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public debt in India

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									Reducing Public debt – Is it a realizable objective of Privatization?
(A Study with reference to the Indian Privatisation Programme) (S.Gangadharan) ABSTRACT Disinvestment and Privatisation is one type of economic reform programme initiated in 1991 by the Government of India as a part of its liberalization efforts to restructure the Public sector enterprises. One of the prime objectives of this programme is the reduction of Public Debt. This paper examines the extent of realization of this objective by examining the level of indebtedness of the Government of India in the Pre (1980-81 to 1989-90) and Post Privatisation (1990-91 to 1999-2000) period. The paper also brings out an analysis on what drives the debt ratio? The study concludes that given the type of monitoring and control methods by the RBI, a favorable economic scenario of 2005-06 and the overwhelming response the PSU shares received in the recent “Offer of Sale” programme, reducing public debt is a realizable objective of the Privatisation programme. Key words – Public Debt, Outstanding Liabilities, Real Interest Rate, Real Growth Rate, Privatisation, Indebtedness ACE Theme - 4 JEL Classification - H

Introduction No macro economic problem is as complex as public debt. The most distressing, that deprives even the basic amenities (health & education) to its people. According to the United Nations Programme for development, many countries spend a greater proportion of their budget on debt repayment than they allocate to education, health and other social services. In 2001, 38% of the budget in African countries was devoted to debt servicing1. Malawi with a Debt to GDP Ratio of 235.70% and Tanzania with 6.1% ranks first and last respectively among the 106 most indebted countries in the World for the year 20042. India ranks 43rd position with an estimated public debt of 59.70% of its GDP. The debt crisis is echoed in the US and throughout Europe. Under George Bush’s Presidency, the national debt has risen by 34% which is 64.8% of GDP. Several financial crises in the past decade in large emerging markets (Argentina, Brazil, Mexico, Russia and Turkey) were triggered by Public debt. The first debt relief campaign for heavily indebted countries was initiated under the banner Jubilee 2000 – an outfit consisting of development NGOs, Christian organization and others. Its intense campaign in 1999 involving the Pope, Bill Clinton, Tony Blair and Bono, compelled the G8 leaders to write off $110bn of debt for 41 of the world’s poorest countries. Recently, a unique way to get global attention to this burning problem has been tried out for the first time by releasing a musical CD. The CD titled “Drop the Debt” was released by the World Village (Harmonica Munds) on

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the UN Secretary General Kofi Annan’s announcement World Fact Book 2004

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August 12, 2003 to raise awareness and funds for an international effort to cancel the debt that burdens the development of the “developing nations”. Leading singers have rendered songs with heartening catchy word like “You paid me only 10 and I retuned 100” to gain the sympathy of the lenders. Another debt relief organization that works closely with debtor governments and helped in writing off millions of dollars of debt of countries like Nigeria, Ethiopia and Guyana is Ann Pettifor’s3 “Advocacy International”. All these shows how vital needs of the populations are being sacrificed to truncated economic rules and necessitates a change in the World Debt policy. The traditional reason for public debt in many countries is excessive domestic spending. The concern is enormous borrowing to finance this spending. While corporate borrowing can be sustainable, as it is used for business expansion and the significance of profits and market value for its shares can be expected to channel the borrowed funds into productive use, the sustainability of the level of indebtedness of the Government is of great concern to the policy makers, as it leads to macroeconomic instability4. Public Debt is a topic that has some peculiar feature. Literature on the issue of the size of debt of the government suggests that running governments like households (a balanced budget is a good budget) is strangely a bad idea – particularly when taxation is used to balance the budget. The issues need to be handled carefully, since implementation of non-populist methods (reduction in the number of staff, cutting down expenditures using the technology etc.) to reduce public debt will over turn the ruling government.

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co-founder of Jubilee 2000 Undermine the country's creditworthiness, devalue the currency and destabilise the entire economy and the society

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Studies on Public Debt (Perotti (1999), Giavazzi and Pagano (1990), Alesina and Perotti, (1995) ) focused on the debt problem with reference to OECD countries. Conclusions from these studies cannot be generalized with the emerging economies because some of the unique initial characteristics5 of the emerging markets lead to different results. Although Curutchet (2002) in his Ph.D dissertation proposal6 attempts to study on Fiscal deficit, Public Debt and Economic Growth in emerging markets, India does not figure in the list of emerging economies that he has proposed to study. Shanthi (1994) in her Ph.D thesis studies India’s indebtedness from 1960-61 to 1990-91 throws a much detailed analysis on the Public Debt of the GOI, her research culminates in the year India went on an economic reform programme on a large scale. This paper hopes to fill up this gap. Restructuring the Public sector enterprises (Privatisation/ Disinvestment) is one type of economic reform programme adopted by the Government of India as a part of its liberalization efforts initiated in 1991. One of the prime objectives of the privatization programme is reducing the Public Debt. The government reemphasized this objective vehemently while presenting its budget to the parliament for the fiscal year 2000-01. “……the entire proceeds from disinvestments and privatization would be used for meeting the expenditure in social sectors, restructuring of PEs and retiring Public Debt”.

