India’s Big Government
Page 58
The Economic Survey of 2014-2015 estimates that the subsidy on the passenger operations of Indian Railways works out to Rs. 51,000 crore (or 0.57 per cent of the 2011-2012 GDP). As is the case with most subsidies, this subsidy also does not reach the poor. As the Survey points out: “The bottom 80 per cent of passenger households constitute only 28.1 per cent of the total passenger thoroughfare on the railways.”
If one looks at the ratio of the average passenger fare to the average freight rates, India has one of the lowest ratios in the world, at 0.3. In the case of South Korea and China, the ratios are 1.4 and 1.2, respectively. In the case of Malaysia and Indonesia, the ratios are at 0.9. For Thailand, the ratio stands at 0.7. Countries like Pakistan and Vietnam are at the same level as India, at 0.3.951
Until now, railway ministers got around this problem by raising freight charges in almost every budget. One result of this has been that railway freight operations have lost out to road transport over the years.
In 1950-1951, Indian Railways moved 90 per cent of all transported goods. By 2011-2012, this had come down to 35 per cent. In fact, for 2016-2017, the National Transport Development Policy Committee expects the ratio of railways to road transport in the movement of goods to be at 35:65.952
As Prabhu said in the Rail Budget speech he made in February 2016: “Indian Railways typically has focused on increasing revenues through tariff hikes. We want to change that and challenge our conventional thinking on freight policies to win back our share in the transportation sector.”
The point is that, after many years, we at least have a minister who realises what the problem is. Tariff hikes in freight services have made them unviable in comparison to road transport. As Prabhu said during the course of his speech: “A review of the tariff policy will be undertaken to evolve a competitive rate structure vis-à-vis other modes.”
What has not helped is the fact that freight earnings are not growing at the pace they were expected to. In 2015-2016, the Railways had hoped to earn (i.e., it had budgeted for) Rs. 1,21,433 crore. The actual earnings when Prabhu made the Rail Budget speech in February 2016 were projected to be at Rs. 1,11,853 crore. This was around 5.7 per cent higher than the freight earnings in 2014-2015, but lower than the target set at the beginning of 2015-2016.
The financial year 2016-2017 hasn’t gone well for freight movement by the Indian Railways. Between April and November 2016, the total amount of freight moved was down by 0.9 per cent in comparison to the same period in 2015.
Indeed, this is worrying, because this is happening at a time when the Indian Railways is trying to create capacity through new lines and gauge conversion. It is also trying to provide better passenger amenities. As Prabhu put it in the February 2016 budget speech, the Railways “will target doubling average speeds of freight trains and increasing the average speed of superfast mail / express trains by 25 kmph [i.e., kilometres per hour] in the next 5 years.”
All this will need higher investment from the Railways, basically money, which it doesn’t have. The heavily subsidised nature of the passenger services essentially ensures that the Indian Railways does not generate enough resources internally to be able to finance its ambitious expansion plan.
The Life Insurance Corporation (LIC) of India is funding railway projects, and has agreed to invest Rs. 1.5 lakh crore over the next five years. While this has been hailed as a brilliant move by the Modi government, things need to be seen with a little more perspective. The money that the LIC will invest in the Railways is not money belonging to the Government of India. This is money that has been raised through lakhs of investors investing in the so-called insurance policies of the LIC. I say ‘so-called’ primarily because most of these policies are investment plans masquerading as insurance policies. Very few of the policies sold by the LIC are actually insurance policies.
Hence, the money that the LIC will invest / has invested in the Railways is basically the hard earned income of many Indians from all across India. The question is: Should retail investor money be used in financing long-term infrastructure projects, where returns are not immediately obvious? Should the small investor essentially be subjected to this risk? To elaborate on this point a little bit more, would a mutual fund or private life insurance company be allowed to carry out similar kind of lending to fund a long-term infrastructure project? The answer is no.
Furthermore, by getting the LIC to finance the expansion of Indian Railways, the government has managed to borrow money without the debt showing up on its books. Nevertheless, given the risk involved, this expansion should have directly been funded by the government. Indeed, this would have been possible if Big Government had decided to let go of its control of the twenty-seven public sector banks.
For 2016-2017, the government has budgeted Rs. 25,000 crore for the recapitalisation of public sector banks. This money could have easily gone towards the infrastructure plans of Indian Railways. Over and above this, there is a lot of other expenditure that the government incurs every year in order to keep many loss-incurring public sector enterprises going. Air India, MTNL and Hindustan Photo Films are the three best examples.
All the money going towards these companies could easily go towards Indian Railways, or even the massive road-building programme launched by the Ministry of Road Transport and Highways. The government only has a given amount of money to spend, and it should spend that money wisely in areas where the bang for the buck is the maximum.
