Generous India - Shashi Tharoor

The recent India-Africa summit in Addis Ababa, Ethiopia, at which India's government pledged $5 billion in aid to African countries, drew attention to a largely overlooked phenomenon India's emergence as a source, rather than a recipient, of foreign aid. For decades after independence when Britain left the subcontinent one of the poorest and most ravaged regions on earth, with an effective growth rate of 0 percent over the preceding two centuries India was seen as an impoverished land of destitute people, desperately in need of international handouts. Many developed countries showcased their aid to India; Norway, for example, established in 1959 its first-ever aid program there. But, with the liberalization of the Indian economy in 1991, the country embarked upon a period of dizzying growth, averaging nearly 8 percent per year since then. During this time, India weaned itself from dependence on aid, preferring to borrow from multilateral lenders and, increasingly, from commercial banks. Most foreign-aid programs with the sole exception of Britain's have dwindled or been eliminated altogether. Today, the proverbial shoe is on the other foot. Long known for its rhetorical faith in South-South cooperation, India has begun putting its money where its mouth used to be. It has now emerged as a significant donor to developing countries in Africa and Asia, second only to China in the range and quantity of development assistance given by countries of the global South. The Indian Technical and Economic Cooperation Program (ITEC) was established in 1964, but now has real money to offer, in addition to training facilities and technological know-how. Nationals from 156 countries have benefited from ITEC grants, which have brought developing -country students to Indian universities for courses in everything from software development to animal husbandry. In addition, India has built factories, hospitals, and parliaments in various countries, and sent doctors, teachers, and IT professionals to treat and train the nationals of recipient countries. Concessional loans at trifling interest rates (between 0.25 percent and 0.75 percent, well below the cost of servicing the loans) are also extended as lines of credit, tied mainly to the purchase of Indian goods and services, and countries in Africa have been clamoring for them. In Asia, India remains by far the largest single donor to its neighbor Bhutan, as well as a generous aid donor to Nepal, the Maldives, Bangladesh, and Sri Lanka as it recovers from civil war. Given Afghanistan's vital importance for the security of the subcontinent, India's assistance program there already amounts to more than $1.2 billion modest from the standpoint of Afghan needs, but large for a non-traditional donor and is set to rise further. India's efforts in Afghanistan have focused on humanitarian infrastructure, social projects, and development of skills and capacity. Five Indian medical missions provide treatment and free medicines to more than 1,000 patients a day, most of them poor women and children. The Indianbuilt Indira Gandhi Centre for Child Health in Kabul is connected through a telemedicine link with two super-specialty medical centers in India.

A million tons of Indian food assistance provides 100 grams of high-protein biscuits to two million of Afghanistan's six million schoolchildren, a third of whom are girls. Indian engineers, braving attacks that claimed several lives, built a 130-mile (218-kilometer) highway from Zaranj to Delaram in southwest Afghanistan, opening up a trade route to the Iranian border. Indians braved the 3,000meter heights to run a power-transmission line from Pul-e-Khumri to Kabul giving round-the-clock electricity to the capital for the first time since 1982. India is currently engaged in building the Afghan Parliament building, a visible and evocative symbol of democracy. India has also commissioned 100 small development projects (mainly quick-gestation, small-scale social-sector projects), and pledged further funds for education, health, power, and telecommunications. Of course, some in Pakistan see nefarious designs behind this assistance, but the ultimate objective is straightforward: to build indigenous Afghan capabilities for effective governance, reflecting India's commitment to regional stability in the face of terror and violence. In Africa, India's strength as an aid provider is that it is not an over-developed power, but rather one whose own experience of development challenges is both recent and familiar. African countries, for example, look at China and the United States with a certain awe, but do not, for a moment, believe that they can become like either of them. India, by contrast, comes across as a land that has faced, and is still surmounting, problems rather like those confronting its beneficiaries. If India can do it, many Africans reason, perhaps we can learn from them. Moreover, unlike China, India does not descend on other countries with a heavy governmental footprint. India's private sector is a far more important player, and the government often confines itself to opening doors and letting African countries work with the most efficient Indian provider that they can find. Similarly, unlike the Chinese, Indian employers do not come into a foreign country with an overwhelming labor force that lives in ghettoes, or impose their ways of doing things on aid recipients. Instead, they recruit, hire, and train local workers and foremen, and leave behind enhanced capacities. Whereas China's omnipresence has provoked hostility inseveral African countries a presidential candidate in Zambia even campaigned on an explicitly anti-Chinese platform Indian businesses have faced no such reaction in the last two decades. Indeed, Uganda, where Idi Amin expelled Indian settlers in 1972, has been actively wooing them back under President Yoweri Museveni. Finally, India accommodates itself to aid recipients' desires, advancing funds to African regional banks or the New Economic Partnership for Africa's Development (NEPAD). Its focus on capacity development, its accessibility, and its long record of support for developing countries have made India an increasingly welcome donor. This could not have been imagined even 20 years ago, and it is one of the best consequences of India's emergence as a global economic power.

