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Thursday, November 1, 2007

Sixth Pay Commission : Does Govt have money for implementation?

The government of India is a big gainer from the surge in the Sensex. The gains are sufficiently large to take care of the potential impact on the exchequer of the recommendations of the Sixth Pay Commission. In conceptual, if not in practical terms, the government is sitting pretty.

The market capitalisation of 29 listed PSUs has soared from Rs 2,34,000 crore on June 1, 2004, shortly after the UPA government took over, to Rs 10,90,000 crore on October 24, 2007. The current value of the government’s shareholding in these PSUs works out to a colossal Rs 8,80,000 crore — enough to wipe out a quarter of the total public debt.

A mere 10% sale of its portfolio would fetch the government over Rs 88,000 crore. That is around 2% of GDP, more than adequate to cover the immediate impact of the Sixth Pay Commission on GDP, which is expected to be of the order of 1% of GDP. It is the impact of any wage award in the initial two or three years that is lethal. Over time, as nominal GDP rises at around 13%-14% annually, the impact declines progressively as a proportion of GDP.

The government has stakes in banks as well. The market capitalisation of public sector banks (PSBs) has shot up in the same period from Rs 69,000 crore to Rs 232,000 crore. Government shareholding in these PSBs is today worth Rs 145,000 crore. (Some of the PSBs have been listed post 2004, hence do not figure in the comparison in market capitalisation between 2004 and 2007).

The fiscal deficit of both the Centre and the states has been showing a downward trend. Total public debt too has begun to decline. These declines understate the extent of the improvement.

If the fiscal deficit is interpreted as a change in net worth of government, the rise in the value of government shareholding in public sector companies also implies a decline in the fiscal deficit. Take this into account and the Sixth Pay Commission loses much of its terrors.

Some will say that this is all notional. The Left will not allow disinvestment in PSUs to proceed. The government cannot, under the present statutes, sell its equity in PSBs. Maybe there is an improvement in conceptual terms but this will not be reflected in cash flows.