Centre for in-principle share sale in ‘some’ PSUs

Centre for in-principle share sale in ‘some’ PSUs
Updated: October 27, 2016 23:21 IST | Special Correspondent
NEW DELHI: The Centre made a cautious move towards large scale disinvestment of public sector enterprises with the Cabinet agreeing ‘in-principle’ to a ‘case-by-case’ examination of just ‘some’ of the 20-odd firms and units recommended for strategic sale by its think-tank Niti Aayog.
Finance Minister Arun Jaitley said the strategic sale of such public sector units with the transfer of management control to a private entity, will be taken up subsequently by the cabinet on a case-by-case basis after consultations with their respective administrative ministries, but there’s no timeline set for the process.
“The recommendations of the Niti Aayog with regard to both disinvestment and strategic sales came up for consideration before the cabinet,” Mr. Jaitley said. “In principle, the cabinet approved the recommendations with regard to some of the units about which the recommendations were made.” he said, adding that closure of public sector units was being considered separately.
The Centre had set a target to raise Rs.20,500 crore in 2017-18 through strategic sales of public sector firm and another Rs.36,000 crore is to be raised from the sale of minority stakes in PSUs.
“There is no timeline for this…We will look at the best possible timing that could give us the best possible price. I am not going to let something be undersold just because of a calendar limit,” Mr Jaitley said, stressing that the government has already made significant headway on its disinvestment targets in the first half of the year.
Last month, the Cabinet granted an ‘in-principle nod’ for the sale of loss-making Allahabad-based firm Bharat Pumps and Compressors Limited – the first such approval since the sale of Kolkata-based Jessop & Co. in 2003-04 under the Atal Behari Vajpayee-led NDA government.
When asked about Niti Aayog’s disinvestment proposals that include a recommendation to divest loss-making units of public sector steel major SAIL, Steel Minister Chaudhary Birender Singh said last week that discussions are underway and there is a need to understand the factors plaguing specific units of SAIL such as high power tariffs. If they were unviable owing to such factors, change of management won’t help, he had indicated.
On Thursday, Mr Jaitley acknowledged that some of the units recommended for sale by the Aayog are ‘important’ and each unit will be considered on ‘its own merit’ with the timing of the sale to be decided accordingly. He also assured that settled valuation procedures will be followed in a transparent process for such transactions.
“Needless to say, it will be transparent. If there is a unit with large chunks of immovable property, even if it is loss-making, the valuation would take into account the property,” the finance minister said.
The Department of Investment and Public Assets Management and the administrative ministries in charge of the specific PSUs would now undertake a detailed examination óf each firm and finalise the methodology to be followed and the base price for a sale, before bringing individual proposals to the Cabinet.

