People's Democracy

Bonanza For The Big Bourgeoisie

Tax Concessions And Disinvestment Under The NDA Rule

Indranil Chowdhury

Amitayu Sengupta

THE essence of the economic philosophy of neoliberalism is that what is good for the multinational/domestic monopoly corporate house is good for the nation. Economic policymaking in our country too had been taken over by this unabashedly pro-big business and anti-people philosophy of neoliberalism ever since the Congress regime accepted the IMF-World Bank therapy in the early 1990s. The BJP led NDA government, however, has gone much further than the earlier regimes in implementing neoliberal policies. A new ministry for disinvestment was set up on the one hand, the first of its kind in this part of the world, in order to give impetus to the privatisation drive and unprecedented tax concessions were doled out to the big business on the other. If anybody is really feeling good after six years of NDA rule, it is the big bourgeoisie of India.

FLAWED ARGUMENT

The argument often put forward in defence of privatisation is that the government should not waste its ‘scarce’ resources behind running public sector enterprises, which are considered to be inherently ‘inefficient’, and divert those resources to social sectors like health and education. However, while the NDA government has been most enthusiastic about mobilising revenue through disinvestment (out of the 48 companies disinvested till date since 1991, 38 companies have been disinvested under the NDA rule) the expenditure on education and health has not increased proportionately under its rule. As shown in Chart 1 central expenditures on education and health as a percentage of GDP at current prices have remained almost constant during the period 1997-98 to 2001-02.

Chart 1

Source: Economic Survey, 2002-03

The fact that public expenditure on the social sectors as well as other sectors of the economy has stagnated under the NDA government is directly attributable to the tax concessions that the government has doled out to big business, which has resulted in substantial revenue losses. As shown in Chart 2 the tax-GDP ratio of the centre has progressively declined under the NDA rule.

Chart 2

Source: Reserve Bank of India, Handbook of Statistics

REVENUE LOSSES

What is noteworthy is that the revenue losses resulting from the successive tax breaks surpass the amounts mobilised through disinvestment by many times. The argument that the government is saving its scarce resources by disinvesting its stakes in public sector enterprises flies in the face of evidence (see Chart 3) that the government has forgone much more revenue through the tax concessions than what it gained through disinvestment.

Chart 3

Source: RBI, Handbook of Statistics and Ministry of Disinvestment 

It is evident that if the government had only collected taxes at the earlier rate, much more revenue could have been mobilised than what the government earned through its programme of disinvestment. In 1999-2000 and 2001-02 the tax revenue foresaken by the government was 4.5 and 4.9 times more than the revenue earned through disinvestment, respectively.

The proportion of corporate taxes to GDP had significantly declined from 1.22 per cent in 1995-96 to 0.53 per cent in 2000-01. This decline partly reflects a fall in the tax rate during this period and partly the tax breaks given to corporate sector. So much so that the top 100 Indian corporate houses saved Rs 6853.64 crore and foreign owned companies saved Rs 1268.41 crore in taxes in 2000-01 alone.

Table 1

Tax savings by companies belonging to different categories in 2000-01

# at the scheduled rate of 39.55 per cent applicable for the financial year

Source: Study by Dr K S C Rao of ISID based upon Prowess Corporate Data.

The effective tax rates for big business houses are far lower than the scheduled rate of 39.55 per cent. The Reliance group for instance made tax savings of Rs 1668 crore in 2000-01, paying at an effective tax rate of only 5.84 per cent. 

Table 2

                     Major beneficiaries of corporate tax deductions in 2000-01

Source: Dr. Rao’s study based upon Prowess Corporate Database

LACKING ECONOMIC LOGIC 

Given the BJP’s ideological conviction to sell even profit-making PSUs, it is not surprising to see the entire process of disinvestments lacking any sound economic logic. The minister of disinvestment is perhaps the only seller in the world who maligns his own product before selling it. In order to justify the sellings, Arun Shourie has always projected each such unit as either a loss making one or one experiencing declining profitability, thereby depressing its market price. As in the case of BALCO, which was a profitable and cash rich PSU with a very low debt-equity ratio, the government first stalled its modernisation plans — which could have easily been done without recourse to additional budgetary support — and later repeatedly emphasised its reduced profitability as an excuse for selling it. Moreover, the government has used the discounted cash flow method and not the replacement value method for pricing the units, which automatically sets the price much lower than the actual value of the PSUs’ assets.

The whole strategy of time bound disinvestment adopted by the NDA government is erroneous, since it adversely affects the price at which equity is being sold. For example, the very announcement of the decision to sell VSNL stakes in April 2001 brought down the share price from Rs 400 to Rs 300 thereby reducing the final evaluated price. The formation of the bear cartel before the issue of ONGC and GAIL shares also points out to the opportunities provided by the time bound disinvestment policy of the government to unscrupulous businesses to manipulate the market That the units are also being sold at prices way below the market value of the assets was best illustrated in the sale of the Centaur Hotel which was bought at a price of Rs 83 crore from the government by Batra Hospitality and then sold to the Sahara group for Rs 115 crore within six months of its purchase. In the recent case of the sale of ONGC and GAIL shares, the price-earning ratio (offered share price divided by earning per share) was set at 9 to 10 which was way below the internationally prevalent rate of 15 to 20 for similar companies like BP or EXXON-MOBIL, thereby deliberately foregoing revenue worth thousands of crores.

That the disinvestment programme of the NDA government has been a completely fraudulent exercise is borne out by the fact that not a single CAG Report on the sale of public sector assets have been brought out over the past four years. It is evident that disinvestment, far from being a means of releasing resources to invest into social sectors, has been a ploy to hand over public assets to domestic and foreign monopolies for a song. The record of unprecedented tax concessions and selling off national assets at heavily undervalued rates has obviously made this regime dear to the hearts of the big business. This accounts for the unlimited flow of resources into the election campaign of the BJP. However, the BJP and its NDA allies seem to have taken the neoliberal philosophy too seriously. They have forgotten the fact that what is good for the monopoly houses is not only not good for the nation but is often antithetical to people’s interest. The people of India has a chance to teach them this basic lesson once again in the forthcoming elections.