Non-tax receipts propped by unconventional disinvestment

by Mahesh Vyas

Fiscal 2017-18 suffered a sharp fall in dividends from RBI. Expectations that demonetisation would lead to a windfall transfer to the exchequer were grossly misplaced. In 2015-16, dividends from RBI and other financial institutions had peaked at Rs.815 billion. These fell to Rs.712 billion in 2016-17. This was the year of demonetisation but, there was no expectations of any extraordinary rise in dividends in this year. The expectation of a windfall was for 2017-18. But, the year disappointed on this account as dividends from RBI and other financial institutions fell to Rs.516 billion. This was the year when the RBI announced the outcome of demonetisation and, it did not show the expected large extinguishing of its liabilities which, it was presumed would lead to an extraordinary transfer to the central government. Budget 2018-19 expects the proceeds from such dividends to rise only marginally to Rs.548 billion.

These dividends accounted for about 15.3 per cent of the gross fiscal deficit in 2015-16. This was their peak contribution. Their contribution has been rising. It was a mere 4.3 per cent in 2011-12. But, their contribution to the fiscal deficit fell to 13.3 per cent in 2016-17 and then to 8.7 per cent in 2017-18. So, RBI and other dividends are important but, not a big deal at least for financing the central government.

Dividends from RBI is the most important component of what is called the non-tax revenues of the central government. Earlier they accounted for nearly a third of all non-tax revenues of the central government. This ratio is down to about 22 per cent.

The share of non-tax revenues in total revenues has been declining. It fell from a range of 16 to 18 per cent to 10 per cent in 2018-19.

Except for the dividends mentioned above, non-tax revenues arise out of user charges of government assets or service charges for services provided by the government. Ideally, these should be rising to reflect their demand. It would be good if the government charged a fair price for its commercial services and collected revenues from those who benefited from these services. This is better than raising taxes.

The only aggression in raising user-charges is with respect to telecom. Other user-charges as a source of revenue are not pursued strategically as perhaps, they should be - in a fair and non-rent seeking manner.

The government has been very successful in generating resources from disinvestment in 2017-18. Disinvestments are not considered a part of the deficit although there is a case that they should be considered so. Disinvestments are considered as a capital receipt, or more correctly a non-debt creating capital receipt.

Debt-creating capital receipts are the various sources of funds from which the deficit is financed. Net market borrowing is the principal source, accounting for bulk of the capital receipts. These amounted to Rs.4 trillion in 2017-18 compared to Rs.3.5 trillion in 2016-17 . But, in the preceding five years, net market borrowing was between Rs.4 trillion and Rs.4.7 trillion in a year.

One indicator of the fiscal stress that we are going through currently is that net market borrowing increased during 2017-18 to Rs.4 trillion although receipts from disinvestments increased to a record Rs.1 trillion. Logically, if proceeds from disinvestments increase then the need to borrow from the markets to fund the deficit must fall. But, in 2017-18, both disinvestments and market borrowing increased. Further, receipts from small savings also jumped up unusually sharply.

This is particularly pertinent this year because disinvestment is more than twice such receipts anytime in the past. That disinvestment itself is unconventional because it reflects largely, one PSU (ONGC in the present case) buying a large chunk of the government’s equity of another (HPCL) or, the PSU buying back their own equity. These deals account for 45 per cent of all disinvestments. Apparently, disinvestment is more about balancing books rather than reforms towards privatisation.

The unconventional disinvestment transactions have led to the disinvestment proceeds of 2017-18 contributing 14 per cent of capital receipts when it normally contributes about 3-7 per cent.

Total non-tax receipts, including non-tax revenues and capital receipts amounted to Rs.9.5 trillion in 2017-18. Share of the largely unconventional disinvestments in this year works out to 10.6 per cent. This is much higher than the less-than 5 per cent share that disinvestments had in these receipts in the preceding years.

The disinvestment target for 2018-19 is lower than in 2017-18 but at Rs.800 billion it is aggressive nevertheless. And, market borrowing during 2018-19 are also only marginally lower than in 2017-18. It is assumed that small savings will revert back to a more normal level. But, it is not clear what caused that unusual jump in 2017-18.

Unemployment Rate
Per cent
5.5 +0.1
Consumer Sentiments Index
Base September-December 2015
96.1 +0.6
Consumer Expectations Index
Base September-December 2015
96.5 +0.6
Current Economic Conditions Index
Base September-December 2015
95.5 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.26 1.49 3.43 2.27
Completed projects 1.25 1.16 1.43 0.82
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.24 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 22 Jul 2018 8:20PM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.0 18.9
 Expenses 9.0 13.0 16.8 20.7
 Net profit -18.0 -14.3 -82.1 11.9
 PAT margin (%) 5.5 4.8 1.2 14.9
 Count of Cos. 4,502 4,493 4,288 134
Non-financial Companies
 Income 8.2 13.3 11.5 18.6
 Expenses 8.1 12.3 12.4 21.4
 Net profit -6.1 13.2 -2.6 7.5
 PAT margin (%) 6.2 6.4 6.5 14.4
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.0
 Current liabilities 11.0 10.3
 Borrowings 3.4 1.8
 Reserves & surplus 7.9 7.8
 Count of Cos. 3,461 3,464 3,319 99
Numbers are net of P&E
Updated on: 22 Jul 2018 8:20PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.9 11.6
 Expenses 5.7 1.9 5.9 16.1
 Net profit 0.1 -9.7 25.3 -43.1
 PAT margin (%) 3.0 2.8 3.4 4.3
 Assets 9.5 10.2 7.4 14.3
 Net worth 8.5 11.3 7.6 13.7
 RONW (%) 5.8 4.9 5.8 5.3
 Count of Cos. 26,129 24,412 21,971 368
Non-financial Companies
 Income 4.9 1.0 5.7 9.9
 Expenses 5.0 0.3 6.1 9.2
 Net profit -8.6 19.9 20.2 8.9
 PAT margin (%) 2.0 2.4 3.0 12.1
 Net fixed assets 13.3 17.8 6.6 55.5
 Net worth 7.0 12.1 6.5 10.3
 RONW (%) 4.6 5.1 5.9 15.0
 Debt / Equity (times) 1.1 1.1 1.0 0.3
 Interest cover (times) 1.9 1.9 2.1 8.8
 Net working capital cycle (days) 66 65 62 7
 Count of Cos. 21,306 20,431 18,292 255
Numbers are net of P&E
Updated on: 20 Jul 2018 4:05PM