Fallacy 3: Disinvesting public sector equity is a valid
way of closing the fiscal deficit
I argued above that there could be only
three possible adverse consequences of a fiscal deficit. Now, disinvestment
of public sector equity, as compared to a fiscal deficit, makes no
difference to wealth inequalities; the private sector only swaps direct
or indirect claims upon the government for public sector equity. There
is in other words a change in the form of wealth-holding, not
in the magnitude or distribution of it as would happen with by a fiscal
deficit. Likewise, while a fiscal deficit sets up interest payment
obligations upon the government, disinvestment of public sector equity
entails foregoing future incomes (on this more later), so that there
is nothing to choose between the two in terms of the future fiscal
strain. The claim that disinvestment of public sector equity is a
valid way of closing the fiscal deficit, i.e. would somehow ameliorate
the harmful consequences of a fiscal deficit, can be sustained therefore
only if it entails less excess demand pressures than a corresponding
fiscal deficit would.
This would indeed be the case if those
who purchased public sector equity did so by reducing their consumption
or investment. Now, to my knowledge, no protagonist of the sale of
public sector equity has ever argued that such sale "crowds out"
private investment (for then the case for such sale would be considerably
weakened). And nobody surely believes that people stint on consumption
to purchase public sector equity. The purchase of public sector equity
in other words has scarcely any flow-expenditure-diminishing effect
on the private sector.
It may be thought that while such purchase
may not directly reduce flow private expenditure, if it is financed
by borrowing then less credit may be available for deployment in other
uses, resulting in an indirect curtailment of private flow
expenditure. But this argument is both empirically questionable and
logically untenable. It presupposes a supply constraint on credit,
which is empirically questionable for large chunks of the nineties,
including now. Besides, if indeed credit were supply-constrained,
then the financing of the fiscal deficit itself would have curtailed
private flow expenditure, so that the fiscal deficit would not have
generated excess demand in the first place, and the need for covering
it would not have arisen at all.
Now, if disinvesting public sector equity
does not reduce flow private expenditure, then the claim that it is
a valid way of covering the fiscal deficit falls to the ground. Instead
of the government borrowing Rs.100, say, from the banks to finance
its expenditure (which is what a fiscal deficit entails), someone
else borrows Rs.100 from the banks, hands it to the government in
lieu of public sector equity, and the government then spends it. The
macroeconomic consequences, in terms of aggregate demand, are exactly
the same in the two cases. If with a fiscal deficit there was going
to be excess demand-generated inflation, then exactly the same denouement
would follow from public sector disinvestment. If the poor were going
to be hit by a fiscal deficit-caused inflation in the first scenario,
they would be equally hit in the second. But the second scenario entails
a gratuitous handing over of public sector equity to private hands
on the basis of false claims (of avoiding the ill-effects of a fiscal
deficit).
