India should not fritter away PSU profits from commodity boom

Slowing tax revenue and rising government spending on food security and universal health threaten to send the fiscal deficit skyrocketing next year. To check this, many experts want to raid the surpluses of public sector undertakings (PSUs).

These surpluses have ballooned thanks to a global commodity boom hugely benefiting mineral-producing PSUs, such as ONGC, Coal India, NMDC and Oil India. These profits are unearned windfalls. They should not be frittered away in current government spending.

Part of the windfall should be conserved for future generations, in the manner than Norway, Chile, Kuwait and Saudi Arabia have done through sovereign wealth funds. T V Mohandas Pai and Gautam Seshadri wrote an article in this space calling for a massive special dividend to be paid by PSUs (Why Borrow? Reward Yourself, ET, Dec 16).

They said that the four big mineral producers plus Bhel could easily pay special dividends totalling Rs 53,000 crore. This would not jeopardise their future investment plans. Others have suggested two variations on this theme. One is a buyback of shares by PSUs. The second is for PSUs to use their surpluses to buy out minor stakes of the government in other PSUs.

Both schemes would transfer PSU surpluses to the Budget. However, raiding surpluses is just one more way of selling family silver to meet current budgetary expenses. This is not a way of balancing income and spending. Such one-off sales can be justified in difficult times, yet need to be recognised as ways of temporarily funding the deficit rather than reducing the deficit.

Treating asset sales as revenue is an accounting trick to persuade unwary observers of the soundness of a sinking budgetary ship. The public sector is no paragon of efficiency in India. The overwhelming bulk of state government PSUs are sick or closed. Central PSUs have done far better, but they too typically withered when faced with private sector competition.

The Cement Corporation cannot compete with private cement companies, Hindustan Paper Corporation cannot compete with private paper companies, BSNL and MTNL cannot compete with private telecom players. How then have some PSUs generated massive profits?

Answer: the surpluses are, overwhelmingly, windfalls from a global commodity boom. The price of oil, for instance, has risen from $18 a barrel in the late 1990s to over $100 a barrel today. Coal and iron ore prices have risen almost as fast.

Before 1991, price controls kept domestic mineral prices well below global rates, and public sector profits were modest. But the freeing of price controls, plus the global boom, has produced a windfall. The recent depreciation of the rupee by 20% will boost the windfall further. The big four mineral-extracting PSUs have cash in hand of Rs 1,15,000 crore. This does not reflect any great efficiency on their part.

On most global production criteria, these are not highly productive companies. Output per man-shift in coal, for instance, is far below levels in China or Australia. The ONGC has a very poor record in production, and some fields that it surrendered to private sector players have subsequently done much better.

How should the massive mineral windfalls be utilised? Remember, the minerals will run out one day. India needs to wrestle with this question, that earlier seemed relevant only to mineral-rich countries like Saudi Arabia, Nigeria, Norway and Chile.

Historically, many countries in Africa and Latin America reacted to mineral bonanzas by going on a spending spree. Much money has simply been stolen, much has been spent on grandiose but dubious investment projects, and some has been spent on infrastructure and social development. Many experts advised these countries to save rather than spend windfalls in periodic commodity booms. This caused new problems.

In the absence of enough good investment avenues, saving a boom at home led to real estate bubbles that later burst, and high inflation. To avoid this, countries recognised the need to save part of their windfalls abroad, not at home. Thus was born the notion of the sovereign wealth fund.

This saved surpluses in foreign assets. It also meant current windfalls were preserved for use by future generations at a time when mineral wealth would have been largely exhausted. Many Gulf countries, Norway and Chile (the world\’s biggest copper exporter) earmarked part of their windfalls for sovereign wealth funds.

In India, companies like ONGC, OIL and Coal India have started investing in mineral blocks abroad, and this is a useful form of saving windfalls abroad. But this does not flow from any overarching strategy: each company has done what it felt like. No doubt the companies need flexibility on this score. Yet, given the size of the surpluses, we need to start a debate on how to use mineral windfalls.

Clearly, a large part of the windfall must be used for current infrastructure and social spending. But not all of it. Already a significant chunk of mineral windfalls are transferred to central and state governments through royalties and taxes. The latest move to raid PSU surpluses for budget support will transfer still more to current spending.

There must be limits to this. This column has no space to enunciate all the possible principles. Its aim is simply to highlight the size and nature of the mineral windfall, and start a debate on what proportion should be saved for future generations.