As far as off-budget financing goes, 'strategic disinvestment' - one of the disinvestment processes - is another area that should draw attention since this too poses threat similar to other such methods and would have serious consequences for the health of the Central Public Sector Enterprises (CPSEs) and fiscal management.
'Strategic disinvestment' implies sale of substantial portion of the government shareholding of a CPSE of up to 50 per cent, or such higher percentage, along with transfer of management control.
Strategic sale in CPSEs to CPSEs
The Central government has already made strategic disinvestments in five CPSEs - HPCL, REC, HSCC, NPCC and DCIL - the tabs for which were picked up by other CPSEs like ONGC, PFC, NBCC, WAPCOS, and public-sector consortium of ports, respectively. This generated Rs 52,828.8 crore in disinvestment receipts - as disclosed in a Rajya Sabha answer on December 3, 2019 (Starred Question No. 159).
How much of this money was generated through market borrowings - which could constitute off-budget resource mobilisation - is not clear.
Further, the Central government gave 'in-principal' approval to strategic disinvestment in five more CPSEs in November 2019 - three of which would be to other CPSEs - as disclosed by the same Rajya Sabha answer.
CPSEs major contributors to disinvestment receipts
The CAG's 2017-18 audit report on the Union government accounts (No. 2 of 2019, released in February 2019) says "disinvestment constitutes a major portion of capital receipts" of the central government.
Out of total disinvestment proceeds of Rs 88,969 crore, five CPSEs - HPCL, NTPC, General Insurance, New India Assurance Company Ltd and Hindustan Aeronautical Ltd - contributed 78.13 per cent, or Rs 69,514 crore.
Meanwhile, here is the historical data on disinvestment receipts since 1991-92 when the process started.
Why strategic disinvestment is a concern: Case study of ONGC
While the details of strategic disinvestments are scarce, the case of the ONGC is instructive.
It acquired HPCL (a CPSE) in January 2018 for Rs 36,915 crore. In doing so, for the first time in its history, ONGC - a debt-free and cash-rich 'navaratna' CPSE - borrowed Rs 24,881 crore, as it had exhausted its cash reserves earlier due to acquiring stakes in bankrupt Gujarat State Petroleum Corporation (GSPC) in 2017 for Rs 7,738 crore, payment of hefty dividends to the Central government, and Rs 4,022 crore share buyback.
The disinvestment proceedings of HPCL (ONGC had acquired 51.1 per cent stakes for a total of Rs 36,915 crore) went to the Central government's kitty.
Now, ONGC is so debt-burdened that it is contemplating selling HPCL off - in less than two years.
A scrutiny of its annual reports reveal its precarious financial condition: Cash reserves have crashed from Rs 2,01,246 crore in FY12 to just Rs 5,041 core in FY19, and borrowings shot up from Rs 45,000 crore to Rs 2,15,936 crore during the same period - as depicted in the following graph.
Bleeding CPSEs: NTPC and PFC
The cases of two other CPSEs, NTPC and PFC, are no different. The former will be picking up the tab of strategic disinvestment in other CPSEs like NEEPCO and THDCIL, and the latter is already burdened by market borrowings (off-budget) to fund power projects on behalf of the Central government.
These CPSEs have also been contributing significantly to the Central government's kitty by way of dividends/surpluses.
CPSEs drained of financial resources
The CAG's 2019 report also points out how CPSEs were the major contributors to the Central government's kitty of dividend/surplus income in 2017-18 - Rs 76,062, including RBI's contributions of Rs 40,659 crore.
Permanent damage to CPSEs for short-term gains
Economists and policy experts are worried at the state of affairs, particularly at the way the Central government is financing its budget through off-budget borrowings, disinvestment and by draining out cash from the CPSEs.
Economist and statistician Pronab Sen says: "The question is how you are doing it. If you are bleeding the CPSEs to finance budget - other than dividend which is a different thing - it is damaging the CPSEs permanently. You can't kill a goose that lays golden eggs. That would be damaging the long-term prospect of the economy for short-term gains."
Rathin Roy, former member of Prime Minister's Economic Advisory Council and director of the New Delhi-based National Institute of Public Finance and Policy (NIPFP), says: "The Government of India's medium-term problem for the past 15 years has been that it is assets-rich but income-poor. So, the strategic view of the GOI's assets would involve income generation from those assets and any sale or acquisition of assets should be keeping that in mind. However, my view is that the past three governments used assets sale to make up for the shortfall in income.
"The constitution of the Department of Investment and Public Asset Management (DIPAM) was welcome since it acknowledged to adopt asset management system. However, I am yet to see evidence of such a perspective being operationalised; disinvestments are still driven largely by fiscal pressure."
Questions were indeed raised when less than a month after the RBI announced transferring Rs 1.76 lakh crore in August 2019 - Rs 1.23 lakh crore as dividend and Rs 52,637 crore as surplus - the Central government announced a corporate tax cut of Rs 1.45 lakh crore.
This was jarring in view of the fact that industrial production and capacity utilisation have been falling because of lack of demand in the economy, ruling out possibility of corporate invests in the short run.
The RBI money could surely have been put to better use - to drive demand - given the fact that the GDP growth rate had taken a big hit - falling steadily from 8.1 per cent in Q4 of FY18 to 4.5 per cent for Q2 FY20 - primarily because of demand depression.