The not-so bright idea of selling the family silver (The Hindu)

Mains Paper 3: Economy
Prelims level: Bharat Petroleum Corporation Limited
Mains level: Disinvestment of PSUs

Context:

• When we examine the proposed stake sale of profit-making public sector undertakings (PSUs), a few strategic issues of national importance need to be considered.

Question behind the sale of stake:

• This is an ideological one — that Government must get out of business.
• There is the need to bring the fiscal deficit down.
• There is a long-term financial one: which option, public- or privately-owned, is better for the Government treasury?
• A fourth is about national security and self reliance: can India be under pressure if we do not have full control over petroleum?
• Why do the United States, China and other superpowers have control over their petroleum reserves?

Number crunching:

The long-term financial issue:

• The Burmah Shell (Acquisition of Undertakings in India) Act 1976 enabled the Government of India to take ownership by paying ₹27.75 crore.
• One estimate of that amount in today’s terms is to use the inflation factor, which is about 22.42 (between the year 1976 and now). This means that the Government would have paid ₹622.06 crore today.
• The current market value of Bharat Petroleum Corporation Limited (BPCL) varies between ₹85,000 crore and ₹115,000 crore.
• The government’s share at present is about 53.3% (which it is contemplating selling), that is worth between ₹45,000 crore and ₹61,500 crore. We got the company for a song.

How much has the Government earned meanwhile?

• Since 2011, the total dividend it has earned is about ₹15,000 crore, which is several times the present value of the investment of ₹622 crore.
• One way is to use inflation and calculate what the value of all future flows would be, based on the present value of all future incomes.
• The average inflation in the last three years has been 4.5%, 3.6% and 3.48% in 2016, 2017 and 2018, respectively, or an average of 3.86%.
• If the Government sells its entire stake, it would forego future income of about ₹78,589 crore. In addition the BPCL has also paid taxes of about ₹25,000 crore to the Government since 2011.
• No doubt the Government will continue to get taxes from the private sector as well.
• However, the effective tax rate on profits before tax for the BPCL is about 34%, whereas for the private sector player it is between 25% and 28%.
• So there will be a loss in tax revenue for the Government after any privatisation.
• As the case of the BPCL and several other PSU ‘Navratnas’ show, they have given super normal returns to the public exchequer.
• Instead of selling such high performing PSUs, should we not be selling the loss-making ones?

Issue of fiscal deficit target

• Another issue underlying the disinvestment is the fiscal deficit target of 3.4%, now reduced to 3.3%.
• There are many ideological debates among economists about the importance of reducing the fiscal deficit, but we leave that to the experts.
• The revenue collections are not enough, the Government is perhaps planning the sale of well-running PSUs to meet the fiscal deficit target.
• If the Government does meet its fiscal deficit target by the stake sale of various PSUs including the BPCL this year, how would it meet that target next year?
• These strategic sales and dividends cannot be repeated every year. We will be back to the same levels of fiscal deficit.
• The real way of meeting this target is to cut out wasteful Government expenditure, most of which is on salaries and pensions, and ensuring that the bureaucracy delivers. Unfortunately, the cuts will be in the social sector.

On national security

• The ideological issue of Government versus private ownership is related to the strategic issue about national security.
• Natural resources, especially oil, are a strategic national resource.
• The United States maintains such an underground crude oil reserve to mitigate any supply disruptions.
• Some comparative figures for such reserves are: the U.S. over 600 billion barrels, China 400, South Korea 146, Spain 120 and India 39.1.
• India does have a target to substantially increase its reserves.
• Meanwhile with the strategic disinvestments, we will lose Government control over both crude and refining. Nothing prevents China or any other country for that matter from buying up refining capacity in India.

Conclusion:

• We need to see through the ideological narrative coming from the developed nations.
• They embraced free trade when it suited them and are now trying to embrace protectionism.
• China adopted a market system but does not allow this to cloud its thinking when it comes to strategic national issues;
• The control then remains with the Government. India too needs to re-think its strategy.

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Prelims Questions:

Q.1) With reference to the IS 10500:2012, the piped water quality standard, consider the following statements:
1. Unlike the BIS standard for bottled water, which is mostly produced by private companies, the standard for piped water — largely supplied by government agencies — is not yet mandatory.
2. Jal Shakti is the nodal Ministry for the Jal Jeevan Mission to provide functional household tap connections to 14.6 crore rural households by 2024.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) What are the pros and cons behind the disinvestment of PSUs?