Finance minister Chidambaram will be looking for every possible way of financing the big increases promised in education, health and employment in the Common Minimum Programme.
The CMP rules out easy money from the sale of majority stakes in profitable public sector undertakings (PSUs). Possible still is the sale of minority stakes, which the last government did in the case of the ONGC, et al, just before the general election.
This, however, is not without problems. The stock market has fallen sharply, and investors who subscribed to those issues have lost money. A fresh attempt at selling minority stakes in such a depressed market could fail.
There is no sense in selling PSU shares at throwaway prices. The markets will revive in time, especially if Chidambaram demonstrates that he is capable enough to expand some populist spending demanded by the CMP and yet stick to the milestones of fiscal prudence laid down in the new fiscal responsibility law. That is when Chidambaram should go to the market.
Now, I am no fan of selling minority stakes in PSUs. I favour the selling of controlling stakes in PSUs, forcing a change in management and thus bringing in real autonomy (which no politician will ever give).
Besides, the government is umpire of the business arena, ensuring observance of the rules of the game, and it is wrong for the umpire to also be a player (see how BSNL gains from favouritism, for instance). Finally, the government needs to stop doing things that can done as well or better by the private sector, and focus on tasks it alone can do (justice, primary education and health, infrastructure, and so on).
Some people justify selling minority stakes in PSUs on the ground that it helps reduce the fiscal deficit. This is fiction. A government can finance a deficit by selling either bonds or assets, but this does not reduce the underlying deficit.
Revenue by definition is a flow, sustainable year after year. This is obviously not the case with sales of PSU shares.
Yet so duplicitous are Third World governments that many treat PSU sales as revenue. Argentina sold many big PSUs in the 1990s and claimed this had reduced its fiscal deficit. But soon all the big PSUs had been privatised, and fresh sales on a large scale were no longer possible. At this point the unreformed, underlying deficit reasserted itself.
International confidence sagged, and Argentina went comprehensively bust. This holds a lesson for India: counting PSU sales as revenue is a dangerous illusion.
Selling minority stakes in PSUs can nevertheless be justified on two other grounds. One is that the existence of a substantial shareholding among the public will check the most egregious acts of omission and commission by the government.
Second, such sales take the companies one step closer to privatisation, which will happen eventually when the time is ripe. These arguments have some force.
What are the prospects for selling minority stakes in PSUs? Many companies can, at a few hundred crores apiece. But very few can fetch thousands of crores. The ones commonly mentioned are BSNL, IOC and BPCL. But tucked away unnoticed in corners are some other notable candidates.
The biggest example is that of the seven subsidiaries of the State Bank of India (SBI). These are a historical inheritance from banks in princely states that were nationalised after Independence. They became the State Banks of Patiala, Hyderabad, Mysore, Travancore, Indore, Saurashtra, Bikaner and Jaipur.
Of these, three are listed in the stock markets — State Bank of Travancore, State Bank of Mysore and State Bank of Bikaner and Jaipur. But their turnover is negligible, just a few hundred shares per day.
Why? Because the original legislation creating these banks prohibited any individual from owning more than 200 shares apiece. Because of this constraint, the price-earnings ratio of the three listed banks is barely 3.0, half that of the parent SBI.
By common consent, the subsidiaries are as well managed if not better than the SBI itself. The State Bank of Patiala, for instance, boasts agricultural non-performing assets (NPAs) of less than one per cent. Taking all lending sectors together, the seven subsidiaries have net NPAs of just 0.84%, an outstanding performance (see accompanying table).
Chidambaram should quickly pass legislation removing the historical baggage of the subsidiaries, such as the 200-share ceiling. This will make possible an IPO to sell 49% of the shares of each subsidiary.
In one go, that will make these subsidiaries as attractive or more so to investors than the SBI itself. Every mutual fund and foreign institutional investor will clamour to buy. Last year, the net profit of the seven subsidiaries was Rs 1,937 crore.
Taking a P/E ratio of 6, which is roughly what the SBI enjoys, the market capitalisation of the subsidiaries should be a whopping Rs 12,000 crore or so. Selling 49% of that should fetch around Rs 6,000 crore. Good money, huh?
The sale proceeds will go to the parent SBI, which can pass on the entire sum as a special dividend to its owner, the Reserve Bank of India, which in turn can pass on the dividend to the government. None of this will transgress the Common Minimum Programme. Majority control will remain with the government.
So, Mr Chidambaram, go for it. Declare in your budget speech that you will introduce fresh legislation to facilitate an IPO of the seven SBI subsidiaries. It will convince many people that you are deadly serious about economic reform.