Mr. U.R.Bhat, Director and Chief Investment officer, Jardine Fleming India

One of the more seasoned players in the mutual fund business, Mr. Bhat has a reputation for being incisive. He has been in the forefront of the stock market operations for Jardine Fleming in India for many years and has steered its investment operations capably.

Clearly confident of India Inc., Mr. Bhat stressed on the need to consolidate on our achievements of the nineties. According to him, India had notable achievements in the nineties:

• we achieved a steady GDP growth rate of 6 per cent
• our reserves rose from $ 1 billion to $ 41 billion and is still rising
• prime lending interest rates came down to about 12 per cent from about 19 per cent
• deposit rates were liberalised
• statutory reserve requirements were bought down by about 35 per cent to 40 per cent
• foreign investment rose from $100 million to $5 billion per annum
• market capitalisation went up almost three times to about $180 billion
• the country had almost got free of the license raj and the MRTP
• import licensing had been done away with
• FEMA replaced FERA
• current account convertibility was introduced
• capital markets got more regulated with the setting up of Sebi

Despite these great deeds there were concerns arising now. Prime among them is the fact that the economy seems to be slowing down, with the growth rate well below the targeted 9 per cent. Foreign direct investment was far below that of China, which stood at about $ 40 billion and the fiscal situation was precarious.

The biggest problem with India, according to Mr Bhat, lay in its balance sheet. Quoting figures collected by JP Morgan Research, HSBC Research and government of India publications, Mr Bhat pointed out that there was an excess of liabilities over assets by Rs 6,200 billion.

He said total resources of Rs 13,400 billion comprising of Rs 10,300 billion in the form of borrowings (domestic and external), Rs 2,500 billion in the form of deposits and provident fund and Rs 600 crore in the form of reserve fund were represented by only Rs 7,200 billion worth of "Real" assets.

The balance figure of Rs 6,200 billion, according to him, were fictitious assets and in reality it was "Loss", which India was carrying in its balance sheet and these comprised of gross capital assets worth Rs 3,400 billion, loans worth Rs 2,800 billion and investment in public sector units or PSUs worth Rs 1,000 billion.

Mr Bhat also stated that that for fiscal 2001 the expected revenue receipts comprising of tax and non-tax revenues could amount to Rs 1,980 billion and revenue expenditure comprising of plan and non-plan expenditure could amount to Rs 1,815 billion. This would result in an operating profit of Rs 165 billion. However interest payments of Rs 1,013 billion result in surplus becoming deficit of Rs 848 billion. As a ratio, revenue deficit amounts to 43 per cent of net revenue receipts. All this not taking into account capital receipts and capital expenditure.

For fiscal 2002, assuming a 10 per cent increase, Mr Bhat has estimated net revenue receipts at Rs 2,177 billion. However he has assumed a 13 per cent increase in revenue expenditure and estimated it at Rs 2,045 billion. This has resulted in a lower operating profit of Rs 132 billion , down by about 20 per cent. Taking into account interest payments of Rs 1,115 billion there is a net deficit of Rs 983 billion, up by about 16 per cent over the corresponding period’s figure. As a ratio, net revenue deficit amounts to 45 per cent of the net revenue receipts.

As much as 35.82 per cent of total revenue expenditure goes towards meeting country’s interest payments. Defence outgoings claim 14.39 per cent, subsidies 8.66 per cent, administration & social services (cost of bureaucracy) 23.02 per cent and plan expenditure 18.10 per cent.

Extending the same to fiscal 2002, interest expenditure is expected to amount to around 35.28 per cent of total expenditure, defence 14.43 per cent, subsidies 8.23 per cent, administration & social services 23.70 per cent and plan expenditure 18.35 per cent.

Mr Bhat is of the opinion that it will be difficult for India to bridge the revenue gap as for doing this it will have to substantially raise taxes, a difficult proposition considering the fact that they are already optimally placed. The other way was enforcing better compliance and increase tax payer base, both in the realms of possibility but time consuming.

He also suggests that a system christened "cost based user charges" could be introduced as a viable option to raise revenues as the cost of services being provided in the country were largely subsidised. He said there was very little scope to cut expenditure.

Citing examples he said 14% defence expenditure was unlikely to be brought down keeping in mind the security compulsions of he country. Similarly there was little scope for effecting any cut in 18 per cent outlay for plan expenditure as it was essential for growth. There was no way the government could affect any cuts in interest payments as the same was being made for debt already contracted for. He pointed out the only area where expenditure could be cut was administration and subsidies for which however a lot of political will was required.

PSUs - the only way forward

"The only way forward is by disinvestment/divesting/privatising the PSUs and unlock capital therefrom", says Mr. Bhat. He pointed out that as much as 7.5 per cent of country’s assets comprised public sector undertakings, returns from which were very low --- in the range of 2 per cent to 5 per cent. He pointed out that nearly 50 per cent of the PSUs were making losses and annual losses exceeded Rs 500 billion. "Many PSUs are private companies, which have been nationalised to protect jobs", said Mr Bhat and added that only 35 PSUs comprising companies from the oil, telecom, power and insurance sectors contributed about 71 per cent of PSU profits. " It was therefore essential that PSUs were privatised. Faster growth say in the range of 6 per cent to 9 per cent per annum could lead to 4 million new jobs every year", said Mr Bhat.

Restructuring India Un-Ltd

• Privatise all non-essential assets. Sell loss making PSUs.
• Improve returns on PSU investments.
• Retire debt and save on interest outgoings.
• Increase government expenditure in agriculture "Which has not received any investment from the government ever since the green revolution", education, rural healthcare and infrastructure.
• Increase plan expenditure in rural infrastructure and social sector.
• Facilitate private investment in infrastructure.