Scams that never were

POTO has become Pota. (Or shall do so as soon as the President puts pen to paper.) Gujarat is limping back to normalcy. Ayodhya, having threatened to boil over, is again on the back-burner. As the Budget session of 2002 enters its afternoon, we have the satisfaction of knowing that Parliament appears to have debated everything under the sun — except maybe the Budget. And other economic issues in general...

I hope that our representatives — as well as the Comptroller and Auditor General and my brethren in the media — shall now force themselves to study bread-and-butter issues again. I shall be content today to write about just three things.

As I spoke of ‘bread-and-butter issues’ let us start with food, namely rice. What are you prepared to pay for decent grain? In Delhi, Mother Dairy prices it at Rs 18 per kilo. And there are people who are willing to buy it. So riddle me this: why can’t the Food Corporation of India (FCI) find buyers at Rs 8 a kilo?

Taxpayers have invested Rs 54,000 crore in funding the FCI. We are told that 60 million tonnes of foodgrain are lying around with this public sector undertaking with nowhere to store this food. (Did someone mention a ‘food for work’ programme?)

This absurd situation raises some questions. Does the FCI actually have all those millions of tonnes that it claims? Is the rice and the wheat actually worth the price that was paid when those stocks were being laid up? Rs 53,000 crore is a vast amount of money. I fear this may end with the FCI becoming India’s largest loss-making public sector undertaking.

The FCI is not the only loss-maker around. India as a whole has run up a massive debt, US $110 billion approximately. (Purists may argue that about US $10 billion of this is actually a ‘deposit’; this is nothing but semantics.) Of this, US $17 billion are very high cost loans, the ECBs (External Commercial Borrowings). The rate of interest on the ECBs is roughly 14 per cent. (The actual rate is 9-10 per cent; the depreciating rupee accounts for another 6 per cent or so every year.)

The Government of India takes pride in the fact that the foreign exchange reserves are now in the vicinity of US $50 billion (less than one-quarter that of China). But this sum is earning interest at barely 1 per cent per annum — about half a billion dollars every year. Yet, simultaneously, India Inc. is shelling out US $2.38 billion as interest on that US $17 billion which it borrowed! Am I the only one to find this an insane situation?

The ECBs are borrowings by private companies. When this door was opened, it was stipulated that not more than 20 per cent could be prepaid. At the time, India’s foreign reserves were sinking alarmingly, and the Reserve Bank feared a run on its precious hard currency. But is this still valid now that there are US $50 billion in reserves? Why not pay it all off today? Especially when it is possible to raise foreign loans at a much lower rate of interest just now. (This may not last; the US Federal Reserve is murmuring about raising rates again.)

The sad tale of the ECBs has several years to run out. (The ban on prepayment was imposed in the 1990s.) But the third issue I shall speak about is rooted firmly in the here and now.

The finance minister proposed certain restrictions on investment in RBI Bonds in his Budget. An individual may not now invest more than two lakh rupees per annum. What is more, the tax-free interest rate has been slashed to 8 per cent.

That was on February 28. In the third week of March, the Government of India faced a different dilemma, with state after state defaulting on electricity dues. The amount at stake is a mammoth Rs 43,000 crore. (Rs 36,000 crore is capital, and the rest is the interest due.) The Union government has decided to bail out the offending state governments.

The Government of India proposed to issue some special bonds for this purpose. These will give investors 8.5 per cent interest, all free from tax. Pardon me, but what sense does this make?

Up to February 28, RBI Bonds promised a return better than the 8 per cent proposed in the current Budget; nor was an individual’s right to invest in these instruments restricted as it is today. Yet, the proposed Power Bonds — shouldn’t they be renamed the ‘Bankruptcy’ Bonds? — are offering more interest, all free from tax, and there is no limit on investments.

Let us not debate whether the Union government should be trying to save the states from the effects of their own laziness and stupidity. (Kerala had to endure the salutary shock of bankruptcy before any government dared take on the unions!) But why is the Government of India coming out with different rules for different instruments?

If there were sound economic reasons in February to slash returns on RBI Bonds, shouldn’t they also apply to the Power Bonds conceived in March? If the intent in February were to make a tax-haven a wee bit less attractive, why was another one opened up just three weeks later?

Please take a look at the amounts involved in the three cases mentioned above. There is Rs 53,000 crore invested in the FCI. The ECBs involve a sum of approximately Rs 80,000 crore. The defaulting states’ combined power bill comes to Rs 36,000 crore (sans interest). And there is something clearly wrong in the way that each potential crisis has been tackled.

But does anyone discuss this? No, apparently the only economic issue worth talking about is the great ‘coffin scam’ — and all
the money India would have lost had it imported coffins. (Which it didn’t!)

I invite interested readers to do a small comparison for themselves. Dig up a newspaper from the beginning of this month, and see what the Budget’s total allocation was for Defence. And then see the amounts at stake in the three instances I spoke of...

It is the privilege of Parliament, the media, and that coffin-obsessed entity, the Comptroller and Auditor General, to probe what they choose. But could we please devote some time to matters of greater import than scams that never were?

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