More Privatisation on the cards?

Parliament

More Privatisation on the cards?

MR Madhavan and Prachee Mishra - October 22, 2019 Comments

The core group of secretaries on disinvestment has recently approved the disinvestment of five public sector undertakings (PSUs). This includes the entire shareholding of the government in four PSUs: Bharat Petroleum Corporation (BPCL), Shipping Corporation of India (SCI), North Eastern Electric Power Corporation (NEEPCO) and THDC (operates and maintains the Tehri Hydro Power Complex), and 30% of the shareholding in Container Corporation of India Limited (Concor). The government currently holds 54.8% of Concor, so the sale will reduce its stake below 25%.

Over the last few years, the government has removed legislative barriers towards privatisation of several other PSUs. This raises the question whether the government plans to privatise them.

What was the Supreme Court’s order on privatisation of PSUs?

In 2003, a similar proposal had been raised by the government for the sale of its shareholding in HPCL and BPCL. This proposal was challenged in the Supreme Court on the grounds that it would violate the provisions of the laws that transferred ownership of certain assets to the government (which later formed these PSUs). For example, BPCL was formed by nationalising Burmah Shell in India through an Act of Parliament, and merging their refinery and marketing companies. The Court ruled that the central government cannot proceed with the privatisation of HPCL and BPCL (i.e., reduce its direct or indirect ownership below 51%) without amending the concerned laws. So the government continues to hold majority stake directly in BPCL, and indirectly in HPCL ( through ONGC, another PSU).

The five Companies approved for privatisation include BPCL and SCI (into which two nationalised companies, the Jayanti Shipping Company, and the Mogul Line Limited were merged). The relevant nationalisation Acts have been repealed over the last five years.

How did the government remove the legislative barriers for privatisation?

Between 2014 and 2019, Parliament passed six Repealing and Amending Acts which repealed around 722 laws. These included laws that had transferred the ownership of companies to the central government which later formed BPCL, HPCL, and OIL. These also repealed the laws that had transferred ownership of the companies to the central government which were later merged with the SCI. This implies that now the government can go ahead with the privatisation of these government companies as the conditions imposed by the Supreme Court’s order have been fulfilled. These Repealing and Amending Acts also repealed several other nationalisation laws that were later formed into PSUs. In the Table below, we have listed some of these companies. Note that the Law Commission of India (2014) had suggested the repeal of several of these laws (including the Esso Act, the Burmah Shell Act, the Burn Company Act) on the grounds that these laws do not serve any purpose with respect to the nationalised entity. However, it had suggested that a study of all the nationalisation Acts should be done before repealing these Acts, and if necessary a savings clause should be provided in the repealing Act.

Did Parliament scrutinise these Acts before passing them?

Many of these repeals were made through the Repealing and Amending Act, 2016. These include the Acts relating to BPCL, HPCL, OIL, Coal India Limited, SCI, National Textiles Corporation, Hindustan Copper and Burn Standard Company Limited. The Bill was not referred to a Parliamentary Standing Committee, and was passed after a cursory debate (50 minutes in Lok Sabha and 20 minutes in Rajya Sabha). Similarly, the two Acts passed in 2017, that enable privatisation of SAIL, PowerGrid, and State Trading Corporation were not examined by a Standing Committee.

So what comes next?

The repeal of these Acts have cleared the legislative hurdle for privatisation of these companies. That is, the government does not need prior approval of Parliament to sell its shareholding. Therefore, it is now up to the government to decide whether it wishes to privatise these entities.

A version of this article was published by the Business Standard on October 20, 2019.

Table 1: Some Nationalisation Acts repealed since 2014 (list not exhaustive)

