Rahul Khullar: The devil is in the detail

The four main non-tax revenues are: disinvestment proceeds (capital receipts); interest; dividends from public sector units (PSUs) and public sector banks (PSBs) as well as the surplus of the Reserve Bank of India (RBI); and revenues from the telecom sector.  First, some stylised facts. Disinvestment budget estimates are rarely realised. And, interest receipts are flat. So, the government has come to rely on buoyancy in the other areas for filling the budgetary hole. As a percentage of non-tax revenues, dividends and RBI surplus account for 45 per cent and telecom revenues for 20 per cent.

Disinvestment is supposed to improve public management of PSUs and PSBs and, incidentally, raise revenues. However, the revenue motive has dominated, to the exclusion of all else - including management reform. And when budgeted numbers were not realised, the recourse was to compel PSUs to cough up more as dividends. Further, RBI’s profits accruing to the finance ministry have also seen a huge jump - the central bank’s entire surplus is now remitted to the ministry. Finally, spectrum auctions have yielded bumper revenues. As always, the non-tax revenue targets are ambitious. So, can they be met?

First, dividend income is unlikely to grow. Price deflation has hit companies’ earnings; PSUs will have the same problem. And financially stressed PSBs will have a hard time remitting dividends when provisioning pre-empts all else.

Second, the one-off buoyancy effect of the remittance of RBI’s entire surplus is over. That leaves us with the fallback of arm-twisting PSUs for higher dividends. But a drawdown of PSUs’ existing reserves has adverse impacts, such as lower market cap values.

Disinvestment targets (Rs 56,500 crore, including Rs 20,500 crore from strategic sales) are lower but still ambitious. Strategic sales are welcome. But is this déjà vu? Strategic sales are tricky and were last undertaken when the Vajpayee government was in power. The other disinvestments have attendant problems. As profit margins dwindle, so do PSU valuations. Stripping them of ever-higher dividends does not help.  As for PSBs, even though disinvestment is being pushed with the best of intentions, the actual sell-off will be seriously constrained. Valuations of banks have crashed. And till there is greater clarity - or transparency - about asset quality, there will be few takers for divested equity. Finally, the timing of sales in volatile markets is fraught.

The burden will fall on telecom (Rs 99,000 crore), nearly twice last year’s level. License fees and spectrum usage charges will yield Rs 25,000 crore. Therefore, it all hinges on auctions. Telecom companies’ internal accruals are severely constrained. Recourse to bank debt is ruled out. Equity flows to the sector dried up five years ago. Is this really the best time to sell spectrum, when the reserve prices bandied about are already too high? Fast tracking auctions may actually benefit only those with deep pockets. And, by using telecom as a milche cow, we risk jeopardising the sector’s growth, apart from the knock-on effects on the already-stretched PSBs. Also, there was no word on expenditure commitments on Digital India or BharatNet.

The finance minister is between a rock and a hard place. Could he have done better? Consider the following: not a word on divestiture (even partial) for PSBs signals business as usual, viz mergers of sick banks with healthy ones; there should have been a clearer articulation of outright and majority sales in PSUs; not even lip service to closure of unviable PSUs, such as fertiliser units, National Textile Corporation mills; monetisation of assets, such as land, of dormant or dead PSUs; absence of efforts at improving PSU management; inducting turnaround management teams for the five most seriously ailing PSBs; and, finally, a non-myopic approach to telecom was required (if telecom dues become non-performing assets, calling for a bailout, what have we achieved?).

Growing non-tax revenues have cushioned governments from taking hard decisions, such as raising tax revenues or sustainable expenditure reform. Now would have been a good time to signal a willingness to undertake serious reform. Instead, it’s same old, same old. Opportunity lost.
The writer is former chairman of the Telecom Regulatory Authority of India