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higher liability dollarization, shorter maturity structure of debt, more foreign own debt, higher volatility of key economic variables and more exposure to sudden capital flows.

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“Fiscal Deficit, Public Debt and Economic Growth in Emerging markets, LUND University School of Economics and Management, Department of Economics, Sweden

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Scaling down the deficit and debt problem of the country is one of the major issues put up before the Twelfth Finance Commission.7 In many countries it is one of the major issues that have attracted the attention of the policy makers. The topic is also currently widely debated in several international forums especially in the second half of the 1990s when different financial crisis, such as the “TEQUILA” crisis (MEXICO); 1994, the East Asian crisis; 1997, the Russian crisis; 1998, the Brazilian crisis; 1999 and the Argentina crisis; 2001 have hit the whole world, especially the emerging markets. The purpose of this paper is to examine (1) the level of indebtedness of the Government of India a decade before and during the privatization programme to find out the extent of realization of the prime objective of the privatization programme, namely reducing public debt (2) to find out what drives the debt ratio? Is it the growth in the GDP or the Real interest rate? (3) the impact of the privatization programme in reducing the Public debt. The discussions on public debt in emerging economies focus on Budget Deficit, National Saving rate and the Economic growth. The literature on budget deficit and public debt revealed two types of arguments, one supporting the deficit and the other against. Those support budget deficit argue that the budget deficit can play a useful role in managing economic fluctuations. Starting from 1940s, economists developed a series of different arguments that encouraged the political process to accept larger and larger peacetime deficits (Original Keynesian Content).

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Chairman, Twelfth Finance commission in a recent seminar organised by the National Institute of Public Finance and Policy

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The traditional economists who oppose the above argument felt that the peacetime budget deficits8 and the national debt are both imprudent and harmful. National debt represents a burden on the economy by shifting the fiscal cost to future generations. It is morally wrong to pass such a burden on to the next generation who are not yet voters (unless the debt was used to finance something that benefited the future generation – a construction project or a military victory). The Keynesian Economist counter this by saying that National debt is (or more accurately, was then) essentially all held domestically and inferred that the debt cannot be a burden because “we only owe it to ourselves”. Spending that created deficits could not be a burden on future generations because the spending used up the resources in the present and did not use any future resources. According to Franco Modigliani (1990)“resources that are used when the deficit is created either by government spending or by tax cuts that lead to consumer spending – could otherwise have been invested in the capital stock which would produce increased output for future generations” Equivalently, government borrowing crowds out the private borrowing that could otherwise be available to finance additions to the private capital stock. The focus on National Saving rate and Economic growth implies a consensus and a conflicting view. The traditional economists and Martin Feldstein (2004) are of the view that Budget deficits reduce national saving and the rate of economic growth. The new neo classical theory of Economic growth

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Budget deficits and debt ratios have not always been as high as they are now. While deficits during major wars were common, peacetime deficits were unusual. In the United States, the entire national debt, including the substantial debt during the Civil war, was fully paid off by a series of surpluses in the latter part of the 19th century.

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(1960) also agrees to this view but conflict on the point that it does not affect the long-run rate of economic growth. Ricardian equivalence proposition theory (1980) conflicts this view. According to this theory budget deficit do not reduce the national saving because individuals increase their personal saving to offset exactly the rise in the budget deficit. Most economists have recognized the practical irrelevance of this theory and concluded that it does reduce the national saving. Martin Feldstein and Charles Horioka (2004) argue that “a country that reduces its national saving by a large budget deficit will have a similar adverse effect on its national investment rate ” By the late 1970s, a higher saving rate was seen as important for growth and for raising real incomes, the long-run Phillips curve was discredited, and the high rate of inflation in the 1970s was recognized as a serious problem Data The data for this paper has been sourced from the Reserve Bank of India’s Publications (Handbook of Statistics on Indian Economy, Report on Currency and Finance, Report on Foreign Exchange Reserve and RBI Press Release) and the Economic Survey of India, an annual publication of the Ministry of Finance, Government of India. Research Methodology The methodology used to infer the results has been the usual Statistical analysis such as the Compound Annual Average Growth Rate (CAGR), percentage and variation of the relevant data pertaining to India on Outstanding Liabilities, Gross Domestic Product, Primary and Fiscal

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Deficits, Tax – GDP ratio, Budget Expenditures and disinvestment proceeds from 1990-91 to 2003-04. Besides this a directional hypothesis that compares the population proportion of two different samples of different periods has been developed. The “t” test of two-sample assuming equal variance has been used to test the hypothesis. A regression analysis that tests the level of dependency on the outstanding liabilities (Public Debt) by the explanatory variables (real interest rate and the real GDP Growth rate) in the pre and post-privatisation period has been worked out. The analysis pertains to the decade 1980-81 to 1989-90 we call it as preprivatization and that of 1990-91 to 1999-2000 as post-privatization. The paper also analyse data up to 2005-06 wherever required. This paper examines the over all level of indebtedness of the Government of India and not an in depth analysis on its internal or external debt. The paper uses nominal data in most of the analysis, since the availability of real data is limited to GDP for comparing various parameters. The paper proceeds as follows. Section – I describes the level of indebtedness of the Government of India in the Pre and Post-privatisation period; Section – II discusses the impact of the privatization programme in reducing the public debt; Section – III concludes, “Reducing public debt is a realizable objective of privatization” considering the tight monitoring and control mechanism by the Reserve bank of India, a favorable growth scenario in 2005-06, the overwhelming response to over subscription of the many PSU shares in the “Offer of Sale” programme and some of the

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discernible key features designed in the economic reform programme to reduce the short-term debt.

