The borrowings of India’s Oil and Natural Gas Corporation (ONGC), until recently a largely debt-free public sector undertaking (PSU), should figure prominently in the essential readings of Modinomics.

The government recently decided that its growing expenditure-revenue gap in 2017-18, partly caused by lower Goods and Services Tax collections, must be fixed by milking the profitable oil public sector undertaking (PSU).

So a bizarre idea was born in the name of creating “synergy between two big government owned PSUs”, namely between ONGC and Hindustan Petroleum Corporation Ltd (HPCL).

Since the government is the owner of both PSUs, all it had to do was sell its 51% stake in HPCL to ONGC and transfer nearly Rs 37,000 crore into the Centre’s kitty. With this, the divestment target for this year was more than met. Of course one wonders, if large-ticket deals like this can be carried out so easily, why make any effort to divest small stakes in a large number of PSUs?

To facilitate these financial acrobatics however, ONGC, which has been a debt-free company till now, will be forced to borrow from the market to fund the proposed acquisition of HPCL.

This comes on the back of a puzzling deal earlier this fiscal. In August 2017, ONGC officially acquired an 80% stake in Gujarat State Petroleum Corporation’s (GSPC) KG basin gas block for Rs 7,738 crore. That deal left analysts puzzled as GSPC had struggled to start production from the block after investing as much as Rs 20,000 crore. This pushed it into a tough financial corner, leaving it struggling to repay massive borrowings from PSU banks.

What should we take away from this? Firstly, ONGC has acquired the status of the chief milch cow of the Modi government. Whether it is to rescue GSPC or to fix the fiscal deficit of the Centre, ONGC is the new Kamadhenu. Mind you, in both cases, the Centre and Gujarat government should have borrowed from the market to pay for the deficits in the balance sheet of the Centre and GSPC. But ONGC was used to hide these gaps.

The national auditor had slammed the GSPC for mismanagement of its investment in the oil block. In 2005, Narendra Modi, the then Gujarat chief minister, had announced that the GSPC’s KG basin block had 20 trillion cubic feet (tcf) gas. But now it turns out that proven reserves were much less than that. So GSPC was merged with cash-rich ONGC.

ONGC chairman Shashi Shanker has said that the company will use a mix of cash and debt to finance the HPCL deal. Why should ONGC borrow for bridging the Centre’s fiscal deficit? ONGC management has confirmed that after the government gave its nod for the ONGC-HPCL merger last week, ONGC board approved a 40% hike in the PSU’s borrowing limit – from Rs 25,000 crore to Rs 35,000 crore.

“We will use our (Rs 12,000-13,000 crore) cash first and then the liquid assets (ONGC’s stakes in IOC and Gail India) and debt will be last,” Shanker told reporters. “This order can change, because we won’t sell the liquid assets in distress. Also, we have offers for over Rs 50,000 crore debt at very competitive rates, both foreign currency and local.”

The market knows what ONGC is being subjected to. Crude prices have shot up 40% in the past six months. ONGC therefore has a lot of cash in its kitty. This will now be transferred to the Centre which is selling 51% of HPCL. The stock market is not impressed because it knows ONGC has lost much credibility.

And it isn’t just ONGC. Over the last year, the idea of a merger among IOC, Oil India and Gail India is being tossed around so that the Centre can collect easy money by selling its share in one company to another. As the government’s fiscal position remains shaky, there is a fear that it could be tempted to use the specious argument of ‘building synergies and integration’ among oil PSUs as a means to collect more money from the balance sheets of these PSUs.

All that this exercise ends up doing, though, is replacing the Centre’s borrowings with that of the PSUs. Crucially, it hobbles the finances of India’s PSUs.

For the HPCL deal, ONGC will have to rely on market borrowings of over Rs 20,000 crore. It has already signed pacts with three domestic banks – Punjab National Bank, Bank of India and Axis Bank – to raise over Rs 17,000 crore to finance the acquisition.

As per disclosures made by the company to stock market watchdog SEBI on Tuesday, ONGC has secured lending commitment of Rs 10,000 crore from PNB, Rs 4,460 crore from Bank of India and Rs 3,000 crore from Axis Bank.

These borrowings will also have significant implications for the PSU’s operations abroad. ONGC Videsh (OVL), a 100% subsidiary of ONGC, has been using its parent company’s debt-free balance sheets to raise cheaper funds from the international market to finance its acquisition of oil and gas assets abroad. Once ONGC becomes indebted, the costs of funds could rise for OVL, hurting its ability to acquire hydrocarbon assets overseas to ensure country’s energy security, said analysts.

The government maintains that future proposed mergers will lead to creation of an Indian public sector giant that would be able to take on international competition. ”It will give them (the oil PSUs which will be merged) capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders,” finance minister Arun Jaitley had said while presenting the Union budget 2017-18.

But does the government have a plan for how the merged entities will integrate in terms of management practices and culture? Such mergers will also bring complexity in terms of differences in work culture. This concern was flagged by Kirit Parikh, the former member of Planning Commission.

The plain truth is if there are six large oil companies and the government decides to sell big chunks of one company to another, it will end up taking massive amounts of cash out of the PSU system to fund its fiscal gap. And this is happening at a time when these PSUs are the only ones investing in the economy and are not hugely debt-ridden like the big groups in the private sector.