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Government begins annual pre-budget PSU cash-stripping

The annual pre-budget rob-the-PSU season is here, as the government embarks on intense cash-strippping raids on the public sector

It's the PSU-bleeding time of the year. As has been the case for many years now, January has arrived and the wise men in the Finance Ministry are figuring out how public sector companies can be stripped of as much cash as possible. Of course, it's not as if any new methods have been invented. Basically, it's about extracting as much of cash as possible as special dividend and by PSUs buying the stock of other PSUs from the government. And it could get worse, now that the Congress leadership seems to have decided that the big new idea that will pave the way for a UPA-3 government is a frequent increase in the number of subsidised gas cylinders.

This year's cash-stripping has been particularly egregious. Coal India has been stripped off Rs 19,000 crore, plus about Rs 3,300 crore as dividend distribution tax. This is a company whose inability to invest more and expand output is not only the biggest infrastructural crisis that India faces, but also the root cause of the biggest corruption scandal that the government faces. And yet, it is being stripped of cash that could have been invested in operations.

Even stranger is the case of public sector banks, which are shelling out close to Rs 10,000 crore as dividends and dividend tax, in the same financial year when banks as a whole have needed Rs 14,000 crore of fresh capital from the government. There isn't a single public-sector bank which hasn't seen non-performing loans rise. That these banks will face sharply increased capital requirements in the near future because of bad loans is a given, and yet the government seems to have no compunctions in stripping them of cash.

And as for sham stock sales, the first one has just been announced. Between them, Oil India and ONGC are to buy about Rs 5,000 crore of Indian Oil stock from the government. Basically, this sum is to be shifted from the two oil companies' bank accounts to the government. Since the government owns all of them, this is basically a sham transaction whose only purpose is to strip cash out of the oil companies. This is just the kind of transaction which, had it been done by a private promoter would have been seen as a highly questionable act.

The government has been trying to push through a sale of Indian Oil stock all year, but no investors have been interested in a company which is going to generate Rs 75,000 crore of losses. Of course, the losses all go into paying for 'under-recoveries', so they also represent cash that has been stripped out of the company by the government.

However, this is not all because yet more money needs to be extracted from PSUs. While the above shenanigans are now more or less a tradition, this year will likely see a new addition to the bag of tricks--an exchange-traded fund (ETF) that will consist of a basket of PSU stocks. This ETF--to be managed by Goldman Sachs--will be offered to investors soon. The idea is that since the ETF basket will consist of both desirable and undesirable stocks, this is one way of tricking investors of buying junk PSUs. While the trick is a new one for the government, it's one that your neighbourhood grocer understands well and so do investors.

It's entirely possible that the only 'investor' who will choose to fall for it is the Life Insurance Corporation, somewhat like what happened with an ONGC issue back when the 2011-12 fiscal deficit was being dressed up. At the time, LIC was forced to by some force Rs 4,000 crore of ONGC shares. Since then, ONGC 's shares have barely held their value over a period when the markets are up about 15 per cent. Do note that stripping cash out of LIC is not the same as doing so out of Oil India and ONGC. The cash in LIC is meant to service the insurance policies of crores of Indians. It's the policyholders' future that is being compromised.

This behaviour is like that of a drug addict, who'll eventually sell off every possession (and everything it can beg, borrow or steal) to finance the next fix. This will go on until someone, somehow wheels this government into a rehabilitation clinic.