I. The Level of indebtedness of the Government of India – Pre and Post- Privatisation Era
In India, the traditional concern for public debt has been with fiscal deficits (both Centre and State) and with the size and maturity of the country's external debt. Somewhat less attention has been paid to the level, cost and structure of its overall public debt, both domestic and external. The outstanding liabilities comprises of the Internal (Market Borrowings, RBI Treasury Bills, small savings and deposits, provident fund, reserve fund) and External liabilities. The total outstanding liability of the Government of India as per 2004-05 (BE) was nearly Rs.20 lakh crores (64% of the GDP), of which internal debt account for 97 per cent. Adding the State government’s outstanding liabilities of Rs.9.11 lakh crores the total outstanding liability exceeds the GDP (Rs.26.75 lakh crore) of 2004-05 (BE). It is common to use the gross fiscal deficit as percent of GDP or the outstanding liabilities (Public Debt) as percent of GDP as a yardstick to measure the level of indebtedness and its sustainability. The latter is the most appropriate tool since the numerator is an unbiased figure given by the Comptroller and Auditor General (CAG) of India – an independent authority appointed by the President of India. Besides this, many empirical studies9 have also used this to measure the level of indebtedness.

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C Rangarajan and D K Srivastava, 'Dynamics of Debt Accumulation in India'. Economic and Political Weekly , Vol 38, No. 46 (November 15--21, 2003, pp. 4851--4858. Mumbai.

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Another indicator that signals the seriousness on the level of indebtedness is the proportion of the Revenue deficit to the Fiscal deficit. This ratio reflects the fact that a large portion of the Fiscal deficit goes to finance public consumption expenditure pre-empting public investment. We can see from Table–I that the proportion of the average OSL to GDP was on an increasing trend in the pre-privatization and on a decreasing trend during post-privatization. Though the proportion of the average outstanding liabilities to GDP has increased by 4%, the growth rate has come down from 3.3 percent per annum to a negative (-0.67%) in the post-privatization. A noticeable point in the analysis as reported in Table – II is the drastic reduction in the growth of the external liabilities from a negative 3.2% per annum during pre-privatization period to a negative 6.66% growth (more than double) during the sale of share and further reduced to a negative 18.5% (six times) during the strategic sale of the post-privatization period. The Revenue deficit, which constituted 49.4 percent of the fiscal deficit in 1990-91 accounted for 73.09 percent of fiscal deficit in 2003-04 (B.E). This is because of the declining trend witnessed in the Tax – GDP Ratio10 in the post – privatisation period. The ratio that was showing an increasing trend and growing at the rate of 2.21 percent per annum in the pre-privatization registered a negative 1.59 percent growth in the post- privatization. The ratio incurred negative growth in almost half of the post-privatization decade. Despite the declining trend in the Tax-GDP ratio, the proportion of the Revenue deficit to Fiscal deficit as depicted in Table – III has been growing

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This ratio gives the proportion of the net Tax Revenue (Direct and Indirect) to the Gross Domestic Product (GDP) at factor cost and at current prices.

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at the rate 5.64% per annum during 1980-81 to 1989-90 has come down to 3.03% during 1990-91 to 1999-2000. A major part of the borrowings of the Government go to meet the current consumption expenditure11 that does not add to capital assets. A comparative analysis on the rate of growth of the Government final consumption expenditure of various Governments across the world as shown in Table -IV indicate declining trend during the decade (1991-2000) where privatization programme was initiated on a large scale globally. The reduction in the growth rate of the final consumption expenditure was more in Europe, U.K,U.S.A than the Asian countries. In India the government final consumption expenditure that was growing at the rate of 16% per annum in the pre- privatization got reduced to 15% per annum in the post-privatization. Table – V gives the proportion of the outstanding liabilities to GDP during the Pre and Post – privatization period. So the above analysis indicates that the ratios that signal the seriousness on the level of indebtedness has been showing declining trend in the postprivatisation period. This forms a preliminary support to our argument that scaling down the level of indebtedness has been more after the initiation of the privatization programme. The paper attempts to further strengthen the above observation by performing a t-Test. The hypothesis developed is a directional hypothesis.

