The curious case of ONGC

One of the things that our Finance Minister Arun Jaitley proudly tweets, blogs and speaks about is the fine management of economy his ministry has purportedly done - by broadly keeping it to the declared objective of fiscal prudence. However a simple bird's eye view will puncture many holes in that achievement. 

Let's start with meeting the disinvestment target by the Government. One news story caught my eye. One of the Navratna PSUs ONGC's (Oil and Natural Gas Corporation) cash reserves have depleted by 98%, down from Rs 9,511 crore in March 2017 to Rs 167 crore in Sept 2018. On the other hand by the end of Financial year 2018 the debt on the company was close to 25000 crores. 

What has this to do with fiscal prudence of Jaitley's budgeting skills. Well ONGC is a living example of accounting jugglery of Jaitley's finance ministry to make the Government balance sheet look good and he can also claim meeting disinvestment targets in front of cameras. But here is the catch - this is not disinvestment at all. It is squeezing cash out of the company to bolster Government balance sheet. And ONGC is not alone. 

You see - a genuine attempt to disinvest Air-India failed abjectly. Even the great modi government could not get it done. So then the government did not even try to move ahead on other ailing PSUs like the IDBI bank. LIC - a 100% government ownership company was made to invest in IDBI bank - which announced a loss of 13000 crores in that financial year. And then Government made ONGC buy its stake in HPCL  for which ONGC - an almost debt free company had to raise huge debt. This is at best cross-disinvestment. One Government company buys shares of another government company from the Government. Now the ownership of HPCL as a result has been transferred to ONGC from the government but wait ONGC is owned by the Government. In short - ONGC was made to pay cash to the Government. This is despite the fact that ONGC made a dividend payment which was also a 1000 odd crores more than the last year. Of Course in all such transactions - the retail investor saw his value get destroyed because of such poor corporate Governance. So ONGC lost about 37% of its market capitalisation in the Modi years. 

And by the way - ONGC was supposed to raise its crude oil production meanwhile - however for the last five years as well the decline its crude production continued as was the case before 2014 too. All in all then this constraints ONGC's ability to actively drill for more oil in the immediate future which also thus caps its possible value creation. It has seen a recent improvement in crude production in the last financial year.

And no, this is not all of the jugglery of Jaitleyji did to manage the fiscal deficit on his books. FCI was forced to take loans to cover for food subsidies that remain unpaid in the financial year 2018-19 to the extent of about 60,000 crores. In simple terms what it means is that he shifted a liability that should have appeared on the government books to a PSU book. This of course remains a burden to paid next year. 

Not just that - after a lot of push and pulls and resistance from the RBI Jaitleyji was also successful in getting the RBI to trasfer a surplus of Rs 50000 crores denting the cash reserves with the RBI too. All in all the government has been shoring up cash from all ways and means keeping the corporate governance so close to Modiji's heart aside.

Why would all these be needed - because the announcement and implementation of various schemes left right and center needs to be funded. While, after all the tax reforms that Jaitleyji claims to have done, the tax mop-up of the Government fell short by a shocking 1.6 trillion rupees from the budget value in 2018-19. The 2019-20 budget actually expects to collect a figure higher than this missed budgeted figure by a 10 plus percent.

So, in short the government seems to be bleeding cash from PSUs, cross disinvesting to generate money, pushed the RBI to transfer higher surplus and failed to mop up budgeted taxes by a huge margins. What this concludes to is that the harmless looking revision of fiscal deficit from a budgeted 3.3% (which was also higher than committed three years ago) to 3.4% is also jugglery. The actual fiscal deficit is much larger and most probably will figure either in revised numbers or next year's budget. In fact looking at the gap in tax mop-ups the revised figure of GDP growth rate of 7% also looks doubtful. This (mis)management of course will have to be paid by the tax payers and share holders and investors in PSUs and LIC etc. 

No wonder then that modi government is pitching this election not on "vikas" but on "Nationalism" and "religious" tone. What is interesting is that Modiji seems to be winning anyways. Enjoy the ride.