Budget 2020: 10% LIC Stake Sale Could Raise Rs 80,000-90,000 Crore, Says Former Top Bureaucrat
The Indian government has taken a step towards greater transparency in its accounting but still stopped short of providing real picture of its fiscal deficit. That’s according to Subhash Chandra Garg, former economic affairs secretary to the Government of India.
Garg, ahead of the budget, had cautioned that the ‘real fiscal deficit’ for 2019-20 could be between 4.5-5 percent of the gross domestic products. On Saturday, the government said its fiscal deficit expanded to 3.8 percent compared to the budgeted 3.3 percent. However, it also disclosed off-budget spending of about 1 percent of GDP. As such, the real fiscal deficit, according to BloombergQuint calculations, works out to about 4.97 percent of GDP.
Similarly, for FY21, the headline fiscal deficit has been pegged at 3.5 percent of GDP, the deficit inclusive of extra budgetary resources, will be close to 4.3 percent of GDP.
Garg said that next year’s deficit targets rely on “optimistic” tax targets and a large ambitious disinvestment of Life Insurance Corporation of India. If concluded, a 10 percent stake sale in LIC could help raise Rs 80,000-90,000 crore, Garg said, adding that the listing of India’s largest insurance company is a good move.
Edited excerpts of Garg’s conversation with BloombergQuint below:
The Fiscal Math
Did the government actually come clean on the fiscal side?
They have come clean in the sense that whatever is off-budget, is there. They have displayed all the numbers, whether it is the fully serviced bonds or it is the food subsidy being met through the National Small Savings Fund or the bonds being issued for capitalising banks, EXIM Bank etc. So, those all details are there in the budget papers.They have made even that much clear that next year, the food subsidy would be partly paid from the NSSF. So even that number has been stated. So, this is all there.
But this is not formally part of the fiscal deficit. So, what you see as the fiscal deficit -- 3.8 percent this year and 3.5 percent for next year -- is not the full deficit. To get the real fiscal deficit, one will have to add these numbers.
And I did precisely that. If you take the headline fiscal deficit number, then you would add the extra budgetary resources to that and the bank recapitalisation amount for FY20. So, if you put all three together, you get a real fiscal deficit of close to 4.97 percent of GDP. Am I close to the actual number?
That’s correct. So, these three numbers are roughly Rs 75,000 crores for the food subsidy, Rs 44,000 crores for fully serviced bonds and something close to Rs 75,000 crore for recapitalisation. So, all these added together would be about 1 percent of GDP for the current year. That added to a fiscal deficit of 3.8 percent is 4.8-4.9 percent. So, you’re very close to it and you have got it accurately to my mind.
On the borrowing side, the government is borrowing Rs 2.4 lakh crore from the NSSF this year and next year. Isn’t this very large?
It’s very simple. It means that the government prefers to borrow through the NSSF rather than borrowing from the market and that could lead to, in my judgment, the interest rates on small savings instruments being kept at the higher level as they have been kept this year. No adjustment has been made in the interest rates of the small saving instruments, that would have led to this year’s projected surplus on the NSSF account being raised from Rs 1.3 lakh crore to Rs 2.4 lakh crore.
I assume that the same policy will continue next year so that you can get more out of the small savings. There is another implication at this moment. I’m not sure how it plays out. The government has reduced the income tax rates but has taken away certain exemptions and that includes the exemptions under 80 (c), which include the investment in public provident fund and all. This could reduce inflows into small savings.
But still keeping the interest rates high relative to other instruments might lead to more inflows.
Do the tax collection estimates look reasonable to you?
The government has done well to recognise that the tax targets for this year were very high and they have reduced them.
My calculations suggested that the tax revenues would fall short by about Rs 2.5 lakh crore. In that sense, there is still optimism built into it. Maybe it can be managed but it’s also possible that when the final numbers come for 2019-20, there might be another shortfall of Rs 75,000 crore to Rs 1 lakh crore. So, we may again be in a position where numbers are quite unreasonable.
To my mind, the projections are somewhat optimistic, but let’s see.
The Big Divestment Target
You got a divestment number of Rs 2.1 lakh crore with a plan to list LIC. What do you make of that?
So that is very interesting. In my view LIC needs to be listed. It’s a big company with a big possible market capitalisation. You have seen HDFC and ICICI and SBI Life being listed at very good validation LIC is a big behemoth with a Rs 30 lakh crore investment portfolio and all. So, it’s a very good decision. It’s the right time.
The government has estimated about Rs 90,000 crores to come from financial institution disinvestment, which I assume is by and large from LIC.
So, my calculations suggest that if you do a 10 percent stake sale of LIC, you might get about Rs 80,000-90,000 crore.
But the challenge is that it would probably need to be corporatised and then this disinvestment process need to begin. It will be a new entity with a lot of policyholders and all. Therefore, the government will need to do this very professionally and quickly to make it happen. Otherwise, we might have a situation like what happened this year with the delays in disinvestment in BPCL Ltd an Shipping Corporation of India.
So, start early and get this done and then it is achievable.
Are there legal hurdles in this LIC divestment? Are the accounts of LIC in a position that they can go public? For instance, we had to go through quite a process before some of the railway entities could come to the market.
That’s correct. I think it still is a statutory corporation. That perhaps would require a change. I need to check but that’s what my understanding is. Even otherwise, getting an insurance company listed,which is being managed in a certain way, will take some action and it will be anew sort of corporate coming into the market.
But I think it can be managed, if we start very early and that is good that the government has made an announcement about this in the budget.
I would have actually liked that many more specific divestment plans of non-financial companies are also stated in the budget itself. So that their process of disinvestment is also started.
The target of Rs 2.1 lakh crore next year is definitely challenging. But with BPCL and others also completing next year and if LIC foes through, a large part of the target may be achievable.
No Boost To Growth?
What stood out for you in the budget? And do you think the budget managed to address the growth concerns?
There is one item in the non-tax revenue segment from the telecommunications sector. The government has projected a very large inflow next year of about Rs 1.3 lakh crore. Presumably that is linked to the AGR dues of telecom companies. So that will have to be watched.
In terms of the overall contribution to growth, I would have loved to see much more reforms being brought in the way the agriculture programs are run or the way the infrastructure sector is promoted and incentivised. Sectors seeing weakness such as the residential real estate, power and roads sectors should have been dealt with.
Ultimately, until we get the private sector to invest heavily into these sectors, and private sector will invest only if there is a profitability, the government has to step in. So, those things I didn’t find.
It’s more of a carry-on budget, lot of laborious detailing and micromanagement that may also create some bit of complications, especially on the taxation management front.
But on the whole, I don’t think this budget does any harm on the growth story. If the economy works through on its own motion and the dynamism comes back, and the fundamentals also change like they’re changing to some extent in manufacturing, we could see 6 percent growth next year.