Null Hypothesis (Ho)

The

growth

rate

of

the

Outstanding

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Consumption expenditure is the expenditure on wages & salaries and commodities & services for current use

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Pda =Pdb

liabilities in the post- Privatisation period is not different from what it was in the preprivatization

Alternate Hypothesis (H1) Pda < Pdb

The growth rate of the Outstanding liabilities was less in the post-privatization

Where Pda is the growth rate of the outstanding liabilities in the postprivatization and Pdb is the growth rate of the outstanding liabilities during pre-privatisation. The statistic used to test the significance of this hypothesis is the T- test of two-sample assuming equal variances. Table – VI displays the “t” statistic (3.35499) is more than “t” critical (2.079614) at 1% level of significance. The analysis so far reveals that though the proportion of the Debt to GDP has been on an increasing trend year after year, the growth rate showed a declining trend in the post-privatisation. Thereby we have concluded that the level of indebtedness of the GOI has come down in the post-privatization. This also means that the GOI has taken some corrective policy decisions to combat the rising debt ratio. But the intrinsic nature of debt and GDP that measures the level of indebtedness necessitates a precise analysis to find out what drives the debt ratio? For instance a high debt becomes unstable even without any increase in the primary deficit. This is because a rising ratio of debt to GDP increases the probability of some kind of debt default or debt restructuring. The financial markets are forward looking and respond to that risk by insisting on higher interest rate to induce investors to hold government bonds. This is because of the fear of the investors that the government may default on their

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holding. As a result the investor sells at a discount. But those higher interest rates cause the debt to grow even faster. It is in this way that high debt become unstable without any increase in the primary deficit. Again a budget deficit implies that the national debt is increasing. But since the GDP is also rising, the ratio of the national debt to GDP may or may not be increasing. That depends on whether the growth rate of the national debt is more or less than the growth rate of GDP. To reduce the ratio of debt to GDP there must be either (1) a primary surplus (i.e Revenue must exceed the Non-interest outlays) or (2) the economy must grow faster than the rate of interest, or both. If only one of those conditions holds, it must be large enough to outweigh the adverse effect of the other. This paper attempts to examine the applicability of the second option to find out the level of indebtedness of the GOI in the pre (1980-81 to 1989-90) and post (1990-91 to 2003-04) privatization. The variables taken for analyses are the GDP growth rate and Interest rate. It would be meaningful to carry out the above analysis with the Real GDP growth and Real Interest rate rather than with the nominal GDP and nominal interest rate that takes inflation into account. Moreover, investment and consumption decisions of firms and households rely more on real rate of interest. The year- to- year growth rate of the Real GDP at factor cost (1993-94 =100 as base) has been computed from 1980-81 to 2003-04. The corresponding comparable data on real interest rate (net of manufacturing inflation and GDP deflator used as a measure of inflation) has been culled out from the RBIs Report on Currency and Finance, 2003-04. The report has used SBIs advance rate as proxy for nominal interest rate. 13

The literature says that if G-R is positive, then the ratio of debt to GDP comes down and it will grow in an unbounded manner if it is negative. Table-VII that exhibits the G-R computed for the last 25 years with real interest rate net of GDP deflator has been positive on six occasions (Two times in the pre, three times in the post-privatization and one in the millennium year) and the number of such occasions got reduced to three when G-R computed with real interest rate net of manufacturing inflation. In both the computations G-R was more than 1 only on one occasion (1988-89) in the pre-privatisation period. This indicates the plus point that the privatisation programme has enhanced such occasions. It is interesting to note that the all time high growth rate in Real GDP (10.5%) achieved in 1988-89 was in the pre- privatization and the all time lowest (1.30%) in the second year of the liberalization programme was in the post-privatisation. While the record growth in agriculture (20.8%) and industrial production (8.8%) and containment of inflation (5.7%) aided the all time high Real GDP growth, the all time lowest growth was attributed to the hangover effects of economic crisis in the mid 1991, high inflation, and depressed industrial production and strained balance of payments. A closer look at the G-R ratio from 1980-81 to 2003-04 reveals that on the one hand there are wide fluctuations in the growth rate of the Real GDP and on the other hand a consistently stable real interest rate has been maintained. Major part of the years in both the pre and post-privatization period G – R has been negative. The contributing factor for this is the high real interest rate due to conspicuous decline in the inflation rates (wholesale price inflation has averaged around five per cent per annum in the period since

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1997 as compared with an average of 8 to 9 per cent per annum in the prior two decades) despite some moderation of the nominal interest rate since mid 1990s. The moderation in respect of the manufactured goods inflation was more pronounced than that in the overall inflation rate. The supporting evidence for this is the number of positive G-R got reduced to three (one each in the pre, post-privatisation and Millennium period) when computed with real interest rate net of the manufacturing inflation. The impact in the structure of the real interest rate underwent a major change as the interest cost as a proportion of the sales of corporates was much higher in India as compared with many emerging market economies (Mohan, 2002). Besides this the stickiness in banks lending rate and high long-term inflation expectations, at least in the second half of the 1990s attributed to the increase in real interest rates. With consistently low and stable inflation since 1997-98 onwards, inflation expectations appear to have stabilized and this has enabled a moderation in nominal and hence, ex post real rates for both government and non-government borrowers during 2000-04 compared to the second half of the 1990s. High real interest rates are a cause of concern since these have an adverse impact on investment demand and output growth. Evidence for the G-7 countries suggests that a 100 basis points increase in real interest rate leads to a decline in output of 6-17 basis points in the short-run while the long-run impact is a decline of 25-69 basis points (Goodhart and Hofmann, 2003). To analyse the impact of real interest rates on output for India, aggregate demand curve specification on the same lines as Goodhart and Hofmann (op cit.) has employed, i.e., output gap is regressed on its lags and real interest 15

