Commentary/Yazad Darasha

Go ahead, Mr Chidambaram, puncture my balloon

Is Finance Minister P Chidambaram suffering the pre-Budget jitters as much as I am? I sure hope so. Never has more hinged on one single event than on the Finance Budget for 1997-98.

Two nights I spent awake worrying about the fiscal deficit. And I woke up on the third day with a bit of a brainstorm. Frankly, I fail to see the significance of this obsession we have with the fiscal deficit. What exactly is this animal that we are so scared of -- so worried that it will grow too large to handle with comfort?

Fiscal deficit is really nothing but the revenue deficit plus borrowings. So that makes two components, although each of the components has sub-components. Borrowings is divided into domestic and external borrowings. While the external side is fairly stable and has been for a couple of years, the domestic borrowings of the central government have escalated.

If the borrowings come down, the fiscal deficit will decrease, obviously. But my point is that borrowings cannot come down in any significant volume, because the government does after all have to function, and functioning needs money. A system of prudential expenditure norms, if set out and put into effect right now, will certainly make a difference three to five years down the line. But not immediately.

That, however, does not take care of the immediate need to reduce the fiscal deficit as a percentage of GDP. And that is where the revenue deficit enters the picture.

The revenue deficit is, as the term implies, the difference between revenue expenditure and revenue income. Increase the income and/or decrease the expenditure, and there you have made a significant dent in the revenue deficit, and consequently the fiscal deficit.

How does one bridge the revenue deficit? Decreasing expenditure on the revenue side runs into the same roadblocks. How can income be increased? Now there is a possible solution that can work in the short term.

Revenue comes from diverse sources -- taxes and duties; returns on investment etc. Increasing revenue from taxes and duties -- both direct and indirect -- need not necessarily imply raising taxes. In fact, on the new economic path that India is treading, a lowering of taxes across the board is more prudent, especially if we are to keep the long-term viewpoint alive and work towards increasing production, industrial growth and consequently GDP.

No, increasing taxes will only work in the short term and actually prove counter-productive three to five years down the line. Instead, a great way would be to reduce taxes and broaden the tax net.

But a more immediate solution (well, relatively immediate) would be on the front of the public sector enterprises. P Chidambaram has already indicated that this sector is high on his agenda. Whether he can convince the left-leaning and socialistic components of the 13-party government at the Centre of the need to revamp the public sector is another matter altogether.

PSUs are the largest single drain on our revenue. Just think of the gains if there is a serious attempt to block this drain. And once the leakages are plugged to a large extent, every PSU can begin paying dividends just as the private sector does. Only, in this case, a large part of the dividends will be paid to the central government, which is the largest -- in many cases the only -- shareholder in the PSUs.

Chidambaram has talked about scrapping new PSU projects that are over six months delayed and where not more than 5 per cent of the estimated capital cost has been spent. This will be a small move that will have ramifications only in the future -- some good, some bad. Whenever a project is shelved, the future earning capacity of the PSU is also curtailed. But some of the capital drain is plugged.

For the moment, however, picture the scene: a finance minister gets tough. Unlikely? Perhaps. But picture it anyway. Chidambaram -- or whoever else holds the hot potato of the finance portfolio at any given time -- gives every loss-making PSU three years. Within that three years, it either begins to show profit and starts paying the shareholders (the government) dividend, or faces partial or full privatisation. And if not privatisation, the ultimate humiliation -- selloff. (Hey, come on, if the Reserve Bank can set capital adequacy targets for the banks, why not profitability targets for PSUs?)

Do the PSUs have the means to achieve profitability in three years? Well, they have the means of production (a lot of capacity), they have the people (a lot, really a lot, of staff, with quite a few who are pretty good -- witness the Steel Authority of India) that they can put to better use, and they have the markets.

What more does any manufacturing concern ask for? Simple. Sound, ruthless management that does not face constant political interference and pressure. Obviously, Chidambaram would have to make sure that chairmen are appointed on merit and allowed to function to the best advantage of that merit.

The men thus appointed would also need to be given reasonable guarantees about their ability to rationalise staff -- hire the best and sack the dross -- without running into political union problems. This may be easier than feared, as there is a left element in the government that needs to be convinced of the need for this step.

Then set the dividend payment targets for each PSU. And watch the money roll in.

Next step? Set the same dividend targets for the private sector? Why not? Isn't it something to think about? One great fallout of that would be a massive boost to the capital markets, as investors will rush to get their slice of the dividend cake! And the companies will consequently find it easier to raise resources from a vibrant capital market, which... A virtuous cycle indeed.

Go ahead, Mr Chidambaram, puncture my balloon.

Tell us what you think of this column