Disinvestment policy Disinvestment is back. Policy-makers believe that there is no reason to oppose it, since at least 51 per cent of the equity holding in the public sector enterprises (PSEs) would continue to remain with the government, which would retain their managerial control. However, this calls for revisiting the

arguments for disinvestment, and asking whether the PSEs recent performance calls for a sale of public sector equity. Dilution of public ownership is meant to bring down the fiscal deficit, thus potentially reducing the adverse inflation and balance of payment effects. Growing fiscal deficit could also lead to downgrading of the nation s credit rating, raising the cost of international borrowing. Disinvestment is also expected to impart stock market-based discipline on enterprises performance, and reducing their losses. Such reasoning assumes that the economy is currently in full employment, that is, any additional deficit would only translate into higher inflation, additional imports and deterioration in the external balance. But what if there are large underutilised resources, as in a labour surplus economy like ours with 56 per cent of the labour force still subsisting on agriculture? If deficits are productively used, they could yield additional output; hence the ratio of the fiscal deficit to GDP may not rise. So, in principle, what matters is not the deficit per se, but what is done with it. Empirically, the relationship between the fiscal deficit, inflation and balance of payments is far from robust, denting the validity of the widely advocated policy to maintain a low deficit at all times. It, however, does not mean that the fiscal deficit can be ignored. They do matter in specific situations, depending on the state of the economy, the composition of debt, how it is financed and what they are used for. A firm s efficiency depends on the market structure: competitive markets, in principle, yield the desirable outcomes. But the bulk of public investments, almost by definition, are in industries that display decreasing costs or have considerable externalities inviting public regulation to correct for market failures. Often these industries also have strategic value to the nation. Such market failures are most acute in networked industries like electricity (for that matter most infrastructure), which is why, the dividing line between regulated private industries (as in the U.S.) or public monopolies often gets blurred. In such situations, it is hard to argue that form of ownership makes a difference to performance. However, it is finance theorists who argue the superiority of private ownership, based on the disciplining function that the secondary stock markets impart on a firm s performance, via the threat of takeover or bankruptcy. Is the threat credible? No, not for the PSEs, as only a small fraction of their equity is sold and traded in the market. Evidence suggests that stock market based discipline on a firm s performance has rarely worked to improve corporate efficiency even in the advanced economies. One only has to recall the recent experience to realise how, given the information imperfections in financial markets, corporate managers (or, promoters in Indian parlance) in the U.S. enriched themselves at the expense of their stakeholders and the economy (one only has to read Joseph Stiglitz s The Roaring Nineties for evidence of this). So, even in principle, disinvestment is unlikely to enhance efficiency. If, however, the objective is to raise revenue to reduce fiscal deficit (as seems to be the case now), its contribution is likely to be minuscule. For instance, during the 13 years since 1991-92 when disinvestment began, the cumulative proceeds of disinvestment was Rs. 29, 520 crores amounting to less than 1 per cent of

the cumulative fiscal deficit. Is it then cost effective? No, because it is a much costlier source of finance than debt; the average yield on equity is distinctly higher than the average interest rate on government bond. As the risk of default on government bond is zero, it would be cheaper to issue bonds than sell shares. Moreover, transaction costs of public issues (listing, underwriting, advertising and so on) are often too high. But, won t debt increase the future burden of its repayment? It will not, if used productively. Perhaps the only robust rule one could think of is that as long as the national output grows at a faster rate than the interest rate (in nominal or real terms), there is little danger of explosive debt growth and national insolvency. Perhaps it is worth quoting Evsey Domar s celebrated passage written in 1952, the problem of the debt burden is essentially a problem of achieving a growing national income. A rising income is of course desired on general grounds, but in addition to its many other advantages it also solves the most important aspect of the problem of debt. The faster the income grows, the lighter will be the burden of debt . Disinvestment also means forgoing the future stream of dividends from public investment. Why should the government forgo them, especially now that the PSEs profits are booming? (See my Public Sector Performance since 1950: A Fresh Look , Economic and Political Weekly, June 24, 2006). Central PSEs profitability as measured by gross profits to capital employed has almost doubled from 10.9 to 20.3, between 1990-91 and 2007-08. This is commendable by any yardstick considering that the petroleum companies had to bear the brunt of the administered prices of oil during the recent boom. Since 2003-04, the sustained improvement in profits (along with a turnaround in tax-GDP ratio) has wiped out government dis-saving, boosting the domestic saving rate to 37.7 per cent of GDP in 2007-08; a level close to what the fast growing East Asian nations have achieved. Over a longer period of the last 25 years, in the aggregate, capital-output ratio has steadily declined implying an undeniable rise in public sector efficiency. This is also evident in perceptible decline in employment, contributing to the improved financial returns. Surely, many problems remain. The crux of the public sector financial losses lay with the utilities and transport. For instance, despite a steady raise in the physical efficiency of power generation for over the last quarter century (as measured by the plant load factor for thermal power plants), the state electricity boards incur huge losses because they cannot raise prices or enforce collection of user charges, as these are outside the enterprises purview; government is responsible for these policy decisions. Instead of squarely facing these hard questions of pricing of public services, the government is resorting to the softer option of selling shares of PSEs , which are yielding improved returns year after year. This is not to suggest that all is well with the PSEs. Surely there is an enormous need and scope for securing better returns on these investments, and to achieve their strategic objectives (wherever applicable). Despite the disinvestment, the owner s (politicians and bureaucrats) dysfunctional interference in PSEs would persist, as they have little to fear from the market; the procedural audit of CAG would also continue. So if one is serious about improving public sector efficiency, then one should bother about changing the relationship between the government (the owner) and the enterprises that is, reforming the corporate governance; an issue nowhere on the policy horizon. As stock market-based discipline seems unworkable, what then is the alternative? We suggest a bank centric governance structure, patterned after the Japanese form of Kereitsu. Disinvest PSEs

