No doubt, our simplifying assumptions would not hold in practice,
necessitating some increase in government indebtedness, though again, in
so far as through the different "multiplier" rounds following
the initial government expenditure of Rs.100, the profits, and hence savings,
of other public sector enterprises also go up, the net indebtedness of the
government would, to that extent, be kept down. Since the different public
sector enterprises in India provide inputs to one another (not to mention
the fact that FCI foodgrains stock-decumulation provides the additional
food demanded by workers when the wage bill goes up), an increase of Rs.100
in power sector investment would largely come back as additional savings
of public sector enterprises without any increase in net indebtedness. In
short, as long as unutilised capacity owing to deficient
demand exists in the power equipment and its feeder units belonging to the
public sector, to talk of the government's experiencing a shortage of finance
for power investment is "supreme humbug". Even if some of
these feeder units are in the private sector, as long as they have unutilised
capacity, power investment financed by a fiscal deficit, even though it
would raise the government's net indebtedness, would still make perfect
sense on the Kahn-Keynes grounds. The opposition to it constitutes the "humbug
of finance".
The point here is not
whether a larger fiscal deficit is the best way of financing power investment.
Nor am I suggesting that all of India's immediate power needs can be met
through such financing alone.
The point being made here is altogether different and can be summed up as
follows: first, in a situation of demand constraint, financing investment
through a fiscal deficit is perfectly legitimate even when the government's
net indebtedness goes up as a result of it; secondly, very often the government's
indebtedness does not even go up since the multiplier effects are all within
the public sector itself; thirdly, to invite Multinational Corporations
desperately for investment in the power sector, on the plea of a shortage
of finance, in a situation of demand constraint for power equipment and
feeder units, is to be fooled by the "humbug of finance"; fourthly,
to do so when these demand-constrained equipment and feeder units are all
in the government-owned sector itself is to be taken in by the "supreme
humbug of finance". Unfortunately this last case is what fits the Indian
government's current policy in the power sector.
IV
My last example is slightly different in nature. It relates to
the practice followed in recent years of treating the proceeds from the
sale of public sector enterprises' equity as being analogous to revenue,
and hence using such sales proceeds to "bridge" the fiscal deficit.
This practice, based on a confusion between stocks and flows, is manifestly
unsound.
Consider an example: suppose the government has a fiscal deficit
of Rs.100. This must generate private savings worth Rs.100 which would be
held in the form, directly or indirectly, of claims upon the government.
In a situation of demand-constraint, these savings are generated through
an increase in output, employment and incomes. But if the economy is supply-constrained,
then these savings would be generated through an inflationary squeeze on
real wages. Hence the fiscal deficit can be objected to on the grounds that
it would cause inflation (or equivalently, balance of payments problems)
by creating excess demand, if the economy happens to be supply-constrained.
Now, if the government raises Rs.100 through disinvestment of public sector
equity, then, unless the buyers of
this equity finance this purchase by reducing their own flow expenditures
(and there is no theoretical reason why they should do so), there would be no reduction in excess
demand compared to when there was no disinvestment. The inflationary effects
of the fiscal deficit would be exactly the same whether it is met by borrowing
or through disinvestment. The only difference would be that instead of holding
claims upon the government as in the first case, the private savers would
be holding titles to actual government assets in the second case.
Thus the argument one frequently encounters, namely that the
government should sell off some public sector enterprises and use the proceeds
for increasing social expenditures, is simply erroneous: the macroeconomic
consequences of doing this would be exactly analogous to what would happen
if the government increased social expenditure merely through deficit financing.
There is a variation of this argument which is equally erroneous.
This states that the government should use the proceeds from the sale of
public sector enterprises for retiring public debt, in which case its interest
payment obligations will go down and it can spend more on social sectors.
Suppose the government sells Rs.100 of public sector equity and retires
public debt of an equal amount. If the interest rate it had to pay on this
debt was 10 percent, then it would be saving Rs.10 per annum from then onwards
on interest payments and can therefore spend Rs.10 more per annum on social
sectors. But the public sector enterprise whose equity is being sold would
have also earned some returns every year. The argument for disinvestment
would make sense only if these returns were less than Rs.10 per annum. But if they were less than Rs.10 per annum, then why should any private
agent pay Rs.100 for them? With returns less than Rs.10 per annum, their
present value, at the same rate of discount as the interest rate on public
debt, would be less than Rs.100. It follows that unless the private buyers
employ a lower rate of interest for discounting the returns, on the public
enterprise they purchase, than the rate of interest on public debt, selling
off public enterprises can never improve
the government's ability to spend. Since there is absolutely no reason
why their discount rate should be lower than the interest rate on public
debt (in fact it would be invariably much higher since the rate of interest
at which they borrow from banks is generally higher), every such disinvestment,
instead of improving the government's spending capacity, actually worsens
it.
It may be argued that while the level of flow demand might remain
unaffected whether the fiscal deficit is met by borrowing or disinvestment,
the difference in private portfolio between these two cases would have important
secondary effects, in so far as claims upon the government, being more liquid,
can exacerbate excess demand-caused inflation, more than the ownership of
government property which would be relatively illiquid. But, first of all,
this is not necessarily true: government equity is no less liquid than government
bonds or term-deposits with banks. Secondly, the degree of liquidity of
the private portfolio can acquire relevance only if excess demand-based
inflationary pressures are engendered;
in a demand-constrained system the question of such inflationary pressures
simply does not arise. The belief that fiscal deficits cease to be fiscal
deficits if covered by equity disinvestment is therefore doubly wrong: first,
its premise is wrong (since the economy is demand-constrained), and secondly,
its logic is wrong (since equity is not necessarily less liquid than debt).
This premise however is that of the "humbug of finance".
