The Indian government's finances are in a mess thanks a horde of problems such as slowing tax revenue, depreciating rupee, rising expenditure on food security and universal health, and so on. You can imagine how bad the fiscal deficit can get if things go on the way they are doing now. To help keep the deficit under check, all eyes are now set on cash-rich public sector undertakings (PSUs). Experts are suggesting various ways that would end up transferring the surpluses of PSUs to the government Budget. To give you some numbers, the big four mineral-extracting PSUs are sitting on a whopping cash pile of Rs 1.15 trillion. But would it be right to use profits that the PSUs have earned to set off against expenditures that the government is incurring?
To be able to answer that, it is important to understand the nature of the surpluses that the PSUs are sitting on. The fact that PSUs are amongst the most inefficient lot in our country is no secret. A majority of state government PSUs are either bleeding or closed. Even the central PSUs have a hard time competing with private sector players. Then how is it that some PSUs have amassed such astounding profits?
The story goes thus- Before 1991, domestic mineral prices were quite below global prices on account of price controls. As such, PSU profits were humble. But then India's economy witnessed a paradigm shift. Price controls were lifted. At the same time, the global economic boom gave a fillip to commodity prices. These factors were the key to the fat surpluses that some big PSUs flaunt on their balance sheets. It is clear that this is not regular income, but windfall gains that may not repeat in the future.
Would it be wise, then, to use such one-off gains against regular expenditures? Remember, commodities like oil and minerals are limited and will exhaust some day. Several countries in Africa and Latin America burnt their fingers by going on a reckless spending spree with their commodity windfalls. On the other hand, Norway, Chile, and Gulf countries like Kuwait and Saudi Arabia realized this and conserved part of their windfall gains for the future through sovereign wealth funds. It is up to India to leapfrog by learning from the lessons of others, or learn through the hard way of self-experience.
To be able to answer that, it is important to understand the nature of the surpluses that the PSUs are sitting on. The fact that PSUs are amongst the most inefficient lot in our country is no secret. A majority of state government PSUs are either bleeding or closed. Even the central PSUs have a hard time competing with private sector players. Then how is it that some PSUs have amassed such astounding profits?
The story goes thus- Before 1991, domestic mineral prices were quite below global prices on account of price controls. As such, PSU profits were humble. But then India's economy witnessed a paradigm shift. Price controls were lifted. At the same time, the global economic boom gave a fillip to commodity prices. These factors were the key to the fat surpluses that some big PSUs flaunt on their balance sheets. It is clear that this is not regular income, but windfall gains that may not repeat in the future.
Would it be wise, then, to use such one-off gains against regular expenditures? Remember, commodities like oil and minerals are limited and will exhaust some day. Several countries in Africa and Latin America burnt their fingers by going on a reckless spending spree with their commodity windfalls. On the other hand, Norway, Chile, and Gulf countries like Kuwait and Saudi Arabia realized this and conserved part of their windfall gains for the future through sovereign wealth funds. It is up to India to leapfrog by learning from the lessons of others, or learn through the hard way of self-experience.
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