Any discussion on the abolition of income tax engenders an inevitable question: how would be the deficit filled? For 2018-19, total accruals from the income tax have been pegged at Rs 441,255.27 crore as per the revised budgetary estimates. The gross tax revenue for the fiscal is Rs 1,946,119.15 crore. That is, the collection from income tax is just below 23 per cent of the total tax revenue. It’s a huge amount, so what would compensate that? The answer is the privatization of public sector undertakings (PSUs).
The market capitalization of all Central PSUs on November 8 was Rs 1,360,028.63 crore, which was almost one-tenth of the total market capitalization. On the face of it, if the government sells its entire stake in CPSUs, it will get revenue worth the income tax accruals in three years. In reality, however, it would be much more.
Let’s begin with the immediate gains of privatization. Consider two privatizations, that of Bharat Aluminium Company Ltd (Balco) and Hindustan Zinc Ltd (HZL). Following a competitive bidding process, both PSUs were sold to Sterlite, owned by the Anil Agarwal-promoted Vedanta.
The strategic sale process for Balco began in late 1997 and reached completion in March 2001. Sterlite Industries, the highest bidder, paid Rs 551.5 to buy 51 per cent stake in the aluminium major. But that was not the only accrual to the public exchequer. Prior to the sale, the government realized that Balco had a bloated equity of Rs 489 crore and large unutilized free reserves of the level of Rs 424 crore. So, the Ministry of Mines suggested that its equity be reduced by 50 per cent before disinvestment. The suggestion was accepted, and the government received Rs 244 crore from the capital restructuring of Balco and another Rs 31 crore as tax on this amount as a precursor to privatization.
In other words, the government, under Atal Bihari Vajpayee, got Rs 826.5 crore from Balco sale. Since at that time the government borrowed at a 10 per cent rate of interest, the privatization saved about Rs 82 crore each year, against approximately an average of Rs 5.69 crore it got as dividend when it owned the company.
Similarly, Sterlite acquired HZL in November 2001 by paying Rs 445 crore for 26 per cent stake in the zinc major. Again this resulted in an annual saving of Rs 44.5 crore against an average dividend of Rs 3.5 crore that it got in the previous eight years.
Besides, there are benefits for the public exchequer post-privatization, for when a PSU is privatized, its efficiency improves and consequently market value increases. Vedanta-owned Sterlite paid about a total Rs 1,000 crore in 2001 to buy 51 per cent equity in Balco and 26 per cent in HZL. In 2016 Vedanta was willing to pay Rs 25,000 crore to acquire similar percentages in the two companies—49 per cent in Balco and 29.54 per cent in HZL.
It is inexplicable why the Narendra Modi government, which is unable to provide relief to fuel users and increase allocation for defence procurement, has not decided to sell the residual stake in the erstwhile PSUs.
It is indubitable that the valuation of Balco and HZL increased significantly after privatization. Even more spectacular has been the spike in the valuation of Maruti Udyog Limited (MUL). The government approved disinvestment in MUL in May 2002. The point to be emphasized here is that at that time it was not a PSU; it was an equal joint venture between Suzuki and the government, both holding just below 50 per cent shares. A two-stage process was adopted. In the first state, a rights issue by MUL in the first phase of Rs 400 crore with the government renouncing its rights share to Suzuki. Suzuki would gain majority control and pay Rs 1,000 crore to the government as control premium. It would be followed with a a public issue in the second phase; the issue would be underwritten by Suzuki.
The initial public offering duly followed in 2003, with a price of Rs 125. At present, Maruti share is trading in the region of Rs 7,400. In December last year, it had actually crossed the Rs-10,000 mark. In the last 15 years, the stock has climbed almost 60 times, just because government got out of it.
What we have proved is that once a PSU is privatized, a lot of value is created. So, the government—instead of selling minority stakes in state-run companies and bridging the fiscal deficit as it is doing now—should focus on selling substantial stakes in these companies to strategic partners. Later, when the company performs better, as it is most likely to, the government can sell its residual equity. If the government starts privatizing PSUs, their market capitalization would grow many times more than it is now, which is Rs 13.6 lakh crore. The shortfall arising because of the loss of income tax money will be more than taken care of.
The point pertinent to our case—abolition of the income tax—is that there is a huge potential in state-run companies that is waiting to be tapped. This fact was acknowledged by the Bharatiya Janata Party-led government under Vajpayee. So, the official Disinvestment Manual 2003 said that privatization would release “large amount of public resources locked up in non-strategic PSEs [public sector enterprises, another term for PSUs] for redeployment in areas that are much higher on the social priority, such as basic health, family welfare, primary education and social and essential infrastructure.”
Besides, privatization would check the “further outflow of scarce public resources for sustaining the unviable non-strategic PSEs.” Remember Air India, the white elephant that is continuously trampling the taxpayer? Its accumulated losses are about Rs 50,000 crore.
The 2003 manual also mentioned that privatization would reduce “the public debt that is threatening to assume unmanageable.” The threat has become real now. The government is behaving like deer in the headlights—fleecing fuel buyers, appropriating the reserves of cash-rich PSUs, fighting the Reserve Bank of India.