Company	Act being repealed	Repealing Act
Shipping Corporation Of India (SCI)	The Jayanti Shipping Company (Acquisition of Shares) Act, 1971	Repealing and Amending Act, 2016
Shipping Corporation Of India (SCI)	The Mogul Line Limited (Acquisition of Shares) Act, 1984	Repealing and Amending Act, 2016
Bharat Petroleum Corporation Limited (BPCL)	The Burmah Shell (Acquisition of Undertakings in India) Act, 1976	Repealing and Amending Act, 2016
Hindustan Petroleum Corporation Limited (HPCL)	The Esso (Acquisition of Undertakings in India) Act, 1974	Repealing and Amending Act, 2016
	The Caltex [Acquisition of Shares of Caltex Oil Refining (India) Limited and of the Undertakings in India of Caltex (India) Limited] Act, 1977
	The Kosangas Company (Acquisition of Undertaking) Act, 1979
Coal India Limited (CIL)	The Coking Coal Mines (Emergency Provisions) Act, 1971	Repealing and Amending Act, 2016
	The Coal Mines (Taking Over of Management) Act, 1973	Repealing and Amending Act, 2016
	The Coking Coal Mines (Nationalisation) Act, 1972.	Repealing and Amending (Second) Act, 2017
	The Coal Mines (Nationalisation) Act, 1973.	Repealing and Amending (Second) Act, 2017
Steel Authority of India Limited (SAIL)	The Bolani Ores Limited (Acquisition of Shares) and Miscellaneous Provisions Act, 1978	Repealing and Amending (Second) Act, 2017
Steel Authority of India Limited (SAIL)	The Indian Iron and Steel Company (Acquisition of Shares) Act, 1976	Repealing and Amending (Second) Act, 2017
Power Grid Corporation of India Limited	The National Thermal Power Corporation Limited, the National Hydroelectric Power Corporation Limited and the North-Eastern Electric Power Corporation Limited (Acquisition and Transfer of Power Transmission Systems) Act, 1993.	Repealing and Amending (Second) Act, 2017
Power Grid Corporation of India Limited	The Neyveli Lignite Corporation Limited (Acquisition and Transfer of Power Transmission System) Act, 1994.	Repealing and Amending (Second) Act, 2017
Oil India Limited (OIL)	The Burmah Oil Company [Acquisition of Shares of Oil India Limited and of the Undertakings in India of Assam Oil Company Limited and the Burmah Oil Company (India Trading) Limited] Act, 1981	Repealing and Amending Act, 2016
State Trading Corporation of India Ltd. (STC)	The Tea Companies (Acquisition and Transfer of Sick Tea Units) Act, 1985	Repealing and Amending Act, 2017
National Textile Corporation Limited (NTC)	The Sick Textile Undertakings (Taking Over of Management) Act, 1972	Repealing and Amending Act, 2016
	The Textile Undertakings (Taking Over of Management) Act, 1983
	The Laxmirattan and Atherton West Cotton Mills (Taking Over of Management) Act, 1976
Hindustan Copper Limited	The Indian Copper Corporation (Acquisition of Undertaking) Act, 1972	Repealing and Amending Act, 2016
Burn Standard Co Ltd	The Burn Company and Indian Standard Wagon Company (Nationalisation) Act, 1976	Repealing and Amending Act, 2016
Indian Railways	The Futwah-Islampur Light Railway Line (Nationalisation) Act, 1985	Repealing and Amending Act, 2016
Braithwaite & Co Limited, Ministry of Railways	The Braithwaite and Company (India) Limited (Acquisition and Transfer of Undertakings) Act, 1976.	Repealing and Amending (Second) Act, 2017
Braithwaite & Co Limited, Ministry of Railways	The Gresham and Craven of India (Private) Limited (Acquisition and Transfer of Undertakings) Act, 1977	Repealing and Amending (Second) Act, 2017
Andrew Yule & Co. Ltd.	The Brentford Electric (India) Limited (Acquisition and Transfer of Undertakings) Act, 1987	Repealing and Amending (Second) Act, 2017
Andrew Yule & Co. Ltd.	The Transformers and Switchgear Limited (Acquisition and Transfer of Undertakings) Act, 1983	Repealing and Amending Act, 2019
Alcock Ashdown (Guj) Limited, Government of Gujarat Undertaking	The Alcock Ashdown Company Limited (Acquisition of Undertakings) Act, 1973.	Repealing and Amending Act, 2019
Bengal Chemicals & Pharmaceuticals Ltd. (BCPL)	The Bengal Chemical and Pharmaceutical Works Limited (Acquisition and Transfer of Undertakings) Act, 1980	Repealing and Amending (Second) Act, 2017
Organisations under Department of Pharmaceuticals	The Smith, Stainstreet and Company Limited (Acquisition and Transfer of Undertakings) Act, 1977	Repealing and Amending (Second) Act, 2017
Organisations under Department of Pharmaceuticals	The Bengal Immunity Company Limited (Acquisition and Transfer of Undertakings) Act, 1984.	Repealing and Amending (Second) Act, 2017

Sources: Repealing and Amending Act, 2015; Repealing and Amending (Second) Act, 2015; Repealing and Amending Act, 2016; Repealing and Amending Act, 2017; Repealing and Amending (Second) Act, 2017; Repealing and Amending Act, 2019.

