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EcoManifesto: Government Should Cut Size And Earn Money Selling Assets

As part of our EcoManifesto series we bring you the second edition: How should the government earn money?

We’ve already said that we should cut tax rates and reduce exemptions. Yet, that won’t give us enough – we already spend about 40% more than we earn, and with lower taxes we’ll earn even lesser. Where’s the money going to come from? (Assuming we keep low deficits)

Get Out of Banking!

The government is our biggest banker. More than 60% of the banking system deposits and loans are with the public sector banks. Why? This makes no sense whatsoever.

Banks should be privately held but publicly accountable. However for that we have a regulator in SEBI and the stakes of public sector banks can be sold over time:

  • Reduce all such bank holdings to 51% even if it means fire sales at rock bottom prices in auctions.
  • Identify banks that can go fully private and take those holdings down to zero in bulk sales.
  • Tighten rules that ensure bankers, public or private, will be held accountable for fraudulent loans or not following RBI rules on NPA recognition. (This should include jail terms)

We need to let banks remain private. There should be no “nationalization” – even when a bank is facing a rough time. In such a case, banks could be taken over temporarily (basically throwing out all existing shareholders but protecting deposits to a certain extent) and then within 24 months the bank should be sold or shut down.

Selling public sector bank stakes can raise over Rs. 40,000 cr. just to bring the stake levels down to 51%, even at a 25% discount.

Get Out of Business, Curb Monopolies

The Government owns three oil refiners. THREE. And then, ONGC which explores for gas, Oil India which does the same thing

It owns companies that make fertilizers. It owns NTPC and a slew of other power producers. It owns power equipment producers like BHEL. The largest life insurer LIC has a huge asset base, and dwarfs every other insurer – this is not good, and the monopoly requires redoing. There’s Coal India too which is a monopoly on coal.

The new political goal should be to reduce the influence of the government as a player in industry. We need to plan and:

  • Sell stake in PSUs immediately, even if it means selling at low prices. Piggy back sales in profitable PSUs with those that aren’t doing so well, so that you can get rid of the shareholding.
  • The inevitable strikes and union action that will follow needs to be worked through, but the current approach of making them uncompetitive is an unsatisfactory solution. We may have to pay employees large amounts upfront to get them to agree.
  • Monopolies should be cut up. LIC should become 5 different companies, each with a CEO. Two of them should be sold within 3 years, and another two within 5 years.

Stake sales will earn the government more money but in the long run it will reduce the cost of running unprofitable and dead-ended companies. There are way too many of these to list, but here’s about 240 of them.

Tax Deduction Removals

We’ve argued that taxes need to be cut and all exemptions removed. As of last year, according to the Statement of Revenue Foregone:

  • Corporate tax deductions from SEZs, Accelerated Depreciation, and other such areas resulted in revenues of over Rs. 89,000 cr. that were lost to the government. Some of this is valid – such as accelerated depreciation for infrastructure. We could collect about 30,000 cr. rupees more will be collected just from the loss of deductions.
  • Removing 80C deductions alone will give us additional revenue of over Rs. 30,000 cr. a year. However with lower tax rates, it’s likely the impact is only half – so about 15,000 cr. per year.

Lower tax rates will increase transactions (since companies have more money to spend). The lack of exemptions make tax filing simpler. This will expand the tax base, and offset the loss in taxes that we would have made with today’s rates.

Reduce Subsidies and Cut Some Indirect Taxes

We complain of the oil subsidy but at the same time tax oil by about 100%. If the center were to just remove its taxes on fuel to zero, and remove fuel subsidies altogether, we would be even.

This is tough politically, but it makes complete sense for people to pay market prices on fuels. It avoids our paying for the inefficiency of the public sector refiners, and allows more efficient private party competition.

If we did this for one year, we’d all adjust our usage accordingly.

Create Open Auction Mechanisms for All Licenses

The success of open auctions of the 3G and the recent 2G licences should teach us that this should be applicable to all licences where the resource is scarce.

Transparency will increase prices, and collusion and cartelization are the enemy, but these can be tackled through enforcement.

Do Not Pay Infra Companies Loans

Many infrastructure companies have borrowed money with the governments backing, and now when they can’t pay up, the government need to pony up the cash. Such contracts should simply not be allowed; unless there is a private insurer for the risk.


The government’s job is not to make money. It is to simply provide the infrastructure so we can run our lives better, make our profits and not harm other people. It collects money because it has to run those services, but if it were to only restrict itself to those services, like defence, police, roads, water and regulation, we might not even need excess revenue.

And that’s the point. We can only sell assets today, and tomorrow those assets won’t be ours. So the one time revenue we make should be used to actively cut departments, divisions and ministries which were created to handle that which we have now sold.

I hope political parties will look into this as their way forward. When I was younger, I used to believe that politicians don’t really care about the rest of us. Now, I believe some of them do listen, and I’m reasonably sure they are aware that the larger the government, the greater the corruption in it and the more inefficient our economy is. To fix this is not about appointing another investigative authority but to reduce the influence of the government on our economy.

