The stock markets have been choppy in the run up to the results of the elections 2004. Down by 100, up by 30, and generally down from the highs. On the counting day when contrary to the market's expectation, NDA started doing badly, Sensex started 200 points less but when it was clear that it won't be a hung parliament and Congress (I) will cobble together a working majority, the sensex ended the day 40 points up from the previous day.
However on Friday, the 14th, certain utterances of communist leaders made the markets nervous, and the market witnessed its largest intra-day fall in four years. The communists were very critical of the previous government's policies related to disinvestment. Sitaram Yechuri demanded complete ban on disinvestment of profitable PSUs. When repeatedly questioned on NDTV, he suggested that Congress (I)'s also has similar views. After a phenomenal victory the communist leaders started basking in glory in front of the TV cameras and started talking about scrapping the disinvestment ministry. It now appears that Bal Thackeray also supports this move. [Not that he knows anything about economics.]
The Chief Minister of West Bengal and an influential communist party leader Buddhadeb Bhattacharjee kept stating that there will be reforms (like he has done in West Bengal) but that we will not like to be dictated to by IMF and World Bank.
In the meantime, on NSE and BSE, immature speculators hammered down PSU stocks by as much as 17% (GAIL), and several other PSUs by at least 10-11% down. Panic set in. Manmohan Singh read out a prepared text and indicated that sensible reforms will continue. Jairam Ramesh appeared on NDTV yesterday and explained about not cutting subsidies, working hard on increasing tax revenue without increasing tax percentage, widening the tax net, introducing VAT and continuing reforms process. We will hope the market at least partially recovers on Monday.
Now few key issues:
1. There is a world of difference between privatising a profit making PSU and offloading insignificant stock to the public to raise valuble cash for the Government to reduce the fiscal deficit. The communists and rabid fanatic Thackeray do not seem to understand the difference. In fact, I doubt if the communists even understand the concept of fiscal deficit, having never been in power in the centre. When the Government offloaded 10% of ONGC to the public, they were not privatising that company! The Government used to hold 84% of the equity with the remaining 16% held by public and institutional investors (and less than 1% held by FIIs) and traded in the exchanges. After divesting 10%, the current shareholding pattern is 74% with the Government, 6% with the FIIs and 20% with the public and Institutional investors in India. The management control is still firmly with the Petroleum Ministry and will continue to be. Offloading the 10% raised over Rs. 12,000 crores for the Central Government. The Government could retain just 26% equity or even less and still retain complete management control over ONGC, and can even ensure that the rest of the equity is held only by Indian public and various institutions in India. After all, most of the public companies (not owned by Government) are like this. The Ambani family only controls about 47% of the Reliance Industries. Tatas control only one third of Tata Motors.
The Indian Government can raise massive amounts of capital from its jewels like state controlled banks, LIC, UTI, BSNL etc. by only selling dribbles to Indian public and Indian Institutional investors, while at the same time restricting the amount of foreign ownership. The communists needn't be afraid that in the process workers will be sent home. We can retain all the workers, pay them good salaries (and also make them deliver value to the companies), and also raise massive amounts of capital for development projects such as laying roads and heck... even paying subsidies to distraught farmers.
In the process, the Government also redistributes some of the value enhancements to its own citizens. With the interest rates coming down, investment in the above mentioned PSU navaratnas will help senior citizens earn more money than any Bank deposits.
Now, why would the communists and Thackeray oppose this kind of 'disinvestment'? It would be because they do not understand the meaning of such disinvestment.
2. All that the communists are saying is disinvestment should be done only on sick PSUs. Here, the Government will only be looking for complete sell-off. And the money you will make will never be more than a few crores. There is no guarantee then of what will happen to these employees. At least the Government will be cutting its losses and will hope that the new owners will be capable of salvaging something from that sick industry and hopefully retain some of the employees.
3. Buddhadeb, like a true rabble rouser rails against IMF and World Bank. IMF and World Bank are not jobless and nor are they meddling in the internal affairs of a state or central government in India. It just so happens that Indian State Governments go with a begging bowl in hand and ask for loans from these institutions. When I ask for a housing loan, my bank demands that I show them the housing documents, my salary details etc. and determine whether my investment is safe and whether I have the ability to pay back the loan and only then sanction the loan. On top of it, they have powers to take over my property if I default on the loan. What can IMF and World Bank do if Indian State Governments default? They have their own experience and merely demand that the Governments that take loans from them control their fiscal deficit reasonably. Fiscal deficit is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. This deficit amount must have to be borrowed by the government to completely meet its expenditure.
Every government which is running a deficit budget must work on increasing its revenues. This is where Jairam Ramesh pointed out his desire to increase the tax revenues, and was quick to point out that he would like income tax revenues to go up without having to increase the taxation. I am not so sure whether it is easy. I think the government should temporarily increase the taxation as well as act decisively on those who avoid taxes. The government should certainly take a relook at the subsidies, but should do so with a human face. Jairam Ramesh was quick to indicate that farming subsidy should remain. Perhaps the subsidy should remain but the rich farmers should at least be brought under tax net. Farming income should become taxable subject to all the standard deductions etc.
Another suggestion that normally comes from IMF/World Bank as well as other economists is to reduce the direct government expenditure on its employees. Sadly this is another minefield and a vote loser. The salaries and pension payable by state governments are the biggest drain on them. Jayalalithaa tried introducing some measures which proved extremely unpopular amongst the government employees and teachers. Her subsequent iron fisted handling of the situation went out of control and also cost her lots of votes during the recent elections. However state governments cannot shy away from this. The most worrying area is government's pension costs. These costs have been going up because the life expectancy has gone up.
While it is rather drastic, the state governments may have to look at completely scrapping pension and instead ask the government employees to look at private pension plans. After all, the only group of people who enjoy such pension benefits in India are a small group of government employees and PSU staff. In a country that doesn't offer any kind of social secutiry benefits, why should one small section enjoy complete social security? I would rather that the pensions go away while farming subsidy to needy farmers remain. The farming votes are after all larger than the government employees votebank.
There is no point in railing against IMF and World Bank. Instead the government should look at raising massive amounts of loans from its own people to retire loans from IMF and World Bank. The funds can be raised both from the expatriates around the world and those who hoard black money in India. With very low yield from other forms of safe investments and decreasing interest rate on dollar deposits, and increasing foreign exchange reserves with the government, the government should look at coming up with a high yield dollar bond to retire massive debts that state governments have borrowed from IMF and World Bank.