Raiding PSU reserves unsustainable way of plugging budget deficits

20 Dec, 2011, 04.51AM IST, ET Bureau…editorial in the ECONOMIC TIMES
Raiding PSU reserves unsustainable way of plugging budget deficits

The fiscal deficit looks like widening by at least one percentage point above the budgeted 4.6% of GDP. Economic growth could slow down next year. Meanwhile the government has ambitious but expensive new schemes in mind, for food security and universal health. So, many analysts want the government to take advantage of tens of thousands of crores lying in the reserves of public sector undertakings (PSUs).

When a private sector owner is in trouble, without a second thought he transfers sums from profitable companies to meet his current spending. Many analysts think the government should do the same. However, such transfers are one-off affairs and cannot be sustained over time. They can be justified in difficult times, but should not become a habit. Spectrum sales have in the past been taken to be current revenue, whereas they should actually be shown in the capital account as a reduction of assets. In the case of manufacturing PSUs, their cash surpluses are not large in relation to their investment plans, and these should not be commandeered by the government.

But many PSUs in mineral extraction have large, rising surpluses well in excess of investment needs. It makes sense to save part of this for future generations by investing abroad (as ONGC, Coal India and OIL have been doing) and spending part of it for current social purposes via the budget. We need a policy on how to apportion that bonanza. There are three ways in which PSU reserves can be transferred to the government. One is the declaration of huge special dividends. The second is a buy-back of shares by the PSU. The third is for PSU to use their surpluses to buy out minor stakes of the government in other PSUs.

A special dividend will benefit all shareholders. A buy-back could in theory be restricted to buying back government stakes and not publicly-held stakes, but that would be unethical and Sebi should say no. The third route also cuts out private shareholders and should be avoided altogether. Better than all these will be quick enactment of a goods and services tax, which can bring in additional revenue and plug the fiscal deficit sustainably.