Faced with a massive shortfall in resource mobilization from disinvestment of shares in central public sector undertakings [PSUs] [Rs 40,000 crores] and proceeds from direct taxes [Rs 50,000 crores], Modi – government has issued a diktat to all PSUs to help it avoid slippage in fiscal deficit target of 3.9% of GDP set in the budget for the current year.
It has directed them to give a minimum dividend of 30% of profit after tax [PAT] or 30% of government equity whichever is higher. PSUs having substantial free reserves and capability to make good profits on a sustained basis are required to give special dividend and issue bonus shares. As regards their capital expenditure needs, it goads them to increase their borrowings keeping in mind prudential debt-equity ratio.
The order is regressive and is completely out of sync with Modi’s thrust on granting greater autonomy to PSUs managements to take their own decisions on policy matters. It resurrects the defunct guidelines of 2004 which required PSUs to give dividend @ 20% of PAT or 20% of equity whichever is higher [for PSUs in petroleum and infrastructure sector, this was higher at 30%].
The government has sought to justify its decision on the ground that at present, dividends declared by individual PSUs vary widely and that there is need for a ‘uniform’ policy in regard to distribution of profits and reserves. It also argues that being majority owner, it has the sole prerogative of taking decisions in this critical area though managements can have freedom on operational issues. Both arguments are flawed.
How can there be a uniform policy dispensation for all PSUs? Every undertaking is different in terms of its ability to generate profits and give dividend. That depends on the area of operation, competitive pressures, regulatory environment, commitments in regard to future growth etc. In this backdrop, imposing a uniform dividend obligation on all irrespective of what each can afford would be completely unfair and illogical.
As regards autonomy, this is a holistic concept and must necessarily encompass all aspects impinging on the health and growth of the enterprise. You cannot do cherry picking i.e. give to management freedom to conduct day-to-day operations but not in regard to disposal of their financial resources. The two are inextricably linked with each other. It is virtually impossible to expect them to deliver without giving them control over their resources.
The order takes cognizance of PSUs capital expenditure requirements. In beginning of current fiscal, government had asked them to increase investment and use internal resources to fund this to the maximum extent possible. It has even taken a number of sector-specific policy initiatives to augment their internal resource generation. For instance, in case of ONGC and OIL, in the last quarter of 2014-15 it decided not to ask them share the burden of under-recoveries on sale of petroleum products at low prices. This policy is being continued during the current year.
In this backdrop, for government now to encroach on their internal resources not only tantamount to reversal of its stance but also will jeopardize their investment plans. This could result in a serious set-back to India’s growth story at a time when, private investment is faltering [courtesy, their heavily leveraged balance sheets and under-utilized capacity] and urgent need of the hour is to sustain the tempo of investment in public sector.
The government exudes confidence that PSUs will increase borrowings to fund investment. It argues that some undertakings have low debt-equity ratio which leaves room for increase in borrowing. But, what it does not realize is that their capacity for increased leverage is because of high reserves. But, if you take away their reserves, this capacity will get eroded. And, don’t forget monumental investment needs of some PSUs; for instance, for achieving coal production target of 1 billion tons, Coal India Limited [CIL] would need tens of thousands of crores. For this, both internal resources and borrowings will be required.
India is an energy deficient country. We import nearly 80% of our oil and 30% of gas requirements. These imports guzzle billions of dollars foreign exchange every year. Luckily, since 2014, prices of both have declined sharply and in response to that the cost of equipment and services for oil & gas exploration has plummeted. India’s upstream majors such as ONGC and OIL should use this opportunity to take up exploration and development of oil and gas fields. Therefore, they must not be hamstrung for resources.
The government’s current predicament on the budget front is not of its own making. Unlike erstwhile UPA dispensation which indulged in reckless fiscal profligacy even allowing rampant mis-appropriation of funds meant for welfare schemes, it is using the money judiciously, effectively and without any leakages. It has implemented several steps in this direction with positive outcomes. The savings of about Rs 15,000 crores annually in LPG subsidy due to direct benefit transfer [DBT] under PAHAL is a shining example.
Even on the revenue side, in every area including proceeds from divestment and direct tax, it laid requisite ground work for getting best results. On divestment front, it had a good strategy and well thought out action plan. But, it floundered primarily because of sharp dip in commodity prices including oil resulting in lower valuations. Likewise, on direct taxes, the lower than expected nominal GDP growth [8.2% against 11.5%] has upset the apple cart.
At the same time, the government does not want to slow down the tempo of investment in building physical infrastructure such as roads, highways, ports, railways etc and spending on welfare schemes which it has taken up in right earnest. Yet, any slippage in fiscal consolidation road map will have its ripple effects across a whole spectrum of economic activities due to step up in inflation, higher interest rate, higher current account deficit [CAD].
The government’s dilemma is understandable. But, the measure it has taken recourse to may turn out to be the proverbial ‘remedy worse than the disease’. While, this may provide some relief in short-term, in medium to long-term it may even boomerang by seriously undermining the capability of PSUs to explore oil & gas and acquire assets abroad, increase coal production, build power plants etc.
The government should withdraw the order and leave dividend declaration entirely to the management of concerned PSUs. The amount they give as dividend has to come out of a well thought out policy that gives due credence to their profitability, reserves and funds needed for growth and modernization consistent with sustainable operation under competitive environments.
If, that results in bit of slippage in fiscal deficit by few fraction of percentage point, it should be taken in stride for the sake of sustaining pace of development and creating jobs.