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Economy Nov 22, 2012

PSU share sale: Chidu is drinking at the Last Chance bar

By Venky Vembu

In 19th century America, when some states were under strict prohibition laws, bars along highways at the entrance to a dry state would advertise to road users the merit of tanking up on alcohol at their premises, given that supplies would be unavailable across the border.

Motorists were thankful for the heads-up from these 'last chance saloons', and used frequently to avail of their services. Today, the expression 'Drinking at the Last Chance Saloon' has slipped into the English lexicon and is used to describe situations beyond which the prospects of hope-or at least good fortune-stand vastly diminished.

As the government prepares to kick off its disinvestment programme from Friday, with the sale of 4 percent stake in Hindustan Copper Ltd (HCL), it really presents Finance Minister P Chidambaram with a chance to grab a drink at the Last Chance Saloon - beyond which the prospects for mobilising revenues to bridge the fiscal deficit appear bleak.

Finance Minister P Chidambaram. Image courtesy PIB

And Chidambaram today must be a thirsty man since some of his earlier stops at watering holes to and tank up on revenues to lower the deficit have proved fruitless. The 2G spectrum auction bombed spectacularly, and although the government used the failure as a perverse alibi to mock the Comptroller and Auditor General's estimation of notional losses in the original spectrum allocation by former Telecom Minister A Raja, it nevertheless accentuates Chidambaram's very real dilemma: how to make up for the shortfall in revenues that he had provided for?

When the government set the reserve price for 5Mhz of 2G spectrum auction at Rs 14,000 crore, it calculated that it would in fact net perhaps as much as twice that amount from the auction. Of course, telecom companies were all along squealing about the high reserve price, but these were dismissed as posturing. But the actual results of the auction proceeds have left a hole in Chidambaram's budget that must be filled with revenues from somewhere else.

Now that even the half-hearted attempt to lower the subsidy bill on fuel and LPG has been put in a deep freeze, thereby making a mockery of one more strand of the deficit reduction exercise, the urgency to find revenues from somewhere has become rather more acute.

It is in this context that the disinvestment programme, which gets under way from Friday, acquires even greater significance.

This year's budget, drawn up by Pranab Mukherjee (who has since moved on to greener pastures at the Rashtrapati Bhavan) had set a disinvestment target of Rs 30,000 crore. Of course, when Mukherjee pencilled in that figure, it seemed like just another of his fanciful numbers that don't mean anything. The stock market was in the doldrums, particularly after he announced his retrospective taxation proposals on the Vodafone issue, and his announcement of the GAAR proposal to mop up revenues.

The collective impact of three years of policy paralysis would also effectively grind down the economy to its slowest pace in nearly a decade. When Chidambaram stepped into the Finance Ministry (after Mukherjee's elevation to the post of President), the situation was pretty bleak, with international ratings agencies itching to lower India's rating to 'junk' grade.

After a brief lull while he got his act together, Chidambaram announced a succession of seemingly 'big bang' reform initiatives, which had the effect of firing up the market.

Chidambaram's intention was, of course, to keep the markets in a heightened state of anticipation because it was pivotal to his strategy to mobilise revenues from PSU disinvestment to lower the deficit - and keep the powder dry for what is certain to be a populist budget next year ahead of the next general elections.

But already, barely two months since Chidambaram announced his 'big bang' proposals, the market's ardour over his reforms-such as they are-has abated. If anything, with a concerted Opposition standing resolutely against the proposal to permit FDI in multi-brand retail, and with the Trinamool Congress looking even now to move a no-confidence motion (which , however, seems fated to fail), the policy gridlock seems set to continue in the short term.

The macroeconomic conditions, however, seem not particularly propitious for a successful stake sale programme. Virtually every reading of the economy is flashing red lights: GDP growth is down, inflation is proving sticky, the rupee is slumping again, credit growth has slowed down, corporate results are muted, new projects announced are sharply down from last year, and public issue of shares has at best been lacklustre.

Perhaps the government expected the sentiment to be a little more upbeat when it drew up its disinvestment timetable. But as things stand, the government has to roll with the punches. It's drawn up quite a few disinvestment proposals for the next few months. The Hindustan Copper offer for sale gets under way on Friday, and will likely be followed up by Oil India, NMDC stake sale in December, followed by NTPC.

But as happened earlier this year, when the government had to call upon the LIC to bail out the disastrous stake sale in ONGC, this time too the government is priming the cash-rich life insurance behemoth to pick up equity in the companies in which it is divesting. It can then claim to have lowered the fiscal deficit, and hopefully avert a sovereign rating downgrade, and stretch its own longevity as much as it can.

This is nothing more than a sleight of hand, but a government so hard up for revenues has few options. In effect, Chidambaram's drink at the Last Chance Saloon may merely be the dregs from scraping the bottom of the barrel. But when you've been thirsty for so long, you take whatever you can get.

by Venky Vembu

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