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India Inc: Asset liquidation for survival

Jun 11, 2001

India's fiscal state of affairs is a perennial subject of discussion. Governments are constantly castigated for their prodigal ways and it is only over the recent past that 'fiscal discipline' has found its way into the lexicon of the administration. The overall shortfall in the Government's books of accounts, in the nineties, has hovered in the region of 5% of GDP. The revised estimated for FY01 put the fiscal deficit figure at 5.1% of GDP and for FY02 the budget estimate is 4.7%. This number has come under the spot, as going unchecked the deficit leads to higher Government borrowing, which in-turn could have the following ramifications.

  • Higher interest rates
  • Crowding out of private investments
  • Higher inflation to the extent the deficit is monetisied

    Revenues FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 RE FY02 BE
    Net tax revenues 534 675 819 937 957 1,047 1,283 1,444 1,630
    Non tax revenues 220 236 282 326 382 449 532 618 687
    Total 754 911 1,101 1,263 1,339 1,496 1,815 2,062 2,317
    Revenue Expenditure
    Defence 150 164 188 210 262 299 352 397 420
    Subsidies 127 129 134 164 195 236 247 269 298
    Administration 189 204 286 305 338 446 521 631 662
    Plan Expenditure 248 283 290 316 352 405 468 531 602
    Total 714 780 898 995 1,147 1,386 1,588 1,828 1,982
    Operating Surplus 40 131 203 268 192 110 227 234 335
    Operating Surplus/Revenues 5.3% 14.4% 18.4% 21.2% 14.3% 7.4% 12.5% 11.3% 14.5%
    Interest 367 441 500 595 657 779 902 1,007 1,123
    Revenue Deficit (327) (310) (297) (327) (465) (669) (675) (773) (788)
    Interest Coverage 10.9% 29.7% 40.6% 45.0% 29.2% 14.1% 25.2% 23.2% 29.8%
    Capital Receipts (excl. debt)
    Recovery of loans 62 63 65 75 83 106 101 149 152
    Disinvestment proceeds - 51 4 4 9 59 17 25 120
    Total 62 114 69 79 92 165 118 174 272
    Capital Expenditure
    Defence 69 68 80 85 91 100 119 148 200
    Plan Expenditure 188 191 174 219 239 263 294 331 399
    Loan 30 13 20 18 37 28 77 41 48
    Others - 17 11 (8) - - - - -
    Total 287 289 285 314 367 391 490 520 647
    Deficit in capital account (225) (175) (216) (235) (275) (226) (372) (346) (375)
    Fiscal Deficit (552) (485) (513) (562) (740) (895) (1,047) (1,119) (1,163)
    Fiscal Deficit / Total revenue 67.6% 47.3% 43.8% 41.9% 51.7% 53.9% 54.2% 50.0% 44.9%

    Total revenues of the Government have registered a compounded growth (CAGR) of 11.6% in the past five years. Over the same period, revenue expenses (excl. interest) grew at a similar rate. Consequently, point-to-point, operating surplus to revenue has remained unchanged at 14.5%. Although in the interim it had declined the surplus has made a comeback. However, the moot point is the country's earning capacity to service its debt (the interest coverage ratio), which is precariously positioned at 30% of the obligation. The interest coverage, although improving over the last three years has declined substantially over the mid nineties. Unable to meet its debt service obligations through the revenue account, India Inc. has two alternatives to fund the expense through the balance sheet:

  • Liquidate assets
  • Take on additional debt

    The thinking, hitherto, has been to opt for the latter of the two choices (easy way out) adding to the debt burden of the country. This has led to double-digit increase YoY, in percentage terms, of interest expense over the last five years rather than a similar growth in GDP, which we all await. As we take on more debt to meet our servicing obligations, technically we are in a debt trap. Even after capital receipts, revenue expenditure remains uncovered.

    The capital account is also mired in deficit. In order to balance the books, sale of public assets (disinvestments) is need of the hour. Disinvestments have to increase by a multiple of 4 times to eliminate the shortfall in the capital account.

    This still leaves us with a revenue deficit, which could be gradually reduced by:

  • Increased revenues, which have, however grown by a respectable 11.6% p.a.
  • Reduced costs. Therefore, where can the Government tighten its belt?

    Defence and plan expenditure are the holy cows with hostile neighbours and dependence on state for development. Subsidy is a 'sticky expense' and may not be dramatically lowered in haste. But a nil subsidy expense for FY02 would reduce revenue expenditure by Rs 300 bn, increase operating surplus by more than 2.5 times and reduce the revenue deficit by 37% YoY.

    Administration expense to total revenues has ranged between 25% - 30% during the nineties and in the last five years has increased by 340 basis points to 28.6%. The Government would do well, first, to not let this expense increase in percentage terms. Although, state administration flab should be cut more aggressively for the machinery to become more agile and reduce burden on revenues the thinking is yet to gain critical mass. Right sizing the Government and therefore lower administration cost may take some time before realization of any material benefits. In the recent budget the Government has frozen recruitment at 1% of civilian staff while 3% of the staff will retire every year. This is expected to cut flab by 2% p.a.

    Much of the burden to raise funds seems to fall on privatisation before cost control measures reap benefits. Consequently, disinvestment could to be the only near term saviour. The reading is clear on the wall - liquidate assets. Not that the think tank at Delhi is not aware of the problem staring at us on the face but for the anti - privatisation lobby -- the ship is anyway sinking so might as well give yourself a chance.

    The heady growth spoken about can be achieved by unshackling the economy; lower interest rates, larger private investments and higher productivity, especially of Government assets. In the absence of which India Inc. will have to remain content with the new Hindu growth rate of 6%.


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