Fallacy 4: Selling public enterprises to retire government
debt reduces future fiscal strain
This argument has been put forward quite
explicitly by the Finance Minister himself in his recent budget speech.
The price at which a public enterprise (or its equity) sells in the
market is determined by the discounted value of its expected stream
of returns. Suppose, for example, that a public enterprise is expected
to fetch for an an infinite period in the future stream of returns
of Rs.10 every year. If the interest rate is 10 percent, then its
market value would be Rs.100 (we are ignoring risks for simplicity);
and if these Rs.100 are used for retiring public debt, then the interest
payments saved every year are exactly Rs.10. The government in other
words has lost Rs.10 per annum of returns from the enterprise and
has saved Rs.10 per annum of interest payments. It is neither better
nor worse off; there is no easing of its fiscal strain in the future.
Selling public enterprises to retire debt
would indeed be worthwhile if and only if the enterprise sells for
a price higher than the market value figure obtained when the
stream of returns expected from it (when it is under government ownership)
is discounted at the rate of interest payable on public debt. This
translates roughly into the proposition that such a course of action
is worthwhile for the government, and would ease future fiscal strain,
if the enterprise sells for a price higher than its current market
value (at the interest rate on public debt). On the other hand if
it sells for a lower price than its market value (at the public debt
rate of interest), then the future fiscal situation is worsened.
Now, there is absolutely no reason why
the enterprise should sell at a higher price than this market value;
and none of those who advocate such sale has ever made out a case
that this indeed would happen. On the contrary, as everybody knows
and as testified to by a host of authorities from the Comptroller
and Auditor General of India to an impeccable "liberaliser"
like Mr.Chidambaram (in the GAIL disinvestment case), the sale of
public sector equity is usually way below its market value, which
only worsens the fiscal situation in the future. Not only then is
there no case for selling public enterprises to retire public debt,
but it is actually a "rip off" which only worsens the fiscal
situation in the future.
One can go on with the list of fallacies.
In fact a whole phoney macroeconomics is being propagated these days
from the Bretton Woods institutions, which unfortunately, even in
this country with its remarkable tradition of economics, has been
swallowed not only by our Finance Ministry but even by large segments
of the economics profession. How else can one explain the fact that
despite evidence of growing rural poverty, of a "rolling back"
of rural employment diversification, of an absolute drop in per capita
real consumption expenditure in rural India (which my colleague Sheila
Bhalla has called an "economic development disaster"), and
of persisting industrial stagnation, the most significant problem
of the economy highlighted in the media is the fiscal deficit! And
that too in the midst of huge unutilised industrial capacity and unsold
foodgrain stocks!
May be I am being unfair. My claim about
the above propositions constituting fallacies is based on macroeconomics
no more complex than IS-LM. I would like any of those who believe
in the correctness of the above propositions to set out simply but
rigourously, in the manner of IS-LM, what their macroeconomics is.
Only one thing I cannot accept: a "liberal regime", "the
need to retain investors' confidence" etc. cannot be premises
of the argument, they can only be conclusions. "Liberalisation"
has to be shown to be good for the people; people cannot be assumed
to exist for making "liberalisation" work. For the rest,
I go along with Joan Robinson: "Let a hundred flowers bloom.
Let a thousand schools of thought contend. But let them all state
their assumptions."
