Faced with huge shortfall in tax revenue and expenditure (especially subsidies) going out of bound, Government is frantically looking for resources to rein in deficit within 4.8% of GDP or Rs 540,000 crores for the current year i.e., 2013-14.
It has opened battle lines on several fronts. The steps under serious consideration include a substantial compression in plan expenditure, postponement of subsidy payments and cut in Government procurement etc.
Another item on the centre stage is proceeds from dis-investment of Government’s shares in public sector undertakings (PSUs). While, preparing the budget, it had estimated these proceeds to be Rs 40,000 crores. It had also taken credit of Rs 14,000 crores from sale of its residual holding in BALCO & HZL.
Thus far, with just two-and-a-half month to go, progress has been extremely disappointing with proceeds from PSU divestment to be a meagre Rs 5000 crores. The sale of residual stake in BALCO & HZL is also facing legal hurdles!
Desperate to reach the target, Government is contemplating a series of steps that would prove to be counter-productive to the health and growth of various undertakings that it intends to rope in to somehow make its program successful.
Thus, it is directing ONGC and Oil India Limited (OIL) – upstream oil & gas exploration companies – to pick up a 10% equity stake in Indian Oil Corporation (IOC), a downstream oil refinery and marketing central undertaking to garner around Rs 4500 crores.
The proposal is reminiscent of a similar exercise in skulduggery undertaken way back in 1998-99 when ONGC and IOC were asked to pick up 10% equity stake in each other and each of them to invest 5% in Gas Authority of India Limited (GAIL). GAIL in turn, was to invest 2.5% in ONGC.
Through that 3-way cross-investment, Government was able to garner Rs 6000 crores. There was some rationale in that exercise as IOC and ONGC were then jointly contemplating investment in exploration, refinery, petrochemicals, refinery etc. So, there were some synergies the two PSUs to exploit to mutual benefit.
In the present proposal, there are no synergies or complementarities to be exploited from investments by ONGC and OIL and the sole consideration is to somehow generate money for Government to meet its fiscal deficit target. The big question is whether, these undertakings have funds to spare?
Both are in the business of exploration and development of hydrocarbon resources. They have huge expenditure commitments to increase supply of oil and gas so that India’s dependence on imports can be reduced. These are fundamental to enabling country’s advance towards energy security.
The seriousness of energy crisis facing India can be gauged from a statement by Petroleum Secretary, Vivek Rae (made at recently held Petro-tech 2014 conference) that ‘our energy imports are hitting around US$ 100 billion; but for IT revolution and remittances from Indians abroad adding to US$ 120 billion, India would be knocking at doors of IMF’.
ONGC has faced a substantial deterioration in its internal finances primarily because of Government’s directive to contribute to ‘under-recoveries’ by oil marketing companies arising from sale of diesel, kerosene and LPG at subsidized rates. During last decade, it made a cumulative contribution of over Rs 216,000 crores.
As a result, its cash balances have almost scratched the surface with a meagre Rs 6000 crores (as on March 31, 2013). Even this will be completely wiped out due to a demand worth Rs 5000–6000 crores ‘retrospectively’ from 2008 raised by Gujarat government towards royalty on oil & gas sold to downstream oil PSUs.
ONGC gives its contribution to under-recoveries by way of discount on sale of crude to oil PSUs. Net of discount, its realization is around US$ 40 per barrel which is barely sufficient to cover production cost from existing fields.
Production from new fields – most of these ‘deep water’ and other difficult terrains – will be at a substantially higher cost. Consequently, far from being able to generate internal resources, it may even go in to a negative territory.
The situation is so precarious that ONGC will be forced to go for borrowings on an unprecedented scale to fund its capital expenditure program @ Rs 35,000 crores per annum. From around 20% in last couple of years, entire investment may have to be supported by borrowings.
OIL too has been similarly affected by Government’s piggy back ride on upstream undertakings to do what is solely the responsibility of the former. It is also seriously stressed to play its legitimate role in India’s mission for energy security.
In this backdrop, to expect ONGC and OIL to make a further contribution of Rs 4500 crores to make Government’s divestment program succeed is untenable and preposterous. Not just that, Government is also eyeing on ONGC (besides other PSUs) for giving ‘special’ dividend. It is looking for money where it does not exist!
At this pace, the so called ‘Maharatna’ central PSUs which have been generating huge surpluses year-after-year and until a few years back standing on rock solid foundation, will turn sick. And, with this our much touted energy security program collapse.
Divestment of Government’s equity stake in a PSU per se is a good idea. However, this makes sense only when shares are sold to public or to prospective strategic partners. While, garnering resources for exchequer, it leads to wider participation and running of company ‘professionally’ and ‘efficiently’.
But, the type of dis-investment being contemplated viz., forced sale of shares to other PSUs with the sole intention of meeting Government’s own consumption needs is ‘unconscionable’.
Initially, the Government was planning to sell shares to public and had even done road shows. But, the response was lukewarm even as investors were not willing to pay expected valuation for purchase. So, it dropped that idea.
Instead of going for a perverted route, it needs to introspect as to why the response from public was mute? Why the value of IOC shares has nosedived? Why does decline show no sign of abatement?
The sole reason is Government’s zeal to use IOC (besides HPCL & BPCL) as platform to give doles to consumers. It does not compensate them fully and keeps huge payments in arrears. They are forced to borrow heavily and incur interest cost. In short, GOI’s monumental subsidy program which it cannot fund on its own, leaves oil PSUs bleeding!
The Government must stop milching PSUs forthwith. It should give all subsidies directly to beneficiaries. That is the only way to saving them from turning sick.
For reining fiscal deficit, there is no escape from bolstering tax revenue, pruning wasteful expenditure and reforming subsidy regime.