rates. As supply shocks can have an adverse effect on output, fuel prices and agricultural sector output are also included in the equation. Estimates of this equation over the period 1970-2003 using annual data suggest that a 100 basis point rise in real interest rates in India depresses real GDP and hence widens the output gap (actual less trend output) by five basis points in the short-run. The impact increases over time and the long-run impact is almost 40 basis points. Output gap = -0.05 RLINT WPD (-1) – 0.07 DFUEL + 0.36 GDPAGRI + 0.87YGAP(-1)
t VALUES significant at 1% level RLINT WPD - Real Weighted bank lending rate (Nominal weighted average – WPI Inflation rate) DFUEL - Fuel Inflation (2.6) (4.5) (8.6) (5.6)

GDPAGRI - Agricultural Growth The equation has been estimated for the years 1972-73 to 2002-03 using Annual Data

The recent trend in the GDP Growth Rate The growth rates witnessed in India in the last three years are the consumption and borrowings driven growth rate. In the last three years (2002 to 2005) India has received capital flows of $76 billion compared with $28 billion in the preceding three years (1999 to 2002). A large part of this borrowing has been used to boost consumption. This would be a positive development as it improved domestic capacity utilization. The Government of India is clearly engaged in wide variety pro-growth policies such as increasing market flexibility, improving infrastructure, reducing regulations and removing financial and legal barriers to individual entrepreneurship that will raise the rate of economic growth to achieve lower

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budget deficits which in turn reduces the relative size of the national debt. The performance of the Government of India in achieving a real GDP growth of 8.43% and a real interest rate of 6.60% thereby making a positive G-R of 1.83% for the year 2005-06 is a clear testimonial that India is poised for such growth in reducing the national debt. The variables that influence the level of outstanding liabilities (Public Debt) of a country are the Fiscal Deficit, the Consumption Expenditure, the Gross Domestic Savings, the Real Interest Rate and the growth rate in the Real Gross Domestic Product. A check on the multi collinearity among the independent variables reveals that three independent variables (Fiscal Deficit, Gross Domestic Savings and Consumption expenditure) have high association with each other and hence they have been dropped from our analysis. We ran the regression with two independent variables (Real Interest Rate and the growth rate in the Real GDP) for finding out their level of dependency on Public Debt. The analysis reveals that the two variables influence 70% of the outstanding liabilities in the pre privatization and 41% in the post privatization. The P-value that validates the significance of this inference further reveals that it is the real interest rate that plays a significant role in influencing the level of outstanding liabilities. This is another supporting evidence to the hypothesis that privatization played a lead role in reducing Public Debt in India.

II. The impact of the privatisation programme in reducing Public debt

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The proceeds from privatization have not been kept aside as a separate fund to be used for some specific purpose. It is included in the capital receipts from 1991-92 onwards. It is only in its recent proposal to disinvest 10% of its equity holding in the BHEL, NLC and NALCO the government has decided to keep the proceeds in a separate account known as “National Investment fund” be used for education, rural infrastructure facilities and social reform programmes. Much of the Government earnings through disinvestment during 1991-96 were used to bridge the budget deficit. Of the Rs.12,300 crores earned through disinvestment more than Rs.7,300 crores was used to bridge the deficit. Reducing budget deficit means reducing the size of the Government debt. Moreover the length of the privatization programme itself was short. It is only 14 years old (1991 to 2004) and we could classify this into three phases (1) the initiating phase - (December 1991 – October 1994) (2) the slow phase – (1994-95 to 1997-98) (3) the rejuvenating phase - (1998-99 to 2002-03) Here also the programme was active only for 6 years (3 years each in the initiating and rejuvenating stage). In these 6 years more than 100% realization has been achieved only twice (1992 & 1999) with a gap of 7 years. In the rejuvenating phase, lot of bold decisions has been taken with regard to the route of privatization. The strategic route adopted in this phase improved the proceeds considerably. In a statement laid in both the houses of parliament on December 9, 2002, the Government emphasized the need to

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use this route increasingly to facilitate modernization, creation of new assets, generation of employment, retirement of public debt and setting up of a disinvestment proceeds fund. The programme witnessed a slow progress due to unstable and frequent changes in the ruling party for 8 years (1993-98). Even here, one year (199596) was spent in setting up the disinvestment commission to bring corrective measures in the rules and regulation with regard to valuation and the routes of disinvestment. The process has undergone a further change in 2003-04 to sell the residual shares in the privatized PSUs and a minority portion of the Government equity in select PSUs through the “Offer of Sales” method (refer Table – VII). The process received overwhelming response from the institutional and retail investors as evident in the case of Maruti Udyog Limited in July 2003. The process continued in the subsequent six (IBP, IPCL, CMC, DCIL, GAIL, ONGC) public sale of shares. Over 16 lakh retail investors were allotted shares and the level of over subscription ranged from 2.8 times (IBP ltd) to 18.11 times (DCIL). The Government realized Rs.10,542 crores from ONGC (5.88 times over subscribed) making it the biggest offering so far in the Indian Capital Market. About Rs.14,135 crores was realized through these six public sale of shares in a short period in the last quarter of the financial year 2003-04 demonstrating the depth of the Indian capital market. At the same time it also saw lot of noise in the form of trade union agitation, court cases not only from the opposition party but also from the ruling coalition partners.

