Funding finding

There is little doubt that Indian public finances are seeing stress that they haven't for a while. The combined deficit — of both Central and state governments — is predicted to cross 10 per cent. The temptation to fill that in by any means necessary will be grave. In particular, the sale of government holdings in state-owned enterprises could help fill the hole. But that would be a mistake. The economic principle of prudence, that the government's stake in PSUs is capital and shouldn't be replaced to finance current spending, is well understood. But that does not mean that the conditions currently attached to disinvestment are not onerous in the extreme. That these conditions are reportedly being reviewed is welcome.

As things stand today, any proceeds from the dilution of state ownership have to be put into what is, essentially, a sovereign wealth fund called the National Investment Fund. It is managed by three fund managers: the asset management divisions of UTI, SBI and LIC; and the corpus is never supposed to be dipped into. The returns on the Fund's investment have stringent requirements on their use: a quarter goes into reviving PSUs, and three-quarters into social sector schemes. There are, no doubt, many excellent principles embodied in this structure: but politically, it is a product of the particular political pressures that UPA-I suffered under; and economically, it simply requires too much.

Some flexibility is essential in crisis situations. If the government were to wish to use the proceeds from disinvestment in some PSU to pay back some of the debt it accrued trying to keep that PSU going, then there should be no institutional barriers preventing it from doing so. This is not to say that capital gains should finance current expenditure; but retiring debt is hardly that. The UPA needs to look at 2003-era disinvestment policy more closely. Trying to avoid both the "alienation of national assets" and the "formation of private monopolies", that policy too suggested a fund: but one that would also "finance fresh employment opportunities and investment, and retire public debt". There are details to be worked out, but that's the sort of flexibility India needs.

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