Take the case of Indian Railways. As Prabhu put it in his February 2016 Budget Speech: “Every rupee of investment in the Railways has the capacity to increase the economy-wide output by Rs. 5. The impact that this increased investment in the Railways will have on the economic growth of the country is unprecedented.” What this means is that every single rupee invested in the Railways would add Rs. 5 to the overall economy. Essentially, the multiplier effect of investment in the Railways is huge, given that very little money has gone into it over the years.
The multiplier for construction is 2. Furthermore, both these sectors are likely to create many jobs for low-skilled as well as unskilled workers, which is what the Indian economy really needs to target.
Now compare this to what happens when the government spends money in recapitalising banks as well as ensuring that loss-incurring public sector enterprises keep running. This essentially ensures that a few lakh employees continue to benefit. Almost no new jobs are created at the lower end of the spectrum.
The fear is that any action against the incumbents who benefit from the largesse of the government would lead to protests from the trade unions. The trouble is that these trade unions punch much above their weight, and the noise that they can create has a lot of nuisance value. Nevertheless, it’s sad that the fear of half a dozen trade unions is what will determine the direction that India takes in the years to come.
To be honest, the Modi government has made some headway on the front of shutting down loss-incurring public sector enterprises. On September 28, 2016, the union cabinet, led by the Prime Minister, decided to shut down Hindustan Cables Ltd. Hindustan Cables has had no production activity since January 2003. Take a look at Table 14.1. The company accumulated losses of Rs. 5,847 crore in the decade spanning 2005 and 2015. What’s more, the losses kept increasing over the years.
Table 14.1: Losses incurred by Hindustan Cables Ltd. between 2005 and 2015.
Year Losses (in Rs. crore)
2014-2015 933
2013-2014 782
2012-2013 885
2011-2012 648
2010-2011 607
2009-2010 506
2008-2009 445
2007-2008 435
2006-2007 311
2005-2006 295
Total 5,847
Source: Public Sector Enterprises Surveys.
In 2014-2015, the company incurred total losses of Rs. 933 crore. It was sixth in the list of the ten largest loss-incurring public sector enterprises in India. In fact, it has constantly been in the list of the t
en largest loss-incurring public sector enterprises since 2005-2006.
Given that it has not produced anything since 2003, the closure has taken way too many years to finally happen. Other than the losses, the company has also managed to accumulate a huge amount of debt. As of March 31, 2015, the company had a total debt of Rs. 5,963 crore. And, not surprisingly, the interest that needs to be paid on this debt was the biggest expense of the company.
In 2014-2015, the total interest on the debt amounted to Rs. 747 crore. The company stopped production in 2003. Given this, it has not been earning anything from its operations. In this scenario, in order to continue paying the employees on its rolls, it has had to borrow money. Employees’ remuneration and benefits, at Rs. 113 crore, was the second largest expense of the company.
And how many employees did the company have? As on March 31, 2015, it had 1,533 employees. The number of employees as on March 31, 2013 was 1,832.
This basically means that the government chose to run a loss of Rs. 933 crore in 2014-2015 just so that 1,500 people continued to have a government job. By keeping Hindustan Cables and many other such companies alive, the government has gone around wasting the hard earned money of taxpayers over the years.
The good part is that, now that it is shutting down, the government will no longer have to bear the losses of the company. The government bears losses of the loss-incurring companies in two forms. One is by putting money into the company every year to keep it going. Or it ultimately has to take on itself the entire debt that the company takes on to keep itself going. The financial system lends to the company despite it not making any money because it knows that, ultimately, they are lending to the government of India. And nothing is deemed to be safer than lending to the government.
The other good thing that will happen is that the government will end up with a lot of land (on which any public sector enterprise like Hindustan Cables sits). The 2014-2015 annual report of Hindustan Cables points out that the company got land free of cost from the state governments of West Bengal and the erstwhile Andhra Pradesh. This land should be returned to the states and can become a part of their respective land banks, which they can use to attract industries.
This is very important, given that the land acquisition policy in the country remains a mess. Hence, land from public sector enterprises which are shut down can be an important source of land in the short-to-medium term for a programme like Make in India to take off.
Furthermore, it is important that the government continue with this and shut down more loss-incurring public sector enterprises in the time to come, especially those companies which haven’t been producing anything for a while.
Take the case of Hindustan Photo Films Manufacturing Company Ltd., which we discussed earlier in Chapter 2. Between 2004-2005 and 2014-2015, the company had accumulated losses of Rs. 12,432 crore.
Table 14.2: Losses incurred by Hindustan Photo Films Manufacturing Company Ltd. between 2004 and 2015.
Year Losses (in Rs. crore)
2014-2015 2,164
2013-2014 1,820
2012-2013 1,561
2011-2012 1,352
2010-2011 1,157
2009-2010 1,003
2008-2009 876
2007-2008 789
2006-2007 653
2005-2006 561
2004-2005 496
Total 12,432
Source: Public Sector Enterprises Surveys.
In 2014-2015, the company incurred total losses of Rs. 2,164 crore. It was fourth in the list of the ten largest loss-incurring public sector enterprises. In fact, it has constantly been in the list of the ten largest loss-incurring public sector enterprises since 2004-2005.
