April 01, 2004 
Press Release
The thirteenth episode of our series, "Lies, damned lies and statistics" touches and aims to expose the very core of the `Shining India’ and the `feel good’ campaign. Tax cuts benefit whom? Who `feel good’ and who `shines’ under the NDA dispensation? It is clear from our study that disinvestment proceeds did not enhance social sector spending. Nor did disinvestment lead to increased overall investment. So apart from liquidating and alienating priceless national assets, this has enabled the NDA government to finance and in effect subsidise corporate tax cuts. Therefore, all those whose financial bottomlines prosper — `feel good’ and `shine’.
Is India Really Shining?
Lies, Damned Lies and Statistics
Disinvestment and Tax Concessions
Exposing the Pro-Big Business Character of the NDA Government
The argument often put forward in defence of privatisation is that the government should not waste its ‘scarce’ resources behind running public sector enterprises, which are considered to be inherently ‘inefficient’, and divert those resources to social sectors like health and education. However, while the NDA government has been most enthusiastic about mobilising revenue through disinvestment (out of the 48 companies disinvested till date since 1991, 38 companies have been disinvested under the NDA rule) the expenditure on education and health has not increased proportionately under its rule. In fact Central expenditures on education and health as a percentage of GDP at current prices have remained almost constant during the period 1997-98 to 2001-02.
Source: Economic Survey, 2002-03
The fact that public expenditure on the social sectors as well as other sectors of the economy has stagnated under the NDA government is directly attributable to the tax concessions that the government has doled out to big business, which has resulted in substantial revenue losses. The tax-GDP ratio of the Centre has progressively declined under the NDA rule.
Source: Reserve Bank of India, Handbook of Statistics
What is noteworthy is that the revenue losses resulting from the successive tax cuts surpass the amounts mobilised through disinvestment by many times. The argument that the government is saving its scarce resources by disinvesting its stakes in public sector enterprises flies in the face of evidence (see chart below) that the government has forgone much more revenue through the tax concessions than what it gained through disinvestment.
Source: RBI, Handbook of Statistics and Ministry of Disinvestment
If the government had maintained the same tax-GDP ratio as it existed before the NDA assumed power (1997-98), much more revenue could have been mobilised than what the government earned through its programme of disinvestment. In 1999-00 and 2001-02 the tax revenue forsaken by the government (calculated by deducting the actual tax revenue from what the tax revenue would have been if the same tax-GDP ratio of 1997-98 was maintained) was 4.5 and 4.9 times more than the revenue earned through disinvestment, respectively.
The proportion of corporate taxes to GDP had significantly declined from 1.22% in 1995-96 to 0.53% in 2000-01. This decline partly reflects a fall in the tax rate during this period and partly the tax breaks given to corporate sector. So much so that the top 100 Indian corporate houses saved Rs 6853.64 crores and foreign owned companies saved Rs. 1268.41 in taxes in 2000-01 alone.
Tax savings by companies belonging to different categories in 2000-01
Actual Tax Paid (A)
Tax Payable at the Scheduled Rate#
Tax saved
Share in tax saved (%)
Top 100 Indian Houses
Foreign Controlled Companies
Other Indian Companies
All Companies
# The scheduled rate is 39.55% of profits applicable for the financial year
Source: Study by Dr. K.S.C.Rao of Institute for Studies in Industrial Development (ISID), New Delhi, based upon Prowess Corporate Data.
The effective tax rates for big business houses are far lower than the scheduled tax rate of 39.55% of profits.The Reliance group for instance made tax savings of Rs 1668 crores in 2000-01, paying at an effective tax rate of only 5.84% on its profits.
Major beneficiaries of corporate tax deductions 2000-01
Business House
Effective tax rate %
Source: Dr. Rao’s study based upon Prowess Corporate Database
Given the BJP’s ideological conviction to sell even profit-making PSUs, it is not surprising to see the entire process of disinvestments lacking any sound economic logic. The Minister of Disinvestment is perhaps the only seller in the world who maligns his own product before selling it. In order to justify the sellings, Mr. Arun Shourie has always projected each such unit as either as a loss making one or one experiencing declining profitability, thereby depressing its market price. As in the case of BALCO, which was a profitable and cash rich PSU with a very low debt equity ratio, the government first stalled its modernisation plans — which could have easily been done without recourse to additional budgetary support — and later repeatedly emphasised its reduced profitability as an excuse for selling it. Moreover the government has used the discounted cash flow method and not the replacement value method for pricing the units, which automatically sets the price much lower than the actual value of the PSUs’ assets.
Moreover, the whole strategy of time bound disinvestment adopted by the NDA government is erroneous, since it adversely affects the price at which equity is being sold. For example, the very announcement of the decision to sell VSNL stakes in April 2001 brought down the share price from Rs 400 to Rs 300 thereby reducing the final evaluated price. The formation of the bear cartel before the issue of ONGC and GAIL shares also points out to the opportunities provided by the time bound disinvestment policy of the government to unscrupulous businesses to manipulate the market That the units are also being sold at prices way below the market value of the assets was best illustrated in the sale of the Centaur Hotel which was bought at a price of Rs 83 crores from the government by Batra Hospitality and then sold to the Sahara group for Rs 115 crores within six months of its purchase. In the recent case of the sale of ONGC and GAIL shares, the price-earning ratio (offered share price divided by earning per share) was set at 9 to 10 which was way below the internationally prevalent rate of 15 to 20 for similar companies like BP or EXXON-MOBIL, thereby deliberately foregoing revenue worth thousands of crores.
That the disinvestment programme of the NDA Government has been a completely fraudulent exercise is borne out by the fact that not a single CAG Report on the sale of public sector assets have been brought out over the past four years. It is evident that disinvestment, far from being a means of releasing resources to invest into social sectors, has been a ploy to hand over public assets to domestic and foreign monopolies for a song. The record of unprecedented tax concessions and selling off national assets at heavily undervalued rates has obviously made this regime dear to the hearts of the big business. This accounts for the unlimited flow of resources into the election campaign of the BJP.