Recent rise in LPG prices

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Anurag Vaishnav - February 20, 2020 Comments

Last week, oil-marketing companies (or OMCs, such as Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited) raised the price of domestic LPG in the country. [1] The price of a domestic cylinder (14.2kg) has increased from Rs 714 in January 2020 to Rs 858.5 in February 2020. This is a 20% hike in the price of a LPG cylinder. Note that this is the sixth consecutive month for which LPG prices have been revised upwards. Figure 1 shows the variation in price of a domestic (non-subsidised) LPG cylinder in Delhi over the last year.

Figure 1: Variation in price of non-subsidised domestic LPG cylinder

Sources: Indian Oil and Corporation Limited; PRS.

How is the price of LPG cylinders determined?

LPG prices are revised every month. The price is determined by public sector OMCs namely, Indian Oil Corporation Limited, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited, in line with the changes in the international market prices and other market conditions. [2] The international market price affects the import parity price of petroleum products (the price that importers pay for import of product at the respective Indian ports). This includes exchange rate, ocean freight, insurance and customs duty among others.

The Ministry of Petroleum and Natural Gas has stated that the recent hike in the price of LPG cylinder is due to a sharp rise in international LPG prices during January 2020 (from USD 448/Metric Tonne to USD 567/Metric Tonne). [3]

What is the difference between the price of a subsidised and non-subsidised cylinder?

The price determined by the OMCs reflects the price of a non-subsidised domestic LPG cylinder. The government modulates the effective price to provide subsidised LPG cylinders to consumers under the 'Pratyaksha Hastaantarit Laabh' direct benefit transfer (or DBT-PAHAL) scheme. [4] Under the scheme, a consumer (with annual income of up to Rs 10 lakh) can avail DBT cash-subsidy for a LPG cylinder. The beneficiaries buy LPG cylinders at market rate and subsequently receive subsidy directly in their bank accounts.

With the recent increase in price of a LPG cylinder, the government has increased the subsidy amount for PAHAL consumers from Rs. 153.86 per cylinder to Rs. 291.48 per cylinder (89% increase).³ This is done to ensure that the subsidized LPG consumers are insulated from the volatility of LPG prices in the international market. Table 1 shows the amount of subsidy provided by the government for LPG cylinder. Note that price of a subsidised cylinder has increased from Rs 494 to Rs 567 (14.8%) from February 2019 to February 2020.

Table 1: Difference between the price of subsidised and non-subsidised LPG cylinder

As on	Non-subsidised cylinder	Subsidised cylinder	Subsidy
February 2018	Rs 736.00	Rs 495.63	Rs 240.37
February 2019	Rs 659.00	Rs 493.53	Rs 165.47
February 2020	Rs 858.50	Rs 567.02	Rs 291.48

Sources: Unstarred Question No.1211, February 13, 2019, Ministry of Petroleum and Natural Gas, Rajya Sabha.
Note: Prices are at Delhi.

How many people avail the subsidy on LPG cylinders?

Currently, there are a total of 27.16 crore LPG (domestic) connections in the country.³ Of these, 26.12 crore (94%) consumers are beneficiaries under the PAHAL scheme, and therefore, can avail LPG cylinders at subsidised rates. Note that, under the scheme, a maximum of 12 subsidised cylinders per year can be availed under one connection. Further, a household cannot have more than one connection.

What is the cost of subsidy for the government?

The subsidy on domestic LPG is met through the budgetary grants of the Ministry of Petroleum and Natural Gas. In 2020-21, the government is estimated to spend Rs 37,256 crore on LPG subsidy. This includes Rs 35,605 crore for DBT-PAHAL and Rs 1,118 crore for Pradhan Mantri Ujjwala Yojana. This is an increase of 9.3% from the expenditure in 2019-20 of Rs 34,086 crore (revised estimate). Note that LPG subsidy constitutes 87% of the Ministry's total budget (Rs 42,901 crore).

Figure 2 below shows the year-wise expenditure on LPG subsidy, and as a proportion of the total budget of the Ministry from 2015-16 to 2020-21.

Figure 2: LPG subsidy over the years (2015-16 to 2020-21).

Sources: Union Budget Documents; PRS.

For more trends and analysis related to the finances of the Ministry of Petroleum and Natural Gas, see here.

[1] "LPG price hiked by Rs 144.5 per cylinder", Economic Times, February 12, 2020, https://economictimes.indiatimes.com/industry/energy/oil-gas/lpg-price-hiked-by-rs-144-5-per-cylinder/articleshow/74096745.cms.

[2] Frequently Asked Questions (FAQ), Petroleum Planning and Analysis Cell, https://www.ppac.gov.in/content/137_3_Faq.aspx.