Privatization would also transfer “the commercial risk, to which the taxpayers’ money locked up in the public sector is exposed, to the private sector wherever the private sector is willing and able to step in,” the manual said.
Further, privatization would help the government focus on its primary duties—that is running administration, maintaining law and order, defending borders, and managing foreign affairs.
Since privatization is the boldest economic reform, for it is the rollback of the state from the economy, it will also convince investors, domestic as well as international, that India is committed to liberalization. Investment will increase the growth rate and, more importantly, create jobs. This is not just theory; it happened in the past. During five years under Vajpayee (1999-2004), when liberalization and privatization were at peak, 60 million jobs were created. In the next 10 years, when the Left-leaning United Progressive Alliance government was in power, only around 15 jobs were created. And this figure came from the Planning Commission under the UPA.
It can be, and is often, argued that the money raised by selling PSUs is akin to ‘selling family silver to pay the grocer’s bill.’ The argument is spurious on many counts. First, a large number of PSUs can scarcely called family silver. In the last fiscal, for instance, 93 such entities lost over Rs 34,600 crore. These were the direct losses; but PSUs also cost the taxpayer thousands of crores in terms of hidden subsidies. In the period between 1992-93 and March 2000, these subsidies amounted to Rs 34,104 crore. Typically, hidden subsidies are in the forms of fresh infusion of government money, loans converted into equity, loans written off, waiver of guarantee fee, freezing of loan/interest payments, moratorium on repayment, exemption from payment of taxes, etc.
Second, even those making profits are not doing as well as they would have done had they been in the private sector. We saw that in the cases of Balco and HZL. Their valuation increased 25 times in 15 years. Even if the profit of a privatized company increases four times in a few years, the government would get as much tax from it as the profit it was making in its public sector avatar. Remember what the government gets as owner of a company is not its profit but dividend which is normally less than or equal to profit.
Quite apart from generating huge revenue for the exchequer, privatization will also help reduce government expenditure, which is especially true about public sector banks (PSBs). Indian banking, over two-thirds of which is in the public sector, is in a mess. This is primarily because of their ownership; as nationalized lenders, they are under the control of politicians and bureaucrats, who are surely not the most honest and competent people. Unless the ownership is changed—that is, PSBs are privatized—there is little possibility of having a robust banking system.
Within the public sector framework, various schemes have been tried; none has succeeded. For instance, the Banks Board Bureau (BBB) was set up in February 2016 under former Comptroller & Auditor General Vinod Rai. Let alone cure the system, it even failed to detect the Nirav Modi-Mehul Choksi scam.
Earlier, in August 2015, Finance Minister Arun Jaitley had launched a seven-pronged plan, Indradhanush. Its components comprised improved method of appointments, a BBB, capitalization, de-stressing, empowerment of bankers, framework of accountability, and governance reforms. In February 2017, the government was reported contemplating even Indradhanush 2.0, which was an attempt to have a recapitalization programme in tune with the global capital adequacy norms, Basel-III.
Policy and opinion makers have also toyed with the ideas of bank mergers and a bank-holding company—to no avail. Non-performing assets or NPAs continue to rise; unscrupulous businessmen like Nirav Modi and Vijay Mallya continue to fleece PSBs with impunity; and the NPAs of PSBs keeps rising and their performance falling. For instance, the return on equity (ROE) of PSBs was -2.8 per cent in 2016-17, whereas that of private banks was 12 per cent. NPAs in PSBs climbed from 5.43 per cent (Rs 278,466 crore) in March 2015 to 13.69 per cent (Rs 733,137 crore) June 2017. Further, PSBs have written off NPAs Rs 360,000 crore in the last 10 years.
In the last 11 years, government after government has spent Rs 2.6-lakh crore taxpayer money in the name of PSB recapitalization. This is apart from the Rs 2.11-lakh crore recapitalization announced by the Narendra Modi regime to be spent in 2017-18 and 2018-19.
This is inexcusable, especially as the government is fiscally stressed. If the government decides to sell PSBs, it will save lakhs of crores that otherwise would be spent recapitalizing them. Further, the government can earn huge sums by selling them off.
It has been widely reported in the media that the combined market capitalization of all PSBs is less than that of one private bank, HDFC, but it indisputable that the worth of PSBs, with their nationwide network, is enormous; their potential is stupendous but it can only be tapped if these are privatized and thus brought out of the control of politicians and bureaucrats.
There is another benefit of income tax abolition. This would result in more money in the pockets of people which they will spend and invest. When they spend more money on goods and services, there is higher collection of goods and services tax or GST. This, along with more investment, economic activity gets a boost, thus fueling growth and employment.
We have not only answered the query—how to compensate for the loss of income tax revenue—but also highlighted that the limitless benefits of the way out, privatization. So, should privatization be done? Yes, certainly. It would presuppose fundamental shifts in thinking and necessitate major reforms and structural changes in the economy, but that is the need of the hour. But would it be done? Well, that’s another story.