The Finance Minister met the heads of select Central government public sector undertakings (PSUs) recently, asking them to generate higher dividends for the government. He is no doubt on an overdrive to contain the fiscal deficit to its target for the current year.
The Budget for 2013-14 projects the dividend from PSUs at Rs 29,780 crore against the Budget estimate of Rs 27,178 crore for 2012-13.
The fiscal deficit target for 2013-14 is Rs 5.42 lakh crore (or 4.8 per cent of GDP, which could turn out to be a lower absolute target, given the slowdown). The Finance Minister is reported to have said ‘The dividend should not be less than last year’s’.
By issuing such an instruction, the Finance Minister may well be trampling on the operational autonomy of public sector enterprises. It is a soft option – one that evades the need to carry out full-fledged reforms in a host of areas.
The diktat brushes aside does not appreciate the difficulties involved in ramping up dividend payouts in a situation of economic slowdown.
The board of directors, including the government nominee director, have to weigh several factors before deciding on the amount of dividend.
Dividend determinants
One of these considerations is financing capital expenditure. PSU plan projects should be financed out of internal resources.
Else, the dependence of the PSU on the government budget for such investment (Rs 26,000 crore) will go up.
This will nullify any fiscal deficit reduction arising out of PSU dividend. (Fiscal deficit is the difference between total receipts, excluding borrowings, and total expenditure, revenue and capital.)
Another factor that impacts dividend is the PSU’s cash position. Arrears in the recovery of revenue can be a problem for some PSUs, for example, those supplying power to the electricity grid.
Lastly, the government’s policy of passing on the subsidy burden to the PSUs erodes their profits — for instance, upstream PSUs such as GAIL and ONGC having to foot part of the subsidy which legitimately should be borne by the downstream companies or the Centre.
However, loss-making PSUs do require close attention and monitoring by the government.
They need to go through in-depth analysis and take course correction steps. For example, BSNL has undergone a steady erosion of net worth since 2010 when it reported a loss of Rs 1,823 crore, and has sought a bailout package of Rs 15,000 crore from the government. It is unlikely to show a profit until 2018.
That the PSUs are in a sorry state is also borne out by the difficulty in disinvesting shares to bolster the Centre’s Budget. The Board for Reconstruction of Public Sector Enterprises (BRPSE) was established in 2004 to advise the government on strategies for reviving and reconstructing public enterprises.
The BRPSE has looked into the running of 63 enterprises and recommended the closure of 16 units. Those recommended for closure include Hindustan Photo Films, Hindustan Antibiotics, HMT Watches, National Textiles Corporation and its subsidiaries and Scooters India. Closure of sick units may help reduce the government deficit.
NPAs piling up
The non-performing assets (NPAs) of public sector banks (PSBs) is a cause for worry. These have been going up in the last two years. Gross NPAs rose to Rs 1.76 lakh crore in quarter ended June 2013, from Rs 1.55 lakh crore at the end of March 2013.
The government needs to draw up a time-bound remedial action plan. This pre-emptive step will prevent a future bailout from the government budget. The Railways is not a PSU; it is a departmentally-run commercial undertaking. Its impact on the government budget deserves serious review.
The CAG’s Audit Report on Railway Finances, 2013, has drawn attention to the Railways facing a severe financial crunch.
The Railways has to rationalise both freight and passenger tariffs to generate an operational surplus. At present, freight revenue subsidises passenger services to the tune of Rs 26,000 crore per annum. High freight rates are untenable, especially when the Government is trying to tackle higher inflation.
The prevailing macroeconomic situation of high inflation and low growth is not conducive to bringing the fiscal deficit in check. Shortcuts such as dividend from PSUs and disinvestment of shares will not help.
How the fiscal deficit is reduced is as important as the extent to which it. This calls for a basic review of expenditure management methods, and a raising of revenue.
( The author was Joint Secretary in the Union Government and IMF Budget Adviser. )