The funny thing is that the company was referred to the Board for Industrial and Financial Reconstruction (BIFR) under the terms of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, in October 1995.
Interestingly, the BIFR had confirmed its opinion for the winding up of the company in an order in January 2003. Since then, the company has continued to exist and accumulate losses as well as debt. The total debt of the company as on March 31, 2013 had stood at Rs. 7,692 crore. This debt had been taken on in order to ensure that the company continues to operate despite incurring losses.
As in the case of Hindustan Cables, the total production of the company has more or less collapsed. During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now, imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of that year.
The most obvious explanation is that these losses helped people continue to have jobs. So how many people does Hindustan Photo Films employ? As of March 31, 2013, it employed 687 individuals. This had fallen to 348 by March 31, 2015.
What does this mean? That the government chose to run a loss of Rs. 2,164 crore in order to keep 348 people employed! Of course, all the money being spent was not going towards employee salaries. The biggest expense of such companies is paying the interest on the debt that they have accumulated over the years. In order to pay this interest, they need to take on more debt. A perfect Ponzi scheme, if ever there was one.
When companies borrow to survive, their structure becomes akin to that of a Ponzi scheme. They survive by borrowing and then using that money to pay off the interest on their outstanding debt, as well as the debt that needs to be repaid. In the case of government companies, this can go on endlessly, given that the lending is ultimately backed by the government.
Hence, it’s about time that, along with Hindustan Cables, the government shut down Hindustan Photo Films and many other such Ponzi schemes that it has been running for a while.
A September 2016 newsreport in The Hindu suggests that the Prime Minister’s Office has given the go-ahead for closing down seventeen sick or loss-incurring government companies. Among the loss-incurring companies to be closed down are Indian Oil-CREDA Biofuels Ltd., CREDA HPCL Biofuel Ltd., National Jute Manufacture Corporation Limited, Birds Jute & Export, and Bharat Wagon and Engineering.953
One advantage of shutting down these companies would be that the government won’t have to keep funding their losses. Over and above this, these companies own a good amount of land, which could be monetised by the government in various ways or simply given back to the state governments. Other than shutting down 17 companies, the Prime Minister’s Office has also given the go-ahead for reducing government ownership in 22 public sector companies to below 51 per cent. The government does not want to exit these companies, but wants to become a minority shareholder. This list includes companies like Pawan Hans Limited, Scooters India Limited and Cement Corporation of India Limited. It also includes three steel plants of the Steel Authority of India (SAIL), at Salem, Durgapur and Bhadravati.954
This will be a real test for the Modi government. As and when it decides to push through these decisions, there are bound to be protests by the incumbents who have benefited from the status quo until now, not to mention the trade unions. It will be interesting to see whether the government takes them on or decides to buckle under pressure. That time alone will tell.
In fact, more than the government, the entire process of gradually getting rid of the loss-incurring public sector enterprises depends on what Prime Minister Modi thinks about the entire issue. Only if he wants to push through major economic reforms will things move forward.
This is made more or less clear through what happened during the summer of 1991, when the PV Narasimha Rao-led government initiated big-bang economic reforms. Over the years, the credit for the big-bang economic reforms of 1991 has largely gone to Manmohan Singh, who was the Finance Minister in the Rao government between 1991 and 1996. But the fact of the matter is that no finance minister could have pushed through the economic reforms in what was till then a socialist country without the help
of the prime minister.
A major reason for Rao being confined to the dustbins of history is the fact that the Congress Party does not like to project anyone other than the Nehrus and Gandhis as having done something for this country. But this disconnect is now being set right, with a slew of new books being written on Narasimha Rao in the recent past, on the 25th anniversary of the economic reforms.
While the world is now getting around to the idea of just how crucial the role that Rao played during the summer of 1991 was, Rao himself never had any doubts about the role he played in initiating economic reforms. As Sanjaya Baru writes in the book 1991—How PV Narasimha Rao Made History: “A few years before PV passed away, a former official of the Finance Ministry asked him how much credit he would like to take for the reforms of 1991-92 and how much credit [he] would… give to Manmohan Singh.”955
Like a good politician, Rao praised Singh and “acknowledged his loyalty and his contribution to reforms”. “Then, in his characteristic deadpan manner, he said: ‘A finance minister is like a numeral zero. Its power depends on the number you place in front of it. The success of the finance minister depends on the support of the prime minister.’”956
That one sentence says it all. The success of any significant economic reforms today depends on how much importance Prime Minister Narendra Modi places on them.
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One of the themes that have been explored throughout this book is that the government needs to make a distinction between paying for goods and services and producing as well as distributing them. This would mean resorting to cash transfers in the case of many subsidised goods that it currently provides. One basic advantage of this, as we have seen earlier, is that it wouldn’t violate the principle of one product-one price, which, in the process, would help bring down the massive leakages that currently take place.