Multiple sources told Business Standard Jaitley was likely to ask PSU chiefs to use their cash piles to either boost public investment or partly offset the expected shortfall in tax receipts.
According to guidelines set by the Department of Public Enterprises, all profit-making PSUs have to declare dividend payout of at least 20 per cent of their profit after tax (PAT); profit-making PSUs in the energy and infrastructure segments declare dividend of 30 per cent of PAT. All profit-making joint-venture companies in which the Centre holds stake have to pay dividend of 20 per cent on the government’s equity holding. In practice, however, PSUs end up paying higher dividend.
Former finance minister P Chidambaram had exerted pressure on major PSUs to give higher special dividend to the Centre. In 2013-14, as he set about meeting a fiscal deficit target of 4.8 per cent of GDP, while his disinvestment plan was floundering and tax revenue falling short, the expected proceeds from PSU dividend were scaled up 44 per cent — from Rs 29,870.12 crore to Rs 43,074.58 crore.
As reported earlier, at the end of March this year, 54 major listed central government enterprises were sitting on cash and cash equivalent of Rs 2 lakh crore, unchanged from a year earlier. The amount is about a fifth of the cumulative investment in fixed assets by these companies. The bulk of this cash lies in bank deposits, which earns little as interest. Coal India accounts for about a quarter of this cash pile. In the past, the company has paid dividend of as high as 81 per cent of PAT.
This year, while Budget planners are enforcing cuts across government departments, they are also looking at alternatives. “At this stage, we feel confident we can meet it (the fiscal deficit target) with expenditure cuts. If that's not possible, we will look at other measures,” Chief Economic Advisor Arvind Subramanian had said in an interview with Doordarshan last week.
“Other measures" could include higher proceeds from disinvestment, telecom spectrum sales and PSU dividend. However, with just three months left this financial year, ramping up the disinvestment drive at a time when just one company has been divested so far seems a big ask. Also, officials say Budget planners cannot depend on blockbuster spectrum sales. As such, banking on PSUs to pay special dividend seems the only option.
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“When push comes to shove, the finance minister can make PSU chiefs to pay more dividends, though the final decision has to be taken by the boards of these companies,” said a senior government official.
Officials concede in asking for higher dividends, Jaitley may eschew longer-term investment gains for shorter-term fiscal comfort. When PSUs pay higher dividends to the Centre, it is usually at the cost of capital expenditure in new and existing investments.
In his mid-year economic analysis earlier this month, Subramanian had made a strong case for public investment driving economic growth. "We have identified public investment could be an engine of growth. Public investment could crowd in; private investment could complement,” he had said.
The rationale behind the statement was while private corporate investment outstripped public investment in the boom years, it also fell much faster than the latter when the economy slowed. Public investment has proved to be more stable since 1999-2000 and, if increased, can cushion India against an economic downturn.
"If PSUs pay the Centre higher dividend, they cannot invest that money in new projects. It is a balancing act Jaitley will have to deal with. A case has been made for greater public investment," said another government official.
Though a separate meeting with PSU chiefs is not on Jaitley's pre-Budget agenda, this isn't being ruled out. Last financial year, Chidambaram had met PSU chiefs separately to direct them to either invest their cash pile or pay dividend to the Centre.
Among major PSUs, only ONGC has declared an interim dividend for this financial year (Rs 4,277 crore). Of the dividend, the Centre will receive Rs 2,948 crore on its shareholding, along with dividend distribution tax of Rs 855.5 crore.