Spiralling Sensex, Stalled Disinvestment
In about seven weeks, the Government of India will unveil Budget 2021. The pandemic has unleashed death and destruction, dashing hopes and shrinking economies. The question haunting the budget is: Where is the money?
In February, the authors of India’s annual budget estimated India's GDP would touch around Rs 225 lakh crore in March 2021. India is currently in a technical recession and the consensus is that India’s GDP will be around Rs 195 lakh crore.
In February, the gap between the expenditure and income was estimated at Rs 7.96 lakh crore and this widened by October to around Rs 10 lakh crore. Indeed, the total fiscal deficit, of Centre and states -- which was 6.3 per cent of GDP is now estimated to be around 10.5 per cent -- could be above Rs 20 lakh crore.
It is true that frequency indicators show improvement and recent reports have forecast a better and earlier than expected recovery. This, though, does not diminish the challenges faced by the government. It must find resources for pump priming the economy, to propel growth to a level which ensures that the high level of deficit and debt are sustainable. The question which begs to be asked is what the moolah mantra for funding growth is.
For sure there is discussion about expenditure control, but the scope is limited given the need for government to fund investment and growth. Net direct tax collections are low and ramping up collection is constrained - there is only so much that can be garnered from an economy which is expected to contract by over 10 per cent and which would take time to normalise.
Intriguingly, there is a mystifying reticence to harvest the potential of raising revenues through disinvestments. Even as the stock markets and the Sensex are spiralling, disinvestment is stalled. Consider the circumstance to appreciate the opportunity that has passed by. Between March 23 and December 11, the benchmark BSE Sensex has shot up from 26,000 points to over 46,000 points.
Has the rise in the stock prices been leveraged? Sadly that is not the case. Budget 2020 set a target of Rs 2.1 lakh crore to be raised via disinvestment of public sector entities - new ETFs, listing of entities such as LIC and strategic sales. As per the data put out by Department of Investment and Public Asset Management, the total receipt from disinvestment in the current year is Rs 6,533.11 crore.
Consider the global context. In 2020, non-financial firms of the world have raised over USD 3.5 trillion from investors. Door- Dash, the food delivery enterprise which is yet to record profits, is valued at over USD 55 billion.
Airbnb touched valuations exceeding that of Expedia and Marriott. With interest rates hovering below 1 per cent and over USD 17 trillion locked in negative yield, investors across the world are chasing returns — and India is also a beneficiary if one looks at the portfolio flows.
So why wouldn't the government list the Life Insurance Corporation of India - as indeed it promised in Budget 2020 - to raise resources? Why not dilute government holding in banks below 50 per cent to enable better governance, raise cash, recapitalise banks so they can face competition from new entrants. Take strategic disinvestment.
For years, the go to line of governments has been disinvestment at the 'right valuation'. The right approach is to focus on the net present value of resources which can be realised - not just the preconceived valuation of what could be.
Arguably, given the state of the economy and global trade, the sales of BPCL or Air India may be challenged. Why not shift government holdings in a sovereign fund and raise resources against the assets first as debt and then cash from sales?
Also offerings can be segmented and disinvestment customised. Take the case of the pharma PSEs on the list. The world is scrambling for production facilities. Why not offer plug and play opportunities to Indian pharma with a global footprint and a toehold in the active pharma ingredient business? Why not invite transnationals to partner? Why not offer them to the global vaccine alliance GAVI?
The economic cost of government running businesses is illustrated by data. It is no secret that a third of the PSEs are haemorrhaging tax payer monies. Between 2010 and 2019, the cumulative losses of Public Sector Enterprises (PSEs) were over Rs 2.65 lakh crore. Add erosion of public wealth - which was worsening even before the pandemic.
Between March 2010 and March 2020, the value of all listed companies rose from Rs 61.65 lakh crore to over Rs 113.48 lakh crore whereas the value of listed PSEs slid from Rs 17.34 lakh crore to Rs 11.33 lakh crore - sure, there have been sales but there also have been new listings.
And the going is bound to be tougher given the advent of ESG norms embraced by global investors. The economic consequences of Covid will be felt long after the pandemic has abated. The challenge before the government is longitudinal - immediate, medium and long term. It needs a playbook for how it will fund social and economic development.
For starters, it may want to design a policy on PSEs. The political economy is at an inflection point. To paraphrase Emily Dickinson, it is useful to open every door to welcome dawn.
(The writer is author of 'The Gated Republic', 'Aadhaar: A Biometric History of India's 12 Digit
Revolution', and 'Accidental India' and can be contacted at firstname.lastname@example.org)