Originally Published 2016-01-27 13:13:46 Published on Jan 27, 2016
Skinny on the budget

The obsession with legislation as a tool for reform has been overstated and the absence of executive decision making is hurting India. Somnolent and deeply ensconced in the arms of Morpheus, India appears maladroit unable to come to terms with a directional call on its economic vision.

Every budget season, there are a slew of prescriptions and prognosis offered from all quarters. In the tower of babble, one hears of how fiscal deficit needs to be reined in, infrastructure given a decisive push and job creation to be the cornerstone of the economy. These themes have been beaten to death. clubbed mercilessly into submission. None of this actually fructifies, the time consumed from the time the budget is presented, till it sees the light of day through the gazette notification and actualised on the ground, the next budget comes along. Budget and Outcomes are two different things - the distance between them more or less unbridgeable.

The Laloo Yadav Railway budgets for instance were symptomatic of this malaise. Nothing ever fructified and he claimed the Railways was showing a surplus. Till the reality hit us and the world's largest employer flush in the face. It is encouraging to see a new Modispeak, one that talks of cutting the umbilical cord from the current inertia and lassitude driven gradualism and incrementalism to one that delivers high energy transformative ideas. The Prime Minister realises that time is of the essence, almost 20 months of his gangbusters mandate is done and dusted. The time to pause and ponder is over. This budget is Modi Government's litmus test, he has to pass through the ring of fire. Instead of giving the same ballyhoo. I want to outline five transformative ideas that could be part of the budget. Just these five decisions which are part of this government's mindspace, but for some strange reason have been kept in abeyance will impress investors and galvanise them. India has to pony up and bone the quality of its reform pitch and pace. Sadly the playbook is bare. To build a better world, one has to tear down the old, there is no alternative to this harsh reality. Self deprecation instead of self praise that we are doing better than the rest of the world. In the tyranny of arrogance lies only failure. India needs specifics to fix what is broken.

Here is the skinny on what can be done, it is hard decisions taken without redacting:


The government has been able to mop up a meagre Rs 12,700 crore through stake sale in four PSUs – Indian Oil, REC, PFC and Dredging Corp. It has huffed and puffed to reach this target. The government had budgeted ambitiously to raise Rs 69,500 crore via disinvestment of PSUs in 2015-16. Of this, Rs 41,000 crore was to come from minority stake sale in PSUs and another Rs 28,500 crore from strategic stake sale. Both have fallen way short. Targets are superficial, achieving them through innovation a better idea. Strategic sale has been anathema, shunned by consecutive governments. The only recourse is the usual dividend payout by haemorrhaging public sector entities, remember how Coal India was asked to fork out Rs 18,000 crore by P Chidambaram, of which the government received Rs 16,000 crore.

Instead bite the bullet and take tranches of 10 failed and loss making for 10 successive years PSUs with some worthwhile assets and divest them through the strategic sale route. There will be no questions asked. Offloading minority shareholding is a ridiculous idea which ultimately results in over ownership by PSU banks and domestic financial institutions, which basically translates into money moving from the right to left pocket. A few days back, one read that the government is considering diluting its 11.7 per cent stake in Axis Bank it holds through the Specified Undertaking of the Unit Trust of India (SUUTI) to meet shortfall in disinvestment proceeds and revenue collection during the current fiscal. At current market price of Rs 389.80, the government will get sub Rs 11,000 crore by selling 27.48 crore shares. Now imagine if the same decision had been taken not when the government is in panic mode, but at its 52 week high of Rs 654.90. Then the government would have realised close to Rs 20,000 crore for the same stake. Agreed that you can't time the markets, but indecision is the greatest bugbear.

Look at the vast phalanx of sick Public Sector Enterprises and there are a zillion owned by the centre and the states. This is what I found on how good money is being poured after bad money in some specific cases which see no consistency in policy making and leaves you up to your gills is a state of despair:

HMT: Revival plan mooted by BRPSE in 2006 after incurring losses over years.

As of March 2012, total government loan including budgetary support for statutory dues to its employees was Rs 417.62 crore.

A note was prepared for the Union Cabinet on the company's revival plan after involving an external consultant. It required Rs 992.99 crore to survive.

The government, approved in April 2013 a Rs.1,083-crore revival package for HMT, which aimed to modernise the company and help it turned around in five years.

Then in September 2014, the Govt spoke of winding up at least six central public sector enterprises including the iconic watchmaker HMT that it believes are not capable of revival. Heavy industry minister Anant Geete had said that the government was preparing a roadmap for identifying state-run firms which not capable of revival. It will give voluntary retirement scheme (VRS) to their employees.