[3] "LPG Price is Derived based on International Market Price", Press Information Bureau, Ministry of Petroleum and Natural Gas, February 13, 2020.

[4] PAHAL-Direct Benefits Transfer for LPG (DBTL) Consumers Scheme, Ministry of Petroleum and Natural Gas, http://petroleum.nic.in/dbt/whatisdbtl.html.

Union Budget 2020-21: Are the fiscal targets realistic?

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Gayatri Mann and Suyash Tiwari - February 6, 2020 Comments

Today, a general discussion on the Union Budget 2020-21 is being held in both Houses of Parliament. In the budget, the government presented the estimates of the money it expects to spend on various ministries, and how much money will be raised from different sources such as levy of taxes and dividends from public enterprises in 2020-21. In addition, the budget presented the revised estimates made by the government for the year 2019-20 in comparison to the estimates it had given to Parliament in the previous year’s budget. The budget also gave an account of how much money the government actually raised and spent in 2018-19.

What are revised estimates?

Some of the estimates made by the government might change during the course of the year. For instance, once the year gets underway, some ministries may need more funds than what was actually allocated to them in the budget, or the receipts expected from certain sources might change. Such deviations from the budget estimates get reflected in the figures released by the government at later stages as part of the subsequent budgets. Once the year ends, the actual numbers are audited by the Comptroller and Auditor General of India (CAG), post which they are presented to Parliament with the upcoming budget, i.e. two years after the estimates are made.

For instance, estimates for the year 2019-20 were presented as part of the 2019-20 budget in July 2019. In the 2020-21 budget (February 2020), the government presented 2019-20’s revised estimates based on the actual receipts and expenditure accounted so far during the year and estimations made for the remaining 2-3 months.

Is there a way to find out the government’s actual receipts or expenditure mid-year?

The actual receipts and expenditure accounts of the central government are maintained by the Controller General of Accounts (CGA), Ministry of Finance on a monthly basis. On January 31, 2020, the CGA updated the accounts figures for the period April to December 2019. Thus, we have unaudited actuals for the first nine months of the financial year.

How do the actual figures for the year 2019-20 so far compare with the revised estimates?

Table 1 gives the revised estimates presented by the central government for the year 2019-20 and the monthly account figures maintained by the CGA for the nine-month period April to December 2019. The difference between these two figures gives us the three-month target that the government will have to meet by March 2020 to reach its revised estimates.

Till December 2019, the government has spent Rs 21.1 lakh crore, which is 78% of the revised estimates for 2019-20. While the expenditure has reached 78% of the target, so far, the government has been able to generate only Rs 11.8 lakh crore or 61% of the receipts (excluding borrowings) for the year 2019-20. This implies that the receipts will have to grow at a rate of 41% in the three-month period January-March 2020 to meet the revised estimates of Rs 19.3 lakh crore. So far, receipts have grown at a rate of 4%.

Table 1: Budget at a Glance – Comparison of 2019-20 revised estimates with Apr-Dec 2019 figures (Rs crore)

Budget at a Glance	Actuals	Revised	Nine-month period	Three-month target	Growth rate so far	Growth target
Budget at a Glance	2018-19	2019-20	Apr-Dec 2019	Jan-Mar 2020	% change (Apr-Dec 2018 to Apr-Dec 2019)	% change (Jan-Mar 2019 to Jan-Mar 2020)
Revenue Expenditure	20,07,399	23,49,645	18,54,125	4,95,520	14%	28%
Capital Expenditure	3,07,714	3,48,907	2,55,522	93,385	21%	-3%
Total Expenditure	23,15,113	26,98,552	21,09,647	5,88,905	15%	22%
Revenue Receipts	15,52,916	18,50,101	11,46,897	7,03,204	6%	50%
Capital Receipts	1,12,779	81,605	31,025	50,580	-33%	-24%
of which Disinvestment	94,727	65,000	18,100	46,900	-47%	-22%
Total Receipts (without borrowings)	16,65,695	19,31,706	11,77,922	7,53,784	4%	41%
Revenue Deficit	4,54,483	4,99,544	7,07,228	-2,07,684
Fiscal Deficit	6,49,418	7,66,846	9,31,725	-1,64,879
Primary Deficit	66,770	1,41,741	5,07,411	-3,65,670

Sources: Union Budget 2020-21; Controller General of Accounts, Ministry of Finance; PRS.

How do the actual tax receipts fare in comparison to the revised estimates of 2019-20?