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It is also necessary to view the situation in the absence of privatization. More precisely what is the opportunity Cost? What would be the debt position of the GOI in the absence of disinvestment or privatization programme? The Government of India has been able to net Rs.46,751 crores by divesting its shareholding in the Public Sector Enterprises (PSEs) from 1991-92 to 2004-05. Due to this, the average fiscal deficit of the GOI has come down from Rs.96,395.64 crores to Rs. 93,056.29 netting a saving of Rs.3,339.36 crores. If this amount were not there the government would have borrowed this to bridge the deficit. Computing interest on the borrowing rate would have cost an another Rs.3,614 crores. Besides this if the deadweight cost of borrowing this amount is also taken into account the debt burden would further increases. The present “Centrist12” government’s economic policy has put a halt to the sale of profitable PSU’s and decided to take up the loss making PSUs on a case-by-case basis. If the trend as witnessed in 2003-04 would have continued the proceeds from disinvestment would have been much enough to retire some debt. It is only the political compulsions that have put a stop to the privatization process of the GOI. The Current Change Scenario in the Disinvestment Policy The UPA government has incorporated two important changes in its disinvestment policy; first, a change with regard to the utilization of the resources mobilized that may increase the public acceptance of privatization and second, a change with regard to the route of disinvestment.

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Government supported by coalitions like broad multi-party coalitional cabinets, non-party transitional cabinets, ”national unity” governments.

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a) Utilisation of resources mobilised Unlike the 1991 policy, the funds do not get diverted to non-value adding purposes like reducing the budget deficit, but go to the National Investment Fund (NIF) and managed by LIC, SBI and UTI to finance additional expenditure on social sector development and for retirement of public debt. b) Route of disinvestment The change with regard to the route of disinvestment, the GOI has reverted back to its original route of partial offloading. The strategic route adopted till 2002-03 has been given up as the Comptroller and Auditor General of India (CAG) – an independent authority appointed by the President of India – in its report on disinvestment tabled in the parliament has alleged low valuation and violation of companies act. Selling in trenches instead one go has been suggested by Vickers and Yarrow(1988); Jenkinson and Mayer (1994). Some of the existing monitoring and control mechanism adopted by the Government of India to arrest the adverse growth in the proportion of Public Debt to GDP implies that the Government is very keen and serious in reducing the public debt of the country. First, the introduction of the Fiscal Responsibility and Budget Management Act (FRBM) to enable the fiscal policy of the country to play a fitting role in the economy’s growth process.

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Second, the compilation of the Half-yearly reports13 by the RBI on Management of Foreign Exchange reserves for bringing about more transparency and also for enhancing the level of disclosures. Third, its focus in bringing out new thoughts in this area by encouraging research on issues connected with public debt of the country. The RBI regularly brings out interesting articles on this subject in its monthly publication of RBI Bulletin. The budget scenario for the year 2005-06 is favourable for a reduction in the debt to GDP ratio. This is due to the fact that the growth in 2005/06 is likely to be driven by sustained growth in corporate investment, coupled with an improvement in foreign direct investment inflows, a supportive policy environment, a reviving rural sector after a year of sub-par rains and export expansion helped by a removal of trade barriers (especially textile quotas). This is reinforced by the fact that the budget assumes a nominal GDP growth rate (at market prices) of roughly 12%. This takes into account real GDP growth of 7% and an inflation target of 4.5-5%. Inflation is likely to remain low due to the base effect of the previous year's inflation and hence will support a tame interest rate environment. This could cause the interest rate to be smaller than the growth rate, further reducing the debt to GDP ratio. Even a relatively small increase in the growth rate could prevent the rise in the debt to GDP ratio.

The report consist of three parts, Part – I – an assemblage of various quantitative information with regard to external reserves that are already in the public domain, such as the level of foreign exchange reserves, sources of accretion to foreign exchange reserves, external liabilities vis-à-vis foreign exchange reserves, prepayment/ repayment of external debt, Financial transaction plan (FTP) of the IMF, adequacy of resources etc. Part – II – an exposition of various matters relating to management of reserves. Part – III – Cross – country comparison of disclosure in respect of management of external reserves. These reports were prepared with reference to positions as on 31st March and 30th September each year with a time lag of 3 months. The first report with reference September 30,2003 was released recently.

