How Chidu's financial jugglery will make slowdown worse

Palaniappan Chidambaram’s red line around the country’s fiscal deficit - he has promised to contain it within 4.8 percent of GDP this year - is little more than financial jugglery. He will surely achieve the target, but in reality he will be hiding the deficit elsewhere. And making the economy’s slowdown worse in the process.

Evidence of this financial legerdemain are visible everywhere. Take the case of the government’s expected decision to ask ONGC and Oil India to buy a 10 percent stake in Indian Oil in order to drum up disinvestment revenues.

Since both ONGC and Oil India are government-owned, this merely means the transfer of money from one pocket to another. What shows up as government revenue after disinvestment will show up as lower cash balances with the oil producers. And this excludes the direct subsidies that ONGC and Oil India pay to Indian Oil for selling diesel, kerosene and cooking gas well below cost to consumers.

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[caption id=“attachment_1289941” align=“alignright” width=“380”]  Chidambaram will not meet his fiscal target unless he cuts capital spending. PTI[/caption]

Shifting money from oil producers to government coffers is not revenue. The payment of subsidy to Indian Oil is government-sanctioned cheating of investors in ONGC and Oil India. It constitutes misgovernance of the highest order.

Less wrong is the move to ask cash-rich Coal India to pay a special dividend - but once again this is against the long-term interests of energy policy and Coal India investors.

The finance ministry hopes to ask Coal India to fork out around Rs 9,000 crore as special dividend in case there is no money coming in from disinvestment. Non-government investors will also get extra dividends - but at the cost of future growth. “If CIL does not go for divestment, then they have to provide us a special dividend,” Economic Affairs Secretary Arvind Mayaram told PTI.

But is it the job of CIL to finance the fiscal deficit or bring more coal mines under production in order to reduce coal imports?

What is being transferred as special dividend to government, to provide Chidambaram with his fiscal figleaf, is really money taken away from investment in coal projects, not real revenues. Not only that, but Coal India’s inability to raise coal production is leading to higher imports (with negative consequences for the current account deficit), higher coal prices for power plants (and hence higher tariffs), and lower domestic investment in coal, which will worsen the slowdown. If big energy conglomerates like Coal India, ONGC, Oil India and even private players like Reliance Industries do not invest in expanding energy production, growth will slacken further and government revenues will fall faster.

In fiscal 2012-13, when Pranab Mukherjee could not find enough resources to bring his deficit down, he asked Life Insurance Corporation to buy shares in ONGC. Since he did not have money to recapitalise public sector banks, he again asked LIC to pitch in with money.

Look at it this way. Money from LIC is being used to allow government to sell shares in oil producers and call it revenue; money from oil producers is being used to sell shares in oil marketers and called revenue; and money from oil marketers is being used to subsidise diesel users - including those using diesel cars, SUVs, and rich farmers using diesel pumpsets - leading to an unprecedented expansion of the fiscal deficit. And money from LIC is also being used to recapitalise banks - and the government-owned insurance sector is now one of the biggest investors in banks. This understates the real expenditures of the government.

In the entire process, money is being transferred from one government pocket to another, and sometimes to favoured consumer constituencies.

But even with all this Chidambaram will not meet his fiscal target unless he cuts capital spending. In the first eight months to November 2013, the UPA government had already used up 94 percent of its full year’s fiscal deficit target. With only six percent left for the remaining four months in a high-spending election year, Chidambaram will push the brakes on capital expenditure - which will make the slowdown worse as money will be bottled up.

The country will pay a heavy price for this financial jugglery.