The other companies on the list include Hindustan Photo Films, HMT Bearings, HMT Chinar Watches, Tungbhadra Steel and Hindustan Cable.

The government had also identified another five sick units -- HMT Machine Tools, HEC, NEPA, Nagaland Pulp & Paper and Triveni Structurals - that it planned to revive through joint ventures with Maharatna PSUs. Geese had said, "A committee under CMD, NTPC has been set up to explore the possibility of setting up a separate entity funded by financially strong CPSEs (central public sector enterprises) to look at management and revival of sick CPSEs."

Finally, in March 2015, the NDA government said that it would free assets worth Rs 22,000 crore belonging to five sick Public Sector Units — including three companies of HMT — as it went about closing “nonproductive units” by rolling out “an attractive VRS package” for 2800 existing employees. As part of UPA's welfare economics, workers who were not producing anything were being paid salaries. More such decision making is needed post haste.

Ironically, this protracted and painful process which could have seen closure much earlier saw three units belonging to HMT — HMT Watches, HMT Chinar Watches and HMT Bearings. The other two - Tungabadhara Steel Products Ltd and Hindustan Cables Limited - were all closed down because shockingly since 2007 there was no production in these units and the Govt had already spent about Rs 4000 crore only on salary and wages of the employees.

NEPA: Sick unit under BIFR since May 1998.

Revival plan entailed financial restructuring and fresh fund infusion - Rs 362.18 crore (govt Rs 234.18 crore and bank/FI borrowings Rs 128 crore). Non-fund based assistance of Rs 930.14 crore through waiver/conversion of Govt of India and Govt of MP loan and interest.

Fwd: For Experts Speak section - [email protected] - Observer Research Foundation Mail

In July 2015, parliament was informed that the government had approved Rs 40,885 crore revival package for 46 ailing PSUs, including National Jute Manufacturers Corporation, HMT Ltd, Cement Corporation of India, Konkan Railway Corporation, ITI Ltd and Bharat Coking Coal.

The break up of the Rs 40,000 crore and chump change was cash assistance of Rs 10,932 crore and non-cash assistance of Rs 29,953 crore.

Under the revival package, cash and non cash assistance worth Rs 7,332 crore had been approved for National Jute Manufacturers Corporation; HMT Ltd (Rs 1,083 crore); Cement Corporation of India (Rs 1,452 crore); Konkan Railway Corporation (Rs 4,079 crore); ITI (Rs 4,157 crore); Bharat Coking Coal (Rs 4,779 crore).Some other big state-owned firms for which the revival package entailing cash and non cash assistance has been approved are HMT Machine Tools (Rs 1,055 crore); NEPA Ltd (Rs 869 crore); Eastern Coalfields Ltd (Rs 2,471 crore); Tyre Corporation of India (Rs 816 crore) and Scooters India Ltd (Rs 202 crore).

Tyre Corporation of India: Referred to BIFR in May 1992. Cabinet on June 12, 2000, approved in principle financial and capital restructuring package for tyre division, Kankinara, and exploring the possibility of JV through strategic sale. One of the beneficiaries of the Govt Rs 40,000 crore revival package of July, 2015.

Then in November last year, Anant Geete changed the goal post yet again. He said that the government was considering shutting down two more sick central public sector enterprises (CPSEs) -- an HMT arm and Tyre Corporation of India Ltd -- even as it has no disinvestment plans for loss-making CPSEs.

For Tangra unit, cabinet recommended closure winding up by offering VRS. Tangra unit shut in August 2001.

In November 2008, cabinet approved financial restructuring plan through cleaning of balance sheet and disinvestment. Waiver of payments amounting to Rs 815.59 crore made. Disinvestment of TCIL through outright sale stalled due to land hurdles in West Bengal. Three Kolkata based groups - Sanjay Buddha's Patton, Pawan Kumar Ruia's Ruia Group, Titasgarh Group's J P Choudhury - had been shortlisted for bidding in September 2013. The Tyre Corporation of India Ltd Disinvestment of Ownership Act goes back to 2007. We are now in 2016.

