@sunandoroy January 2000
Ever since the initiation of structural reforms in the Indian Economy in 1991, the Central Government has undertaken various measures to reduce their subsidy burden. These measures include, among others, phasing out unnecessary subsidies and targeting subsidies to the weaker segments of the population. Such efforts have resulted in a reduction of the subsidy burden from 1.8 per cent of GDP in 1991-92 to 1.2 per event in 1999-2000.
Public enterprise reforms in India were also initiated with a view to enable PSEs to generate resources internally by imposing a hard budget constraint on them and at the same time undertake reforms to make PSEs financially viable and competitive. The ongoing process of reforms in public enterprises has resulted in an improved performance of public sector enterprises as a whole. Net profit of PSES as per cent of capital employed rose from 2.0 per cent in 1991-92 to 4.8 per cent in 1998-99 [Public Enterprise Survey, 1998-99, Vol. I, p.21]. The internal resources generated through provisioning for depreciation, retained profits, etc. rose from 12942 crore in 1991-92 to 31301 crore in 1998-99.
However, there are some hidden subsidies given to PSEs on which significant costs are incurred by the Government. In recent years, the Comptroller and Auditor general of India (CAG) has attempted to locate such hidden subsidisation of the central PSEs by the central government. It has discussed this issue in its Report ‘Union Government (Civil) Accounts of the Union Government, No.1 of 1999 and again in the Report ” Union Government (Commercial) Public Sector Undertakings- Review of Accounts ( 1 of 2000) . ” .
The hidden subsidy identified by the CAG relates to investments made and loans given by Government in PSEs.
Hidden Subsidy in Equity Investment of Government in PSEs
Return on Government’s equity investment in PSEs come from dividends paid by the PSEs to the Government . The guidelines issued by the Ministry of Finance in 1995 and 1996 envisaged that all profit-making PSEs would declare a minimum dividend of 20 per cent either on equity or on post-tax profit, whichever was higher. Minimum dividend payable by PSUs in Oil, Petroleum, Chemical and other infrastructure sectors was desired at 30 per cent of post-tax profit . The Ministry further emphasised that the objective of the Government was to achieve minimum return of 5 per cent on overall investment in all PSUs across the board .
The return on equity investments of central government on PSEs remained abysmally low during 1993-94 to 1998-99. While the dividend received by the Government ranged from 1.43 per cent to 3.19 per cent during 1993-94 to1997-98 which rose to 6.88 per cent in 1998-99, the interest paid by the Government in the form of market borrowing through Government securities ranged between 11.86 per cent to 13.75 per cent. As the revenue receipts were not sufficient to meet even revenue expenditure, the Government had to borrow from the market to finance such equity investments in PSEs. According to the CAG, the difference between the dividend received and interest paid on borrowed funds form hidden subsidisation of PSEs by central government.
According to the data provided by the CAG, the hidden subsidisation of the PSEs in the form of interest subsidy were Rs. 4940.99 crore in 1993-94, which rose to Rs.5707.7 crore in 1996-97 , and thereafter fell to Rs.3408.3 crore in 1998-99. This decline is attributable to an increase in dividends paid by PSEs to central government from Rs. 633 crore in 1993-94 to Rs. 4708 crore in 1998-99. During this period, especially since 1995-96, weighted average coupon rate on Government securities also fell by almost 2 percentage points from 13.75 per cent to 11.86 per cent in 1998-99 which reduced the cost of market borrowings of the Government. As a share of GDP ( at factor cost) , the hidden subsidy in equity investment fell from 0.63 per cent to 0.21 per cent.
| Table 1 : Subsidies to Public Sector Enterprises
(Rupees in crore) |
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| YEAR | TOTAL | DIVIDEND | PERCENTAGE OF | WEIGHTED AVERAGE | Implicit Interest | HIDDEN SUBSIDY |
| INVESTMENT | RECEIVED | DIVIDEND TO | OFCOUPAN RATE ON | Subsidy | TO NATIONALISED | |
| INVESTMENT | GOVT’S DATED | col2 x (col5-Col4) /100 | BANKS | |||
| SECURITIES | As Per cent of GDP | |||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| 1993-94 | 44116 | 633 | 1.43 | 12.63 | 4940.99 | 0.63 |
| 1994-95 | 47070 | 824 | 1.75 | 11.9 | 4777.61 | 0.52 |
| 1995-96 | 49737 | 1216 | 2.44 | 13.75 | 5625.25 | 0.52 |
| 1996-97 | 53194 | 1577 | 2.96 | 13.69 | 5707.72 | 0.46 |
| 1997-98 | 57120 | 1820 | 3.19 | 12.01 | 5037.98 | 0.36 |
| 1998-99 | 68440 | 4708 | 6.88 | 11.86 | 3408.31 | 0.21 |
Note : The coverage of CAG audit was 244 PSUs till 1997-98 which was extended to 257 in 1998-99. The GDP figures used for the estimation of implicit subsidy relate to GDP at factor cost at current prices.
In recent years, Cross holding of equity by PSEs has been introduced by the Government to allow one Government company to develop a strategic partnership with another Government company by permitting Government companies to acquire a block of shares in each others’ equity . In pursuance of the above policy, Government of India decided (January 1999) that the three Government companies, viz. Oil & Natural Gas Corporation Ltd.(ONGC) , Indian Oil Corporation Ltd.(IOC) and Gas Authority of India Ltd.(GAIL) would cross-hold equity as follows: (1) ONGC and IOC will each buy 10 percent of each other’s equity being held by Government of India ; (2) ONGC and IOC will each buy 5 percent of equity of GAIL being held by Government of India; and (3) GAIL will buy 2.5 percent of equity of ONGC being held by Government of India. This arrangement also serve as a mechanism for disinvestment of Government of India’s share holding in PSUs and consequently reduces the hidden subsidy burden of Government.
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Hidden Subsidy in Loans taken by PSEs from Central Government
The CAG has also noted that the waiver of dues of PSEs also forms part of the hidden subsidy burden of the Government . Indirect assistance by way of moratorium on repayment of loans or write offs and waiver of interest has been a recurrent feature of Governments’ supportive role inregard to PSEs. The relevant figures for the last three years are shown in the table below :
Table- 2
WAIVER OF DUES of PUBLIC SECTOR ENTERPRISES(PSEs)
-1996-97 to 1998-99
(Rs. in Crore)
| ITEM | 1996-97 | 1997-98 | 1998-99 |
| 1. Loan repayments waived | 1068.27 | 300.70 | 572.99 |
| 2. Interest waived | 404.66 | 193.16 | 1360.37 |
| 3. Penal Interest waived | 51.74 | 62.60 | 257.78 |
| 4. Repayment of Loan on which moratorium allowed | 762.91 | 707.57 | 779.51 |
| Total | 2287.58 | 1264.03 | 2970.65 |
| Share of GDP | 0.18 | 0.09 | 0.18
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The hidden subsidisation of PSEs is significant when seen against the explicit subsidies ( including major subsidies like food and fertiliser subsidy). As a matter of fact, since the initiation of structural reforms in the Indian economy since 1991, the Central Government has undertaken various measures to reduce their subsidy burden. Such efforts have resulted in a reduction of the subsidy burden from 1.8 per cent of GDP in 1991-92 to 1.2 per cent in 1999-2000. In comparison, the hidden subsidies benefiting PSEs in India amounted to 0.39 per cent in 1998-99 ( 0.21 per cent of GDP in Investments and 0.18 per cent in Loans to PSEs).
Note : The data used in this note have been taken from the publications of the Comptroller and Auditor general of India.
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