A lower than estimated growth in nominal GDP has also affected the tax receipts of the government during the year. The 2019-20 budget estimated the nominal GDP to grow at 12% over the previous year, whereas the latest estimates suggest this growth rate to be 7.5% in 2019-20. The revised estimates for 2019-20 show gross tax receipts of Rs 21.6 lakh crore (includes states’ share). Till December 2019, tax receipts of Rs 13.8 lakh crore has been collected, which is 64% of the target. The tax receipts will have to grow at 19% in the three-month period January-March 2020 to meet the target. Table 2 shows similar comparison for the various taxes and also for the tax receipts devolved to states. While the budget estimated a growth in receipts from all major taxes, receipts from taxes such as corporation tax (-14%), union excise duties (-2%), and customs (-12%) have declined during the period Apr-Dec 2019.

Table 2: Tax receipts – Comparison of 2019-20 revised estimates with Apr-Dec 2019 figures (Rs crore)

Revenue Receipts	Actuals	Revised	Nine-month period	Three-month target	Growth rate so far	Growth target
Revenue Receipts	2018-19	2019-20	Apr-Dec 2019	Jan-Mar 2020	% change (Apr-Dec 2018 to Apr-Dec 2019)	% change (Jan-Mar 2019 to Jan-Mar 2020)
Gross Tax Revenue	20,80,465	21,63,423	13,83,035	7,80,388	-3%	19%
Devolution to States	7,61,454	6,56,046	4,76,113	1,79,933	-2%	-34%
Net Tax Revenue	13,17,211	15,04,587	9,04,944	5,99,643	-3%	57%
Dividend and Profits	1,13,420	1,99,893	1,61,979	37,914	175%	-30%
Other Non-tax Revenue	1,22,284	1,45,620	79,974	65,646	-10%	96%
Revenue Receipts	15,52,916	18,50,101	11,46,897	7,03,204	6%	50%

Note: Figures for income tax exclude receipts from the Securities Transaction Tax.

Sources: Receipts Budget, Union Budget 2019-20; Controller General of Accounts, Ministry of Finance; PRS.

If we look at sources of receipts other than taxes, non-tax revenue during Apr-Dec 2019 is Rs 2.4 lakh crore, i.e. 69% of the estimated Rs 3.5 lakh crore. Disinvestment receipts till date amounted to Rs 18,100 crore, i.e. 17% of the budget target of Rs 1.05 lakh crore. Though the investment target has been revised down to Rs 65,000 crore, it implies that Rs 47,000 crore would need to be raised in the next two months.

How does this impact the borrowings of the government?

When the expenditure planned by the government is more than its receipts, the government finances this gap through borrowings. This gap is known as fiscal deficit and equals the borrowings required to be made for that year. Given lower than expected receipts, the government has had to borrow more money than it had planned for. Borrowings or fiscal deficit of the government, till December 2019, stands at Rs 9.3 lakh crore, which is 22% higher than the revised estimate of Rs 7.7 lakh crore. Note that with three months still remaining in the financial year, fiscal deficit may further increase, in case receipts are less than expenditure.

When we look at fiscal deficit as a percentage of GDP, the 2019-20 budget estimated the fiscal deficit to be at 3.3% of GDP. This has been revised upward to 3.8% of GDP. However, till December 2019, fiscal deficit for the year 2019-20 stands at 4.6% of GDP (taking the latest available GDP figures into account, i.e. the First Advance Estimates for 2019-20 released in January 2020). This increase in fiscal deficit as a percentage of GDP is because of two reasons: (i) an increase in borrowings as compared to the budget estimates, and (ii) a decrease in GDP as compared to the estimate made in the budget. The latter is due to a lower than estimated growth in nominal GDP for the year 2019-20. The 2019-20 budget estimated the nominal GDP to grow at 12% over the previous year, whereas the latest estimates suggest this growth rate to be 7.5% in 2019-20.

Note that, in addition to the expenditure shown in the budget, the government also spends through extra budgetary resources. These resources are raised by issuing bonds and through loans from the National Small Savings Fund (NSSF). The revised estimates for 2019-20 show an expenditure of Rs 1,72,699 crore through such extra-budgetary resources. This includes an expenditure of Rs 1,10,000 crore by the Food Corporation of India financed through loans from NSSF. Since funds borrowed for such expenditure remain outside the budget, they do not get factored in the deficit and debt figures. If borrowings made in the form of extra-budgetary resources are also taken into account, the fiscal deficit estimated for the year 2019-20 would increase from 3.8% of GDP to 4.6% of GDP due to extra-budgetary borrowings of Rs 1,72,699 crore. This does not account for further slippage if the targeted revenue does not materialise.

More Privatisation on the cards?

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