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III. Conclusion
This research paper that examined the level of indebtedness of the Government of India in the pre and post-privatization era has revealed that the economic reform programme of the Government of India has given some extra push to scale down the level of indebtedness. The extent of this push may be limited considering the odds the privatization programmme faced such as the impact of coalition politics that contradicted various issues and aspects of privatization policy, the trade union agitation, court cases etc. These obstacles have not only slow down the privatization process but also failed to get the desired price for the PEs the government had decided to sell. We conclude that privatization programme is one of the most appealing answer to the question of reduction of public debt because some of the discernible key features designed in the economic reform programme such as attracting non-debt creating capital flows and de-emphasis on short-term external borrowings have been designed to led to build-up adequate resources and reduction in short-term debt. A major source of vulnerability in the Asian crisis was the large stock of short-term liabilities of banks and corporate. Besides this the tight monitoring and control mechanism by the Reserve bank of India, the recent amendments in the disinvestment policy by the GOI and the capital market’s positive reactions to the PSE shares are conducive for divesting GOIs holding in the PSEs in the stock market that could fetch more revenue to the government. Since the proceeds from disinvestment are invested in building the rural infrastructure and social reform programmes,

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the economic life of the rural people improves. As 80% of India’s population is rural, the share of rural India’s contribution to the GDP increases and paves way for higher growth rate in GDP. Hence, “Reducing public debt is a realizable objective of privatization”. The need of the hour is to resume the privatization programme and take bold decisions irrespective of the current political compulsions. It is a matter of time that such thing happens in the near future.

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Table - I Proportion of the Average Outstanding Liabilities to GDP
Pre- Privatisation (1980-811989-90) Post-Privatisation period (1990-91-- 2003-04) Sale of Shares (1990-911999-2000) I. Internal Liabilities (a) Internal Debt Market Borrowings (b) Other internal liabilities II. External III. Total Liabilities outstanding 53.85% 58.19% 66.10% 46.33% 30.32% 13.65% 18.55% 7.51% 53.16% 30.32% 15.13% 22.84% 5.03% Strategic Sale (2000-01 - 2003-04) 63.24% 44.05% 25.67% 19.19% 2.85%

Source : Handbook of Statistics of the Indian Economy, 2003-04, Table-120, Reserve Bank of India

Table – II
Growth rate of the proportion of the Outstanding Liabilities to GDP of the GOI Annual Average Growth Rate (%) PrePost-Privatisation period Privatisation (1980-811989-90) Sale of Shares Strategic Sale (1990-91- 1999-2000) I. Internal Liabilities (a) Internal Debt Market Borrowings (b) Other internal liabilities II. External III. Total outstanding Liabilities 4.4% 2.8% 2.0% 6.8% -3.2% 3.3% -0.15% 3.35% 4.32% -6.27% -6.66% -0.67% 2000-01 - 2003-04) 4.67% 2.09% 7.42% 11.06% -18.47% 3.62%

Source : (1) Budget documents of the Government of India and Finance Accounts (various issues). (2) Handbook of Statistics of the Indian Economy, 2003-04, Table-120, Reserve Bank of India

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Table - III Debt Indicators of GOI
Percent PostPrivatisation

Pre - Privatisation Sl.No. Performance Indicators Average 1 2 3 Revenue Deficit as a percentage of Fiscal Deficit Tax-GDP Ratio Outstanding Liabilities to GDP 27.03 8.19 53.85

Growth Growth Rate Average Rate 5.64 2.21 3.3 56.86 7.5 58.19 3.03 -1.59 -0.67

Source – 1.Handbook of Statistics of the Indian Economy,2003-04, Table-120, Reserve Bank of India 2. Economic and Functional Classification of the Central Government Budget, Economic Survey, Ministry of Finance, Government of India, Various Issues

Table - IV
Growth Rate in the Government Final Consumption Expenditure Developed Countries Australia Canada France Germany Italy Japan Korea, Rep United Kingdom United States Developing Countries Bangladesh China India Pakistan Sri Lanka M alaysia 1981 1991 to Increase/De to 1990 2000 crease 10.24% 7.91% 8.18% 4.13% 13.73% 5.81% 14.38% 7.78% 7.28% 4.8% 2.1% 3.8% 3.3% 3.9% 3.6% 9.8% 4.3% 3.7% -5.47% -5.79% -4.42% -0.80% -9.80% -2.22% -4.61% -3.45% -3.55%

7.89% 13.77% 16.22% 18.43% 19.52% 5.35%

10.07% 17.09% 15.14% 10.29% 15.33% 7.57%

2.18% 3.31% -1.07% -8.13% -4.19% 2.21%

Source - Economic and Functional Classification of the Central Government Budget, Economic Survey, Ministry of Finance, Government of India, Various Issues

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Table - V Proporation of Outstanding Liabilities to Real GDP Pre-Privatisation Post-Privatisation 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 Average 45.90% 44.84% 50.06% 47.96% 50.94% 55.09% 59.85% 61.89% 60.71% 61.23% 53.85% 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 Average 61.56% 60.21% 59.70% 61.17% 58.73% 56.48% 54.33% 55.99% 55.80% 57.95% 58.19%

