A brilliant financial engineering solution to lower India’s fiscal deficit for FY 2011-12

I just did  a review of Govt’s finances after the second supplementary demand for expenditure. Like most others, the post sia situation is pretty grim. The exp to be higher and rev lower leading to a much wider fiscal deficit. How much was anyone’s guess.

However knowing fiscal mathematics and government innovation, one knows something will come. One major item for such innovation was disinvestment figure. Govt budgeted Rs 40ooo cr but so far just around 2500 cr in the kitty. So there were suggestions from Mohandas Pai that government should ask cash rich PSUs to declare aggressive dividends. This was opposed  by SS Aiyar saying govt should not fritter away gains in commodity booms.

Now comes this wire from Bloomberg on another new plan. I must say upfront this is just speculation so far and coule be completely false. However, the mechanism is just brilliant fin eng:

India plans to borrow as much as 500 billion rupees ($9.5 billion) using land and shares as collateral to bridge a budget deficit, two government officials with direct knowledge of the matter said.

The South Asian nation will set up a fund manager by Jan. 15 that will pledge stocks it holds in non-state companies including ITC Ltd. (ITC),Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT), the officials said declining to be identified before a public announcement. The company will use the proceeds to buy the government’s stakes in state-run firms, the officals said.

The new holding company will pledge the stakes and real estate properties transferred to it from the Specified Undertaking of the Unit Trust of India, an agency formed in 2003. The state-run firm will be wound up within 3 weeks and the assets will be transferred to the new company, the officials said.

Actually, there was another press release on 6 Dec 11 in BS which reports a ICICI Sec study which proposed this plan:

Last month, ICICI Securities had suggested a plan to mop Rs 46,171 crore from buyback of securities, strategic cross-purchases and secondary sale of equity in these units in the immediate to medium term. It had suggested raising Rs 22,941 crore from monetising the portfolio of Suuti, besides looking for banks and insurance companies for possible selloffs.  

Suuti holds 11.54 per cent in ITC Ltd, 8.27 per cent in Larsen & Toubro and 23.58 per cent in Axis Bank. The value of holdings in these companies is Rs 18,983 crore, Rs 6,251 crore and Rs 9,786 crore, respectively, according to the ICICI paper.

The idea was for Suuti to exit from all the stocks after the bifurcation. In earlier years, too, the government considered selling its stake in these institutions held by Suuti, but the plan was shelved. Selling Suuti stake in private companies can help the government meet its disinvestment target.

The new version is even better. It works like this:

  • Govt transfers the above listed assets held by SUUTI to a new fund. It may not want to sell these assets as these are all good quality companies and have no major promoters. It might not want some other player holding a major stake in these companies
  • These assets to be pledged to a bank and money raised.
  • It then sells its stakes in various PSUs to this new fund and gets the money.
  • So in a flash, you get the money to manage fisc and meet disinv targets. And who knows the targets could be overshot!
  • And then you also don’t end up selling shares in these important cos. As economy improves, government can buy the PSU stakes back…

Amazing jugglery and engineering to manage the fiscal..Each year something like this comes…Though execution will be a task. Pledging land etc is a task which takes a long time. Cannot be done in 2 months before the budget..But even then, this is superb…Greece and Portugal should take some lessons..

The day of reckoning for Indian fisc might still be away…It may not happen this year as most expect…



8 Responses to “A brilliant financial engineering solution to lower India’s fiscal deficit for FY 2011-12”

  1. lp Says:

    Hi i have a small doubt,may look silly ..

    “if govt pledges stake and gets money to meet the targets..how does it repay back to get the stake back? from where will the money come for it?”

    • Amol Agrawal Says:

      The money will come from us..where else…as things improve higher tax revenues, disinvestment at higher prices etc will get more money in the kitty and the stakes will be bought back

      • lp Says:

        I doubt if they buy back there stakes in these companies the reason is debt which is going to mature in 2012,2013 ,2014 is much larger than the ones of 2010-11 and not always we get the lump sum amount just like 3G auction did….Lets see the trick in jan

  2. maheep Says:

    4G auctions maybe!!!

  3. PB Says:

    Whenever there are multiple transactions where a simpler transaction is possible, there is always a catch. Only the middlemen will be the winners in these transactions.

  4. How Indian Government is financing its deficit using more of short-term debt…. « Mostly Economics Says:

    […] of overestimating revenues and underestimation of expenditure mainly subsidies. This has led to some innovative proposals to bridge the deficit (update on SUUTI plan: It is on target as govt in finalizing a note to wind […]

  5. How Government is financing its deficit using short-term debt… « Mostly Economics Says:

    […] of overestimating revenues and underestimation of expenditure mainly subsidies. This has led to some innovative proposals to bridge the deficit (update on SUUTI plan: It is on target as govt in finalizing a note to […]

  6. ramadeva Says:

    The SUBSIDY to the Industry in the last two Budgets was around Rs 5.2 LAKH CRORES and the total subsidy to the Industry from 2008 is a whopping Rs 15 Lakh Crores.
    This subsidy,if stopped,will take care of everything,and no manipulation is required.But the UPA under MM Singh is hiding facts and is even BLUFFING[for deregulating Petrol prices],like the OMCs making losses whereas they are actually contributing immensely to the Exchequer.This type of lies[others are incorrect export data,fake Inflation figures etc] will not work.
    The manipulation proposed,makes one wonder whether the UPA has skeletons in its cupboard.

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