shares among interdependent PSEs and tying them around a large public sector bank (the main bank). As government holding in the PSEs falls below 51 per cent, direct interference from the government, and the parliament will get reduced, and the CAG audit will cease. Compared to stock market, banks, in principle, are better at screening investment projects, and monitoring fund utilisation to safeguard their reputational capital. As performance of a particular enterprise would depend on the other firms in the Kereitsu, there would be peer monitoring and better coordination by the main bank. To safeguard their loans, banks would be in a better position to appoint managers offering them long-term contracts with suitable incentives (for details see my paper, Disinvestment and Privatization in India: Assessment and Options , in Trade Policy, Industrial Performance and Private Sector Development in India, Oxford University Press, for the Asian Development Bank). Surely this will not solve the problem of monitoring the monitors (the banks in this case), as government remains the ultimate owner. But with delegated monitoring and with multiple monitors like other regulators in place, there is a distinct possibility of greater professionalism and minimisation of dysfunctional interference. In sum, disinvestment is unlikely to impart the expected efficiency gains; resources thus mobilised are costly and their quantum, as a proportion of the fiscal deficit, will be minuscule. The infrastructure deficit is perhaps a far greater danger than the fiscal deficit. So as long as the public debt is used for productive investment that yields additional output, extinguishing the additional debt burden would not pose a threat. Moreover, selling shares when the profits are booming makes little economic sense. ''The arguments in favour of disinvestment, either in terms of resource mobilisation or in terms of people-ownership , are devoid of sound economic rationale. Rather, the disinvestment agenda is driven by powerful interests; like the big players in the stock market whose fortunes depend on good news and the private corporate sector, which wants to escape the responsibility of paying taxes for financing the government s welfare programmes.''- Prasenjit Bose,Convenor,Research UnitCPI(M) ,writes for Pragoti. The President s address on 4th June 2009 has unveiled the agenda of the Congress led Government at the Centre. Among its major themes was the issue of disinvestment of public sector companies, a bone of contention between the UPA Government and the Left parties during the past five years. In keeping with the election manifesto of the Congress party, the President s address mentioned: Our people have every right to own part of the shares of public sector companies while the government retains majority shareholding and control. My Government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that government equity does not fall below 51%. While the policy of diluting government s equity in PSUs upto 51% is not new, what is novel in the current approach is to shroud the move towards creeping privatisation of PSUs as people-ownership and posit the disinvestment question in terms of the right of the people to own PSU shares. This is indeed trying to be too clever by half. People-Ownership A public sector undertaking, by definition, is owned by the people. The state owns and manages the