Fiscal Responsibility Act:Evolution

• Finance Minister Arun Jaitley’s statement during his Budget speech that “a time has come to review the working of the FRBM (Fiscal Responsibility and Budget Management) Act” is not the first time that governments have tried to create more wriggle room out of the strict fiscal parameters set in the Act.
• The idea of a Fiscal Responsibility Act was first introduced by then Finance Minister Yashwant Sinha (incidentally, the father of the current Minister of State for Finance Jayant Sinha) in his Budget speech of 2000- 01.
• “For medium-term management of the fiscal deficit we also need the support of a strong institutional mechanism embodied in a Fiscal Responsibility Act,” the senior Mr Sinha said at the time, adding that he had set up a committee to examine the issue and recommend how to best move forward.
• This committee, under the chairpersonship of the then Secretary of Economic Afairs E.A.S Sarma, referred to fiscal rules of around 20 countries including those of the US, Canada, Japan, Brazil, South Africa and the European Union.
• After its deliberations, it came up with a draft Bill which mandated reducing the revenue deficit to nil within five financial year starting April 1, 2001 and also bringing down the fiscal deficit to two per cent of the GDP in the same period.
• However, a major concern surrounding the draft Bill at the time was not the strictness of these fiscal parameters, but the Bill’s provision for a Fiscal Management Review Committee. This committee was to be chaired by the Prime Minister and had the Finance Minister, Speaker, Chairman of the Lok Sabha, the Leaders of the Opposition in both houses of Parliament, the Comptroller and Auditor General (CAG) of India and the Governor of the Reserve Bank of India as its members.
• The CAG immediately disagreed with the creation of such a committee and placed its dissent on record in the E.A.S Sarma Committee Report. “The proposed committee will be an encroachment on the prerogative of the finance minister, who has to present reports/policy statements of the government to the Parliament for its consideration and debate. In fact, such a body shall create unanticipated legal and procedural problems,” the CAG’s dissenting note said. “[The] setting up of a Fiscal Management Committee through statute is not consistent with the existing Constitutional arrangements and it goes against the basic structure of the Constitution,” the note added.
• In other words, such oversight would hamstring the finance minister and would lay unnecessary pressure on his ability to meet the FRBM targets.
• The Fiscal Responsibility and Budget Management Bill, 2000 was examined by a Standing Committee on Finance, chaired by Shivraj Patil, which placed its recommendations in front of Parliament in December 2000.
• The overall view of the Committee was pretty straightforward. Planned deficit financing is a good idea as long as it creates productive assets, according to the report. “However, the numerical ceilings and the time frame set for attaining the said levels induce excessive rigidity into the decision making depriving the Governments of the flexibility needed to respond to the exigencies in an appropriate manner, to serve the national interest best.”
• More interesting than this view was the number of dissenting notes—no less than four—and the vehemence of dissent the issue brought forth. One note, in particular, exemplified all that was considered wrong with the FRBM Act.
• “The objective of this Bill is to impose some self-discipline on the government on fiscal matters. But this is no more than an eyewash. If the government has the required political will to control deficit, then it does not need any legislation. If, on the other hand, it lacks political will in this matter, no amount of legislative self discipline would work,” according to the dissenting note, by Biplab Dasgupta and Prabodh Panda, both Members of Parliament.
• “If the government can pass the Bill, say tomorrow, it is equally possible for it to withdraw the Bill day after tomorrow. As long as the Government enjoys majority in Lok Sabha, it can make or unmake a Bill umpteen times,” the note added, understandably oblivious of Parliamentary politics post-2010.
• In any case, the FRBM Bill was passed by Parliament in 2003 and put into place in 2004. The targets set by the Act for the government was to bring the revenue deficit down to zero and the fiscal deficit to below three per cent of GDP by 2008-09, among other procedural rules. A committee was formed under Vijay Kelkar to put forth a roadmap for the implementation of the Act.
• The 13th Finance Commission reviewed the Act in 2009 and reiterated the view of Shivraj Patil Standing Committee report that the numerical ceilings needed greater flexibility and that there was a need to keep in the mind the effect global economic events could have on these targets.
• “First, we recommend that the MTFP (Medium Term Financial Plan) make explicit the values of the parameters underlying expenditure and revenue projections and the band within which these parameters can vary while remaining consistent with FRBMA targets. This will enable the government to make an evidence-based case for relaxation of these targets, should such circumstances arise,” according to the 13th Finance Commission’s report’s chapter named ‘Revised Roadmap for Fiscal Consolidation’.
• “Second, we recommend that the FRBMA specify the nature of shocks that would require a relaxation of FRBM targets. These would include agro-climatic events of a national (rather than regional or state-specific) dimension, global recessions impacting the country’s exports and shocks caused by domestic or external events like asset price bubbles or systemic crises in important sectors like the financial markets,” it added.
• Following these recommendations, the Act was amended via the Finance Act 2012. One of the amendments was that, along with the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and the Macroeconomic Framework Statement, the Central Government would also have to lay a Medium Term Expenditure Framework Statement before Parliament.
• Another big change made in the amendment was that, instead of targeting the revenue deficit, the FRBM Act would target a new concept, the ‘efective revenue deficit’—the difference between revenue deficit and grants for creation of capital assets. In essence, this placed capital expenditure out of the purview of the revenue deficit.
• Finally, the dates by which the effective revenue deficit and fiscal deficit targets were to be met were The effective revenue deficit was to be eliminated the fiscal deficit was to be below three per cent by March 2015. These targets were once again revised in the Finance Act 2015, pushing the dates of achievement to March 2018.
• Finance Minister Arun Jaitley’s plan to review the FRBM Act, and Minister of State for Finance Jayant Sinha’s statement on Tuesday about the need for a “dynamic, more flexible approach to fiscal management” should be seen as yet another step in this long chain of events.
• History shows that almost every time such a review or amendment to the FRBM Act has taken place, the Finance Ministry has received greater breathing room to achieve its fiscal targets.

Fiscal consolidation path: A review

• Passed almost three years after it was first introduced in Parliament, that too in a significantly watered down form, the Fiscal Responsibility and Budget Management Act has faced a rocky road in terms of implementation.
• Paused four times since its enactment in August 2003, including for a reset of the fiscal deficit target in 2008-09 following the global financial crisis, the FRBM Act has become a subject of animated debate. Central to this has been the question of whether the law has served the purposes for which it was envisaged.
• There is no denying that the Act has helped focus attention on the issues relating to fiscal consolidation — thanks to the mandatory medium-term and strategy statements that the government of the day is required to present annually before Parliament.
• But with regard to the larger objective of ensuring macro-economic stability, the record has been less than ideal. Both headline consumer price inflation and the debt-servicing costs for the Central government were, at different points in the post- FRBM era, at divergence with the performance of fiscal deficit, raising questions about the over-emphasis on a cast-in-stone target number.
• The nub of the issue is this: has the law allowed the government the elbow room needed to use all the fiscal tools at its command to ensure that the growth momentum is maintained, without either significantly fuelling inflation or curtailing spending on vital and socio-economically relevant development programmes?
• It is in this context that Finance Minister Arun Jaitley’s Budget proposal to have a committee review the implementation of the FRBM Act — even as he committed him- self to sticking to the 3.5 per cent fiscal deficit target for the next financial year — is timely and germane.
• He has referred, for instance, to the possibility of adopting a target range rather than a specific number. The argument is that this would give the necessary policy space to deal with dynamic and volatile situations such as the one India currently faces — global economic and financial market uncertainty, a slowdown in China, and tepid private in- vestment demand domestically.
• The suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion, as mentioned in the Budget speech, is worth exploring.
• While any attempt to jettison or even revisit the fiscal deficit targets is bound to draw sharp criticism from, among others, the global credit rating agencies, Mr. Jaitley has to look no further than the BRICS compatriot China. Chinese Premier Li Keqiang has just unveiled a budget deficit of 3 per cent of GDP, the highest level for that country since 1979 and a significant jump from last year’s 2.3 per cent target.