Sriperumbudur Nokia plant

I would offer the Nokia Sriperumbudur Plant to the highest bidder and ask the entity to roll out Make in India products from there. In the first week of March, 2015, the PM while replying to the Motion of Thanks to the President's address in parliament spoke in the Rajya Sabha on the Nokia plant which is lying shut for sometime now. The Union Govt, the PM said was, “making efforts to see that the Nokia unit in Chennai, which shut down last year, restarts soon. It was not because of us but because of policies of the previous government… We are trying to revive that facility...If we have to create jobs, we will have to promote the idea of Make in India. We will have to focus on infrastructure development.” Pertinently, production at the three manufacturing facilities of Nokia’s supplier companies – Foxconn, Lite-On Mobile, Build Your Dream (BYD) – closed their factories one after the other in the following months near the Nokia plant were also suspended in February 2015 following the exit of Nokia's Chennai manufacturing unit from the deal it signed with Microsoft last year.

At a time when Micromax has emerged as the 10th largest mobile phone manufacturer in the world (Made in China and assembled in India incidentally), Nokia’s Chennai plant arguably one of the biggest in the world, was shut down due to a tax tussle with the state and the centre on retrospective taxation and asset freeze. As many as 8,000 employees remain jobless due to the plant's closure. It is a question of intent, when Satyam capsized and India's reputation as a credible provider of infotech solutions lay in tatters, it was the much vilified Congress led UPA which roped in Tech Mahindra to salvage what was perceived to be a blue chip company. The acquisition through a bidding process worked for Tech Mahindra and India.

The PM's statement of intent has seen no movement forward. If the tax issues relate to the central and state government, begin an immediate dialogue and resolve the problem and showcase the Nokia and supplier facilities in Sriperumbudur to the world. AS taxation issues dog Indian mobile handset manufacturers in China, many of them are moving manufacturing to India. Instead of doing a jamboree in Mumbai in mid February on Make In India, do something constructive on Sriperumbudur first. Investors will line up if something concrete is offered, otherwise Sriperumbudur will become another Enron (Dabhol Power Company in Ratnagiri district in Maharashtra) in India plaguing investor sentiment forever. A symbol of decay and dismay.

ITDC disinvestment

In May last year, we had the tourism minister Mahesh Sharma talking disinvestment again. He outlined that ITDC hotels in Jaipur, Bhubaneswar, Puri, Jammu, Guwahati, Ranchi, Pondicherry and Lalitha Mahal palace in Mysore.

We are now in January, 2016 and still waiting for 'Godot' to fashion the actual sale of these hotels or at least a timeline on when this will see closure. ITDC's is very clear that Ashok in Delhi will not be sold and it will be thrown yet another lifeline so that new MPs can land there and stay on forever, you know Hotel California by the Eagles - such a lovely place, such a lovely place, plenty of room at the Hotel California, any time of the year, you can find it here... we are programmed to receive, you can check out any time you like, but you can never leave. Yes, as we have found to our chagrin and vexation, new MPs stay endlessly till such time as they get accommodation. This culture of sponging is what has destroyed the very credo of running a hotel, for it is ran like a government mess and hostel.

Of the 16 hotels remaining with ITDC, the aforementioned eight are sick and hence will be privatised, but the Ashok which is emblematic of decay and degradation will stay in the Govt's fold. For FY 2014-15, ITDC made an operating profit of Rs 5.22 crore against an operating loss of Rs 18.65 crore year on year. And if you want to believe me, it actually registered a profit before tax of Rs 38.95 crore in FY 2015 vs Rs 11.93 crore in the corresponding period a year earlier. One is still awaiting clarity on the sale structure.

BSNL-MTNL merger

In the long line of deadlines, the latest of July, 2015 has already been missed despite the PMO asking IIM Bangalore too work on a feasibility study. Remember that this state owned telecom entity will have to compete in the brutal and litigious world where private operators are struggling to cope. Of the many imponderables in the merger path, a major impediment was the fact that MTNL was also listed on the US bourses. It is believed that MTNL will be delisted before the final process of merger with unlisted BSNL and telecom equipment manufacturer ITI Ltd is green lighted. In 2001, MTNL was listed on the NYSE and then in January, 2013, its ADS was listed on the OTCQX. OTCQX provides a listing platform and access to US investors and to non-US companies listed on a qualified stock exchange in their home country. As such, MTNL has to be delisted from both OTCQX and the Bombay bourses. Government owns 56.25 per cent shareholding in MTNL.

Debt is another issue that the owner - Govt of India - has to grapple with other than buying back MTNL shares. Earlier this year, BSNL's debt stood at Rs 4,459 crore, while MTNL's debt was overflowing at Rs 14,120 crore at end of the last financial year. It has been clear as daylight for a long time that the government's telecom twins can't tango anymore. BSNL and MTNL have seen rapid erosion in their top line, earnings and brand equity as they struggle to stay afloat in an increasingly competitive environment.

