In its latest missive, the finance ministry has advised public sector units (PSUs) to tap capital markets to raise resources. The message was couched in terms of the larger issue of ushering in corporate governance and left to its representatives who sit on the boards of these PSUs. What it left unsaid is that the finance ministry as a source of funds is rapidly drying up and PSUs like other entities have to learn to fend for themselves.
In itself, the idea is a good one. It would on the face of it help usher in better corporate governance standards, make the PSUs less reliant on government doles and, of course, also help deepen the Indian stock markets. Given the credibility deficit of the government, it is more likely that the intent was to bring some relief to the exchequer; this line of thinking gains credence when considering that market conditions are not conducive to divesting stakes, especially from first-timers.
A file photo of finance minister Pranab Mukherjee
Effectively, the intent is to outsource the fiscal problem. What may happen is the best of the worst situation. The PSUs will be unable to list and at the same time will see a cut in their source of funding. The only option will be to either raise debt or simply cut back investment; the former will add to the crowding out effect of government borrowing and the latter could mean even lower investment in the economy.
At a larger level, this decision is a symptom of denial that is engulfing the government in general and the finance ministry in particular. It promised a fiscal correction in the current year with hints that it would target government expenditure. However, unable to get its way on serious expenditure reforms (the finance minister places the blame on difficult allies in the coalition), North Block has begun to look at Plan B. The finance minister, while replying to the budget in the Rajya Sabha, promised austerity measures to balance the budget. Unfortunately, the savings, if any, will be minimal—the outgo is insignificant compared with the payouts on subsidies and various open-ended entitlement programmes.
The moral of the story, if any, is that the finance ministry has to wake up to reality. Mere words will not provide succour; actions speak for themselves.
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