Source - Economic Survey of GOI, Various Issues

Table - VI Growth rate of the proportion of the Outstanding Liabilities to GDP Pre-Privatisation External Total OSL Liabilities 8.72 13.21 10.42 21.89 9.99 11.55 9.56 17.47 8.72 19.22 11.17 19.18 13.46 16.06 10.31 16.12 9.61 15.46 Post-Privatisation External Total OSL Liabilities 15.87 12.00 13.45 12.51 11.34 17.33 7.30 11.94 0.63 11.83 5.67 10.85 2.00 14.14 3.42 13.61 2.04 13.53 12.09 13.49 8.15 15.64 -18.25 13.20 -22.91 10.08 15.01 14.13

Year Internal Liabilities 1982 14.42 1983 27.50 6.84 1984 1985 15.24 1986 19.36 1987 19.47 1988 13.36 1989 14.90 1990 15.12

Year Internal Liabilities 1992 11.49 14.2 1993 1994 21.04 8.11 1995 1996 14.44 1997 11.24 1998 12.15 16.7 1999 2000 44.07 11.8 2001 2002 12.76 2003 11.14 2004 10.53 2005 13.01

Source : Handbook of Statistics of the Indian Economy, 2003-04, Table-120, Reserve Bank of India

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Table - VII Real GDP Growth and Real Interest Rate
Pre-Privatisation Year Growth Real Interest Rate in Rate* (%) Real GDP (SBI (%) Adv.Rate Manf.Infln.) (G-R)1 Real Interest Rate (%)* SBI Ad.Rate Price Deflator Real 7.30% 7.30% 7.30% 7.30% 7.30% 8.40% 8.40% 8.40% 8.40% 8.40% 7.85% 6.80% 6.80% 6.80% 6.80% 6.80% 7.00% 7.00% 7.00% 7.00% 7.00% 6.90% 7.20% 8.40% 7.30% 6.60% 7.38% (G-R)2

Year 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 Average 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 Average 2000-01 2001-02 2002-03 2003-04 Average

Growth Real Interest (G-R)1 7.17% 8.30% -1.13% 5.97% 8.30% -2.33% 3.06% 8.30% -5.24% 7.68% 8.30% -0.62% 4.31% 8.30% -3.99% 4.45% 9.00% -4.55% 4.33% 9.00% -4.67% 3.83% 9.00% -5.17% 10.47% 9.00% 1.47% 6.70% 9.00% -2.30% 5.80% 8.65% -2.85% Post - Privatisation 5.57% 7.10% -1.53% 1.30% 7.10% -5.80% 5.12% 7.10% -1.98% 5.90% 7.10% -1.20% 7.25% 7.10% 0.15% 7.34% 9.90% -2.56% 7.84% 9.90% -2.06% 4.79% 9.90% -5.11% 6.51% 9.90% -3.39% 6.06% 9.90% -3.84% 5.77% 8.50% -2.73% Millinium Year 8.20% 4.37% -3.83% 9.70% 5.74% -3.96% 8.00% 3.77% -4.23% 5.00% 8.45% 3.45% 5.58% 7.73% -2.14%

(G-R)2 -0.13% -1.33% -4.24% 0.38% -2.99% -3.95% -4.07% -4.57% 2.07% -1.70% -2.05% -1.23% -5.50% -1.68% -0.90% 0.45% 0.34% 0.84% -2.21% -0.49% -0.94% -1.13% -2.83% -2.66% -3.53% 1.85% -1.79%

Source - (1) - Hand book on Indian Economy, RBI,2003-04, www.rbi.org (2) - Report on Currency and Finance, Department of Economic Analysis and Policy, 2003-04, p186 GDP Deflator = (GDP at Market Prices - GDP at Factor cost at Constant Prices) GDP at Factor cost at Constant Prices * Given by the Government of India

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Table - VIII Disinvestment proceeds during 2003-04 Proceeds Percentage of Realisation/ Equity to be realised Disinvested (Rs.Crores) 27.5 72.0 18.9 9.2 26.0 28.9 26.3 20.0 10.0 9.9 993.94 18.18 323.88 77.1 350.66 1202.85 190.44 221.2 1627.36 10542.4 15547.42

Sl.No.

Name of the PSU

Type of Sale

1 2 3 4 5 6 7 8 9 10

Maruti Udyog Ltd Jessop & Co.Ltd* HZL ** ICIL IBP IPCL CMC DCIL GAIL ONGC Total

Offer for Sale Strategic Sale Call Option Limited Auction Offer for Sale Offer for Sale Offer for Sale Offer for Sale Offer for Sale Offer for Sale

* Amount has been recived by Bharat Bhari Udyog Nigam Ltd, the holding company of Jessop & Co.Ltd ** Excise of Call Option by the Strategic Partner Source - Economic Survey,2003-04, p.148,

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10. Suman Bery, “Does India face a Public Debt Crisis?” Business Standard, December 09, 2003. 11. RBI Press Release, Report on Currency and Finance, 2002-03, Theme – Management of the External Sector in an Open Economy Framework (January 28,2004 12. Economic Survey 2003-2004, Government of India, Ministry of Finance, pp 19 – 148 13. Report on Foreign Exchange Reserve, http://www.rbi.org/ 14. Drop the Debt: A CD for Canceling “Third World Debt” www.rockpaperscissors.biz 15. Environmental Governance and Institutions – Government

Expenditure: General government final consumption expenditure www.earthrends.org/searchable_database

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