company on behalf of the entire people of the country. In contrast, a nationwide survey conducted by the NCAER in 2007-08 revealed that only 0.5% of Indian households invest in equities. A recent article in The Economist (21st May 2009) estimates this section to be 0.7% of Indian households. Thus, the Congress concept of people-ownership implies transferring the common ownership of the PSUs by all Indians into the private ownership of 0.5-0.7% of Indians. Moreover, the latest RBI Annual Report shows that Mutual Funds account for only 7.7% of India s gross household financial savings in 2007-08, and shares and debentures of private corporates, another 2.7%. Bank deposits, which account for 55.3% of all financial savings and Life Insurance, which account for 16.9%, are much preferred savings instruments for Indians than direct or indirect ownership of company shares and debentures, which account for only around 10.5% of all financial savings. Thus, even the better off sections of the Indian people who hold financial assets, are not particularly keen on holding equities. This aversion towards the speculative risks inherent in the equity market would have only increased following the global financial meltdown witnessed since September 2008. The dominant players in the equity markets are not the small retail investors but the big financiers like the FIIs and Mutual Funds. A large proportion of investors in the FIIs and Mutual Funds are also the big corporates themselves, who park their savings with them in order to make a quick buck. Invoking people-ownership in order to justify the sale of government s equity in PSUs is therefore, nothing but a subterfuge. The express purpose for announcing the intent to disinvest was to whet the appetite of the global and domestic financiers in times when the global financial markets are in doldrums. That the message was not lost can be seen in the recent bull run in the Indian stock markets. Resource Mobilisation A case for disinvestment is often made as an avenue for resource mobilisation. The previous UPA Government had constituted a National Investment Fund , to channelise the proceeds of disinvestment to finance social welfare programmes. But this process did not gain much momentum because of the stiff resistance of the Left and some other parties to the disinvestment process. With the Congress not requiring the support of the Left parties this time, concerted attempts at prodding the Government down the disinvestment route have gathered momentum. The Financial Times (20th May 2009) quotes a report brought out by the French securities firm CLSA to state: A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62 bn (Rs. 2.9 lakh crore approximately) at current market prices We believe the government will, however, test the waters with small stake sales. A 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can bring in USD 17 bn (Rs. 80000 crore approximately). Another such estimate by Delhi based investment bank SMC Capitals suggest that if the Government follows up on its promise of bringing down its equity stake in all the 45 listed PSUs to 51%, it can mobilise upto Rs. 4.46 lakh crore going by the current market valuations. This, according to them, signifies that the present government, with the clear and aggressive disinvestment policy, has lot of cushion and headroom in its fiscal policy making. With the aggressive disinvestment policy, the fiscal deficit may not be such a serious threat to Indian economy, as

generally perceived . Such arguments, however, are based upon completely fallacious logic. While being obsessed with maintaining a low budget deficit is itself irrational, especially during a recession, divesting stakes in profit making PSUs to bridge that deficit is even more bizarre. Selling off government equity in a profitable PSU is actually a mirror image of running a budget deficit. While in the case of running a deficit, the government has to make interest payments in the future against a one-time borrowing from the market, in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes. In fact disinvestment is worse since it involves transferring state-owned assets to private hands, which is not the case when the government borrows from the market. According to the Public Enterprises Survey 2007-08, the Central PSUs taken together contributed Rs. 19423 crore to the central exchequer in 2007-08 as dividends, witnessing an increase of over Rs. 4000 crore from 2005-06. Considerable divestment of government s stakes in CPSUs would squeeze this important source of revenue for the Government. The Central PSUs also have huge cash surpluses piled up over the years, which are not being put into productive use. The Public Enterprises Survey states that the reserves and surplus of all CPSUs taken together stood at Rs. 4.85 lakh crore in 2007-08. While aggregate real investment in CPSUs in 200708 increased by 10.16% over 2006-07, reserves and surplus grew by 16.56%. In the absence of managerial autonomy, the CPSUs are unable to utilize these reserves for their own expansion or diversification. If the resources of the CPSUs are to be tapped at all, an eminently better way would be to seek special dividends from them rather than selling off their equity. This way the Government would be able to mobilise resources without transferring a single percentage in equity ownership or sacrificing future dividends. It also needs to be underlined that while the effective tax rate for the CPSUs taken together in 200607 was 30.78%, the average effective tax rate for private sector companies in the same year was 19.5% only (as per the Statement on Revenue Forgone, Receipts Budget, 2008-09). When the private sector s effective tax rate is way below the scheduled tax rate (33.66%) owing to myriad tax concessions, why can t more taxes be raised from the private corporate sector by doing away with some of the tax exemptions? Current public spending on social welfare programmes should be financed by raising more tax revenue from the private corporates and the affluent sections, whose earnings and assets have grown manifold over the past decade, through better administration of corporate tax and wealth tax and introduction of long-term capital gains tax and inheritance tax. This would be both socially desirable and economically sustainable, compared to the irrational course of selling government s capital assets like equities in profit making PSUs. Conclusion The arguments in favour of disinvestment, either in terms of resource mobilisation or in terms of people-ownership , are devoid of sound economic rationale. Rather, the disinvestment agenda is driven by powerful interests; like the big players in the stock market whose fortunes depend on good news and the private corporate sector, which wants to escape the responsibility of paying taxes for financing the government s welfare programmes. It is unfortunate that at a time when even the American President is working out ways of insulating the economy from the undue

dominance of such vested interests, which precipitated the global economic crisis in the first place, the newly elected Government in India is succumbing to them.