Realistically speaking, they are both dead in the water due to the competition that is killing them softly.

BSNL reported a net profit of over Rs 10,000 crore in 2005-06. By March 31, 2011, it was deep in the red by Rs 6,384 crore. Its select indicators revealed that it had a turnover of Rs 29,687 crore and a net loss of `6,384 crore based on available financials for March 31, 2011. Since the trajectory was southwards, it only accentuated - BSNL and MTNL incurred losses of Rs 3,785 crore and Rs 1,567 crore, respectively, till September 30 for the 2014-15 financial year. The balance sheet has seen large strokes of red for years now - BSNL had incurred a Rs 7,019 crore loss in 2013-14, Rs 7,884 crore in 2012-13 and Rs 8,850 crore in 2011-12, whereas MTNL had reported a loss of Rs 4,109 crore in 2011-12 and Rs 5,322 crore in 2012-13. MTNL showed a profit of Rs 7,825 crore in 2013-14 mainly due to write back of provisions on account of pensionary liabilities and spectrum amortisation costs after decisions of government taken for revival of MTNL. Bidding for expensive spectrum came as a death blow to these twins, subsequently the government chose to give financial support of Rs 6,724.51 crore to BSNL and Rs 4,533.97 crore to MTNL on surrender of broadband wireless access spectrum.

Worse still is its vast army of employees - as many as 229,447 across the country reminding you of the problems being faced by Air India in rationalising its work force.

A voluntary retirement plan for employees as part of efforts to revive the loss-making company has been in the works for ever at BSNL.

It had set an internal target of 99,700 employees - Group A (1,483), Group B (6,262), Group C (76,655) and Group D (15,214).

The VRS has been on the table since 2009 when a panel headed by Sam Pitroda, adviser to the Prime Minister on public information infrastructure and innovations, recommended that BSNL take the VRS route to prune its nearly 2.81 lakhstrong workforce by a third.

The rapidity of its fall can be best explained through its annual revenue figures - BSNL saw its overall revenue fall from Rs 39,715 crore in 2006- 07 to Rs 38,053 crore in 2007-08 and further to Rs 35,812 crore in 2008-09, before dipping to Rs 32,046 in 2009-10. For 2014-15, revenues were down to Rs 27,996 crore. It is actually a most piquant situation for a combined BSNL and MTNL separation scheme involving 1.21 lakh workmen will cost the government an additional Rs 17,445 crore.

Let me leave you with these final thoughts on this journey of pain - Though the decision on merging BSNL and MTNL was expected to happen by December-end 2015, the other pre-merger procedures of the Government will continue till March 31, 2016. The proposed newly-formed entity will start its operation at the beginning of the next financial year in April 2016. Again one is waiting for closure.

Taxation and regulatory clouds

In November last year during his first visit to the United Kingdom home to Vodafone Plc which for years has been embroiled in a tax dispute with the Govt of India, PM Modi categorically said, "There were a number of regulatory and taxation issues which were adversely impacting on the sentiments of foreign investors. We have taken very decisive steps to remove a number of long pending concerns." He had added that the government was determined to make the tax regime predictable and transparent. "We want to make sure our tax regime is transparent and predictable. We are also keen to see that genuine investors and honest tax payers get quick and fair decisions on tax matters," he said at another event. But there has been no intent shown which shows that we are ready to mitigate these investment risks permanently. The reality is that tax terrorism continues unabated, old retrograde and regressive taxation policies have only been kept in abeyance, removed for the present, but the spectre of their return always a threat percept. Judicial over reach and activism has also taken its toll on the investor climate.

The obsession with legislation as a tool for reform has been overstated and the absence of executive decision making is hurting India. Somnolent and deeply ensconced in the arms of Morpheus, India appears maladroit unable to come to terms with a directional call on its economic vision. Even the longish climate of a massive commodity downturn which has seen monumental savings on the oil pool deficit and resultant low inflation has not been capitalised upon. Imagine, in 2014-15, India's oil import bill was $113 billion, crude is down 15 per cent in 2016 alone after plummeting 30 per cent in 2015. In 2015, the oil bill was approximately $61 billion, a saving of an astonishing $52 billion. Use this cash to pump prime public investment and do it aggressively so that there is a pick up in economic parameters and rural consumption which has been in distress for sometime now.

Take decisions with timelines attached to it, and don't vacillate and remain mulish on them. India cannot afford to wait any longer.

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