Govt may pledge Suuti assets to cut deficit

With planned divestments difficult to push through in the face of political opposition and the current market conditions far from conducive, the Union government has decided to take the easiest alternative route to meet its budgetary shortfall for the fiscal — pledge assets.

The government plans to borrow Rs50,000 crore against the assets of the Specified Undertaking of The Unit Trust of India (Suuti), Bloomberg reported on Thursday, citing two government officials.

According to the report, the plan involves dissolving Suuti, transferring its assets to a newly-formed fund manager and using the money borrowed against these assets to cover the shortfall in targeted divestment. The new fund manager will be set up by January 15 and Suuti would be wound up within three weeks, it said.

Suuti was formed from the restructuring of the erstwhile Unit Trust of India (UTI) after the collapse of its assured return schemes. Its assets include stakes in Axis Bank (23.58%), ITC (11.54%) and Larsen & Toubro (8.27%), totaling Rs31,916 crore in value at Thursday’s closing prices.

Market mavens, however, are far from excited by the impending move.

“Markets are unlikely to take huge positives from this step as it’s a kind of patch-up job; a change in the accounting treatment. There are other policy concerns and even decision making has not been steady with the government reversing its own stand too often,” said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services.

Another expert said the move cannot be held to be the equivalent of normal divestment since there is no cash generation. “This is a kind of window dressing. It’s a poor way to meet its targets,” he said on the condition of anonymity.

Incidentally, the Reserve Bank of India on Thursday termed the likelihood of the government meeting its deficit target “unlikely” (the report did not factor in the possibility of Suuti assets being pledged).

“The fiscal situation remains challenging as the revenue collections were lower than expected in the first half of the current year. The stress is likely to aggravate as the risks of fiscal slippage have increased during the current year. Slowdown in revenue collections and the potential rise in food, fertiliser and fuel subsidies may make attaining the budgetary target of fiscal deficit of 4.6% of GDP for 2011-12 challenging,” it said in its Financial Stability Report.

The government had in its budget announced plans to sell its stakes in various public sector companies to raise Rs40,000 crore.
The plans, however, were hit by a weak stock market, and the government has only managed to raise Rs1,165 crore, or 2.9%, of the targeted amount.

The BSE Sensex, whose movements are seen to be representative of the market at large, has fallen 18.68% since the beginning of the financial year, closing Thursday at 15813.36 compared with 19445.22 on March 31.

If the capital raised by pledging Suuti stake is used to meet the divestment target, it will help narrow the fiscal deficit, or the difference between the government’s revenues and expenditure.
In its budget, the government had estimated its fiscal deficit at 4.6% of the gross domestic product, or the total value of the goods and services produced in the country.

However, it hinted earlier this month that these figures are likely to be missed.

International rating agency Moody’s has, in fact, pegged fiscal deficit for this fiscal at 7.6%.

Gaurav Kapur, senior economist, RBS, said there would be some slippage even after pledging the assets of Suuti. “This move will cover the Rs40,000 crore, which the government needs in terms of the disinvestment target. I think the fiscal deficit would still be around 1% higher than what is projected in the budget purely because of higher subsidies,” he said.