When the going gets tough, the government gets desperate and takes the easiest way out.
The recent auction of the 2G telecom spectrum was supposed to raise Rs 40,000 crore. It hardly raised anything close to that amount.
The disinvestment process, which is supposed to raise Rs 30,000 crore during the course of the year, has not raised a single rupee nearly nine months into the year.
What does not help is the fact that the amount of tax collected seems to be slowing down.As economist Shankar Acharya recently wrote in theBusiness Standard: "By end-September the government's tax receipts amounted to less than 40 percent of the year's budget target."
During the first half of the financial year (i.e. between April and September), the fiscal deficit was at Rs 3,36,000 crore, or 65.6 percent of the targeted fiscal deficit of Rs 5,13,590 crore for the year. Fiscal deficit is essentially the difference between what the government earns and what it spends.
What all this tells us is that the government of India is spending more and more money and is not earning enough to finance the expenditure. Also it is not in a position to control it expenditure given its commitment to the aam aadmi.
And that has made it desperate enough to bend its own rules. The Economic Times reported yesterday that the finance ministry has allowed Life Insurance Corporation(LIC) of India to own up to 25 percent of a listed company. The Insurance Regulatory and Development Authority (Irda), the insurance regulator, allows insurance companies to only own up to 10 percent stake in a listed company as a prudential measure.
Irda has blasted the government for going ahead with this decision. As The Economic Times reports, "Irda, which had in 2008 amended investment norms to prohibit an insurer from holding more than a 10 percent stake in a company, openly criticised the government's decision,with Chairman J Hari Narayan saying it was against prudence. "It is against the (Irda) Act and against any prudence," he said."
I agree with Irda. There are multiple reasons for the same. As George Orwell wrote in Animal Farm: "Allanimals are equal,but some animals are more equal than others." The government is working on this principle by allowing LIC to own up to 25 percent of a listed company when the other insurance companies can own only up to 10 percent of a listed company. There can't be two separate rules for companies in the same line of business, which is insurance in this case.
Also what happens in a situation when LIC ends up investing in a company which turns out to be a dud? Imagine what would happen when LIC decides to get out of the shares of such a company. The stock price of the company will fall, impacting returns of investors who have bought insurance plans from LIC. As the old saying goes, "putting all eggs in one basket" is a pretty risky proposition and goes against the basic principles of investing. As Hari Narayan of Irda told The Economic Times: "They have to understand the gravity of the issue and the potential danger...I do not agree with the government."
So the question is why is the government going ahead with a move which is fundamentally so wrong?The thing is that the government is desperate to raise money one way or another. Its attempts at selling 2G telecom spectrum have flopped miserably. It also knows that with all the scams its credibility is at an all-time low. And if it tries to sell shares of public sector companies in the open market, the process might flop in the same way that the recent 2G spectrum auction did.
Hence, in this scenario the biggest hope for the government is LIC. The trouble, of course, is that in some of the companies that the government wants to sell shares, LIC may already have a stake which is close to the mandated 10 percent. So to get around this the government has raised it to 25 percent.
This means the government is planning on using LIC as Plan B in its disinvestment drive - someone who will bail it out if regular disinvestment does not raise enough money.
But is this real disinvestment, when money is being moved from one arm of the government (LIC) to another (the central government's annual budget)?
As I had written in another piece recently, when it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March). At that point of the year people start seriously thinking about their tax-saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for existing ones. And that's when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest. Given this, the change from 10 percent to 25 percent has been made just at the right time.
The only loser in the process is the individual who puts his hard-earned money into the insurance plans of LIC and ends up financing the fiscal deficit of the government. This is nothing but another form of "financial repression" where the premium that Indians pay towards their LIC insurance policies will end up financing the fiscal deficit of the government.
The aam aadmi will indirectly be bailing out the government.
Hence, don't be surprised if your LIC agent aggressively starts marketing unit-linked insurance plans (Ulips), which invest in stocks, in the remaining part of the year. They will have no other option. The instructions will come right from the top.
Also, this does not do anything about the basic problem which is that the Indian government is spending much more than what it can write cheques for.
Vivek Kaul is a writer. He can be reached at email@example.com