Investors and businessmen are discovering to their horror just how empty the Indian government’s rhetoric of responsible budgeting has been. The damaging implications of fiscal indiscipline have so far been masked by a high rate of economic growth. With Fitch Ratings cutting India’s debt outlook to negative, the veneer is now peeling off.
The Federation of Indian Chambers of Commerce and Industry, a New Delhi-based lobby group, has come out with a four-point agenda for governmental action over the next 100 days. One of its key demands is that the administration “address the perception of a looming fiscal crisis”.
A crisis it may not be, at least not yet. However, this is no time for complacency.
The government must start acknowledging the grim fiscal reality in order to seek political consensus for reviving asset sales. It has a ready blueprint of what needs to be done from the previous administration’s experience. For now, it seems to be in no mood to even take a look at it.
Assuming the price of crude oil at $120 (Rs5,076) a barrel, Morgan Stanley economist Chetan Ahya estimates the total budgetary gap to be 10.4% of the gross domestic product in the year ending 31 March 2009, up from just 7.7% last fiscal. If instead of $120, the average price of oil is assumed to be, say, $135 a barrel, the deficit estimate would rise to 11.4%, Ahya wrote in a 17 July note to investors.
Ahya’s calculation combines Central and state-level data with the so-called off-budget spending items. Apart from the subsidies on energy, food and fertilizers, off-budget items include the cost of the farm debt waiver programme as well as the expenditure to be incurred on a pay hike for civil servants.
The last time the overall deficit exceeded 11% in India was in the year ended 31 March 2002. Back then, the economy was growing at an annual pace of just about 5.8%, against the central bank’s forecast of at least 8% expansion for the current fiscal year. The inflation rate was less than 2%, compared with about 12% now.
The government of then prime minister Atal Bihari Vajpayee turned the bleak fiscal situation into an opportunity to sell state ownership of key assets to private investors, in the process raising $5 billion in three years.
“Disinvestment in public sector enterprises is no longer a matter of choice, but an imperative,” then president K.R. Narayanan said in his address to Parliament on 25 February 2002, setting the government’s agenda.
In May 2004, the government changed. Prime Minister Manmohan Singh’s Congress party obliged its Marxist backers’ demand to halt privatization by formally scrapping the previous administration’s policy of selling controlling stakes to strategic investors. In the four years that ended 31 March, asset-sale revenue dwindled to $1.5 billion, even as the benchmark stock market index almost tripled in this period.
It’s too late to make good on the opportunity that has been squandered. But now that the Marxists aren’t dictating economic policy, and the government has survived a vote of confidence, it’s both possible and crucial to revive the asset-sale programme.
That, it seems, is unlikely to happen.
“We’re not selling any assets,” finance minister P. Chidambaram said last week. “What we plan to do—this is what I said in the Budget speech—is that we want to list unlisted public sector enterprises.”
It may be too late for that. The benchmark stock index is down more than 34% in dollar terms this year. Traders expect the turbulence to continue. The National Stock Exchange Volatility Index has risen 73% from its mid-May level.
Instead of running enterprises with a view to providing jobs to people, the government has to spend its energy on education, health care and law and order. The 25 and 26 July terror attacks in Bangalore and Ahmedabad, respectively, ought to be a fresh reminder of the consequences of wrongheaded governmental priorities.
Making common cause
It takes time to create a pipeline of deals. So even if the strategic-sale programme is restored now, this government won’t be able to sell anything before its term expires in May.
That doesn’t matter. What’s important right now is to send a signal to investors that the two major national parties —the Congress and the Bharatiya Janata Party (BJP)—agree on the need to shrink the balance sheet of the Indian state.
If that message is credible, it would assuage investors’ concerns about what Mumbai-based brokerage Enam Securities Pvt. Ltd calls the government’s “fiscal mess”.
The BJP has snubbed the Congress by not supporting it on the proposed civilian nuclear energy agreement with the US; therefore, it’s unrealistic to assume that the Congress would make common cause with the BJP on asset sales, even when—just like the nuclear deal—it is very obviously the right thing to do.
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