more. This is what Jaitley meant when he talked about considerations of inter-generational equity.

When one government borrows more it leaves a problem for another government in years to come. Also, as more money goes towards debt servicing it leaves little money for other things, unless more money is borrowed.

Further, the government doesn’t have any separate access to borrowings. As economist M Govinda Rao wrote in a recent column in The Financial Express: “This year, the Union government’s deficit is set at 3.9%, and with the states together having a deficit of about 2.2%, the aggregate fiscal deficit of the government works out to 6.1%. It is reported that 21 distribution companies are likely to join the UDAY scheme and the deficit on that account could be about 1%.” If we were to add all this the real fiscal deficit of the government would come at 7.1% of the GDP. The household financial savings in 2014-2015 stood at 7.5% of GDP.

This means that if the government borrows more it will automatically lead to higher interest rates for everyone else who wants to borrow. When the finance minister talks about public investment and not being bothered about a higher fiscal deficit, these points also need to be ‘seen’. Currently, they are not being seen.

As Bastiat put it: “Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.

Of course, politicians are in the business of winning elections not in the business of foreseeing or in the business of practicing good economics.

The column originally appeared on The Daily Reckoning on January 12, 2016

Here is why the government should not forget about the fiscal deficit

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010When it comes to ideas to revive an economy which is not doing well, economists are essentially two trick ponies,They will first suggest that the central bank should cut interest rates. At lower interest rates people will borrow and spend more, businesses will benefit and the economy will grow faster as a result. QED.
And if that is not happening they will suggest that the government should increase public expenditure. As the government spends more money, that money will land up as income in the hands of people who will in turn and spend that money. The money that they spend will land up as income in the hands of other people, who will also spend that money. And so the multiplier effect will work, first leading to spending, and in turn creating economic growth.
The second trick seems to be dominating the debate currently in India. The mainstream view now seems to be getting around to the idea that the government should forget about the fiscal deficit, during the next financial year and spend more money, in the hope of creating more economic growth. Fiscal deficit is the difference between what a government earns and what it spends. The difference is made up for through borrowing.
The finance minister
Arun Jaitley had said in his budget speech in July 2014: “My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” It’s now being suggested that the finance minister should abandon these targets for the time being.
The logic offered is very straightforward. The
combined fiscal deficit of the central government and the state governments has fallen dramatically over the last few years. In 2009-2010, the number was at 9.33% of the gross domestic product(GDP) of India.
By 2013-2014 this had fallen to 6.78% of the GDP. During this financial year(i.e. 2014-2015) it is expected to fall to 6.03% of the GDP. Along with this the total liabilities of the central government have also gone down over the years from 48.8% of the GDP in 2009-2010 to 46.3% in 2013-2014. This number is expected to fall further to 45.7% of the GDP in 2014-2015, as per the government debt status paper released by the ministry of finance in December 2014.
So, what this seems to suggest is that the finances of the Indian government(s) are well placed at this point of time and given that, the central government can easily spend more. But is that really the case? Rajiv Shastri makes a very interesting point in a column
he wrote for the Business Standard in December 2013:In reality, quantifying deficit and accumulated debt only as a percentage of GDP has the potential to misguide. In isolation it distorts both, the true scale of fiscal profligacy and the government’s debt-servicing ability.”
What Shastri is effectively saying here is that the government does not have access to the entire GDP to repay its debt. It repays its debt only out of the money that it makes every year through taxes and other sources of revenue.
How is the central government doing on that front? In 2007-2008, revenue receipts stood at 10.87% of the GDP. By 2013-2014, they had fallen to 9.06% of the GDP. As far as tax collections are concerned, they have fallen from 8.81% of the GDP to 7.36% of the GDP. This year tax collections are expected to be at 7.59% of the GDP. This number is unlikely to be achieved given that the shortfall in tax collections is expected to be around Rs 1,05,084 crore or around 0.84% of the GDP.
The non-tax revenues of the government have also fallen from 2.05% of the GDP to 1.70% of the GDP between 2007-2008 and 2013-2014. During this financial year the number is expected to be at 1.65% of the GDP. Interestingly, the interest that the government pays on its accumulated debt was at 3.43% of the GDP in 2007-2008. It has jumped to 3.79% of the GDP in 2013-2014.
An increase in interest payments means lesser money gets spent on other important things. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note: “
India’s central government spends nearly a quarter of its total spending on servicing the large debt burden…Bringing this down would create valuable space for other far more important expenditures.”
What these numbers clearly tell us is that the ability of the government to service the debt that it has accumulated has been coming down over the years, which is clearly not a good sign. Also, when compared to other emerging market countries, India has one of the highest government debt levels in the world, as can be seen from the following table.

Further, it is also worth remembering that a lot of other emerging market countries have already tried increased public spending in the aftermath of the financial crisis (as I said at the very beginning, economists have basically got only two ideas) and the results haven’t been great.
As Ruchir Sharma of Morgan Stanley points out in a column in today’s edition(Feb 16, 2015) of The Times of India: “Many 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 in 2010. That is the lowest growth rate in four decades, outside of a global recession.”
Any government looking at increasing its spending in order to boost growth should keep this in mind. Also, at the end of the day what matters is not the quantity of spending but the quality of spending.
As Baig and Das point out: “
Recent budgets have routinely allocated close to 5% of GDP in capital spending, a non-trivial amount by any measure. But these generous allocations have not materialized in a discernible pick up in the investment cycle…If the authorities aim at high quality, high multiplier projects worth 4-5% of GDP as opposed to simply ramping up the rate of spending, they will handily achieve the goal of providing a boost to the economy, in our view.”
Also, increasing public spending by the government takes away attention from economic reforms. Both can rarely be executed together. As Sharma points out: “A stimulus mindset is the opposite of a tough reform mindset, and governments can rarely do both as the contrasting experience of the 1990s showed. By the end of that decade, most emerging nations had no money to burn, no lenders they could turn to.”
Given these factors, increasing public spending by the government may not be the best way to go about reviving economic growth.

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

The article originally appeared on on Feb 16, 2015

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

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek 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 as a part of The Daily Reckoning, on Jan 29, 2015)