Also Read: Remove Exemptions, Reduce Tax Rates

  • XYZ says:

    It’s like you are living in the 80s or the 90s.
    The government is much more efficient in delivering public goods. Maybe not the Indian government but in general it’s true that private players are less efficient in this aspect.
    We need financial stability so that the manufacturing and services economy can prosper. We do not want financialization of our economy like in the US. Definitely not at this stage when we are so poor.
    So, we need nationalized banks especially in a weak regulatory environment. They provide some stability and most importantly credibility to the financial sector. Let there be a mix of public and private players. We have it right on this.
    Agreed that the government should get out of most businesses and definitely should curb monopolies (both public and private). But you chose the wrong examples. We need an ONGC to compete with the state-owned players from China, Russia etc in the global race for energy resources. We need those resources to provide to our expanding population. This is not a game of simple economics but a geopolitical game and companies like ONGC should ideally be instruments in implementing an intelligent Indian geopolitical strategy (which doesn’t exist as of now).
    I will add that we desperately need to simply laws and break up private monopolies at local, state and national levels. But we also need concentrations of capital for large-scale investments. So some monopoly on capital is necessary. There is no one-size-fits-all solution here.
    Taxes: Isn’t there a need to prepay taxes in India on projected income? Also, don’t businesses find it difficult to pay lower taxes once they declare a certain level of income the year before? I have heard that the tax authorities scrutinize more carefully if you pay a lower amount of tax compared to the year before and that this makes people declare a lower income for consistency. Please correct me if I am wrong.
    80c is good. We need savings in this country. This is one way of encouraging that. It’s about creating a mindset. Western countries are in decline because of a lack of savings and fixed investment. We don’t want to go down that direction.
    Agreed about reducing subsidies and cutting indirect taxes. But I am amazed at how popular subsidies are. People talk very passionately in support of them. It is always described mixed with pity and pathos for the poor. Perhaps a good number of people in the Indian middle class remember how subsidies helped them when they were growing up poor or in lower middle classes. I have yet to figure this out.
    Open auctions – agreed. But I remember someone (I think it was Shankar Sharma) arguing that auctions removes any surplus that would be available for the winner thus removing any incentive for private players and keeping them in dire financial straits all the time.
    Infrastructure can only come through a net expenditure by the government. It has been the case all over the world. These are public goods with public benefit, many intangible. We have to find ways to harness the agility and efficiency of the private sector while delivering these public goods. Loan guarantees weren’t too bad for this. What we need are clearer laws regarding property rights vis-a-vis public rights (or whatever the correct terminology is).
    The government’s job is not make money. But it definitely can and should strive to provide financial stability, an economic safety net and ethical values. I am very disappointed with the way a large section of the private sector operates in India. A lot of them are crooks. The public sector may be corrupt and inefficient but they are less discriminatory (no caste/region/religion groupism), provide upward mobility (rather than family autocracy as in pvt sector) and stability to a large section of Indians who crave for all of them, especially the last one.
    Thanks for reading my take on this.

    • Thanks for your comments. My views are based on facts and data I’ve seen. Indian private industry is far better at delivering public goods than most public organizations. We have proof of that from even government’s own sources.
      The financialization argument is poor. Our public banks do nothing or next to nothing in real reach – neither do our private banks right now but they are swamped by the competition by the ludicrously fat public sector entities. If we created real competition here, we can really make banking go down to the wire. You should see how concentrated banking is in the top five cities, and how terrible we are at loans or coordination elsewhere. We need more banks, but we also need our current banking system to be far more efficient, and it won’t be if it’s dominated by the public sector. Calling us poor won’t help. We’ll only get rich by growing the private sector, not the public one.
      ONGC is one government owned company and no, you don’t need one, because a number of countries manage well without one. There needs to be a vibrant private sector alongside the public one, and if anything the state owned companies should have the exact same playing field as the private ones.
      Taxes: No, I see a LOT of companies paying lower taxes, especially when tax rates are lowered and they do fine. I have personally done it at SMEs. Some tax officers are unhappy but they will understand if you aren’t skirting the law.
      80c isn’t good at all. It’s a crap section designed to do nothing. If we lowered tax rate, people can save on their own. We don’t need to be led by the nose to invest or save. Please give us our maturity, we save a heck of a lot (over 30%) and reducing that would do very well for our economy. In fact, the saving needs to become investments, and the taking of risk. And risk taking is not enshrined in 80c at all, the biggest risk is angel investing and SME investments (which have no 80c coverage, but have the highest net return on capital). We should get rid of it – any attempt to highlight one risk over another is just becoming a mommy state, and I think we have had enough of that.
      Open auctions: the arguments for them outweigh the arguments against. I would argue that if auctions removes the surplus then people should stop bidding. They will learn if there are more auctions. And only more auctions can help. Having less will leave either party unhappy later, or the public will blame collusion – no, it’s far better to create transparent auctions.
      Infra in India has mostly come from private enterprise. Some has to come from the government. Loan guarantees are a HORRIBLE way to do this because it promotes collusion. The way this has to be done is for the private sector to take the risk, otherwise they should just do it as a contract (and the government does it, like with the NHAI). The private sector shouldn’t be allowed to part-own or fully own the project but to parlay all the risk away, which is what has happened.
      Public sector in India are FAR more discriminatory (you can see groupism in there far more than in the private sector), and don’t provide any upward mobility or stability – in fact the biggest movers are all in the private sector, and they are both efficient and less corrupt because they have less incentive to be so. The concept of financial stability is irrelevant because my proposals will result in more, not less financial stability, in the medium term, while the short term gives us room to adjust with some volatility. The path we are currently taking will destroy us in the medium term, with the public sector being a noose to the hopes and aspirations of the large number of intelligent people that form the country, unless we change really fast and understand that the private sector is far more important to groom.

  • Px says:

    I guess the only way u can get ur vision implemented is to join politics !
    The Swedish finance minister Mr Borg in the current environment used to have a pony tail ,,, I wonder how
    Yes ur talking sense … but the most organized bizz in India is corruption and crony capitalism ! who will take on the establishment ?
    The rules are simple Profits are private, losses public !