(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Jeff Glekin
MUMBAI Aug 14 (Reuters Breakingviews) - India's new finance
boss, P. Chidambaram, is renowned for his intelligence. Now he
has a chance to use it, by producing a good plan to cut the
country's mounting fiscal deficit. Last year the budget was in
the red by the equivalent of 5.9 percent of GDP, and this year
could be even worse. His best bet is to propose deregulation of
energy prices. That would give the country a fillip in five
First, freeing up energy prices would lower India's subsidy
bill. The OECD estimates that diesel sops alone costs the
government three percent of GDP. The state-owned refiner, Indian
Oil Corp, posted its worst ever quarterly loss in the three
months ending June. Oil & Natural Gas Corp, the country's
largest oil explorer, said discounts it offered to state
refiners on crude-oil supplies cut its annual profit in half.
Second, the ability to charge market prices would raise the
value of state-owned firms. Coal India sells its
output at around 70 percent of international market prices,
according to investor The Children's Investment Fund. It makes
$8.30 of EBITDA per tonne of coal, compared to $45.70 at China's
Shenhua. If Coal India could double EBITDA per tonne that might
add $20 billion to the company's value.
- That could lead to another benefit: fatter privatisation
revenue if the government continues its programme of
divestments. Another 10 percent sell-off of Coal India would
still leave the state with 80 percent. And a successful
part-sale could help Chidambaram build a case for similar moves
Fourth, the effect of a market-based pricing system would
inevitably lead to better resource allocation and an increase in
supply. This month's power outage, which left half the nation
without electricity, demonstrates how critically that's needed.
Finally reform would encourage higher levels of investment
as businesses took advantage of higher returns and as foreign
capital again got a taste for the India growth story. Achieving
that last goal would deliver a huge pay-off to the economy and
to the government's own finances - and leave Chidambaram looking
- India's Finance Minister P. Chidambaram was preparing to
present a fresh plan on fiscal consolidation, the Economic Times
reported on Aug. 8.
- India's fiscal deficit for the 2011 year, which ended in
March, hit 5.9 percent of GDP against the budgeted figure of 4.7
percent. For 2012 the government has set a target of 5.1 percent
of GDP, although most economists expect the figure to be closer
to six percent.
- At the end of the first quarter, fiscal deficit was
already 37 percent of the budgeted amount as revenues came in
below estimates while expenditure was higher. For the same
period in the year-earlier period, the number was 32 percent.
- Shares in Coal India rose two percent in early morning
trading on Aug. 14 after the company's announcement after
trading on the previous day that its net profit for the quarter
ended June 30 rose eight percent, year on year.
- For previous columns by the author, Reuters customers can
(Editing by John Foley and David Evans)