A debate on the monetisation of unutilised and under-utilised government and public sector assets has started with the introduction of a roadmap for monetisation in the Union budget.
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The debate got momentum with a speech made by Prime Minister in a webinar conducted by the Department of Investment and Public Asset Management. The Prime Minister is of the opinion that there is no need for the government to be in the business of business.
In the budget, the government proposed to launch a ‘National Monetisation Pipeline’ to assess the potential value of underutilised and unused government assets. To keep the whole process transparent, an asset monetisation dashboard will be created to track the progress and provide visibility to investors.
Monetisation of assets is not a new concept. A number of countries including the United States, Australia, Canada, France and China have effectively utilised this policy. In India too, the concept was suggested by a committee led by Vijay Kelkar on the roadmap for fiscal consolidation in 2012. The committee had suggested that the government start monetisation as a key instrument to raise resources for development. It asked the government to use these resources for financing infrastructure needs.
Why Monetisation:
The global pandemic impacts the economy and turns it into an economic crisis. It forced the government to increase spending to provide essential relief to vulnerable sections of the society. Thus, total expenditure of the government has jumped to ₹34.50 trillion against the target of ₹30.42 trillion. On the flip side, revenue of the government is shrinking. The result: a huge rise in borrowing. As yet, total borrowing has increased by 2.3 times, from ₹7.96 trillion to ₹18.49 trillion.
An increase in the borrowing also increases interest cost. The ratio of interest payment to revenue receipts was 36.3% in 2019-20. As per revised data, it has increased to 44.5% in the current fiscal year and is projected at an all-time high of 45.3% in 2021-22. Almost half of the revenue is going towards servicing old debts. To revive the economy, capital expenditure is indispensable.
In this backdrop, the government has already launched the National Infrastructure Pipeline (NIP), with 6,835 projects in December 2019. The project pipeline has been increased to 7,400. The NIP has its own specific target and the government is committed to achieve it in the coming years.
It called for a major increase in funding. Therefore, the government has increased capital expenditure to ₹4.39 trillion as against the budget target of ₹4.12 trillion in 2020-21. For 2021-22, the government has proposed to spend ₹5.54 trillion, which is 34.5% higher than the budgeted amount of 2020-21.
Now, the government found that monetisation of government- and public sector-owned assets would be an important financing option for new infrastructure construction. It is looking to monetise physical assets namely land, building, road, railway stations, immovable enemy properties etc.
Model for monetisation of assets:
The success of monetisation will depend upon the model of monetisation opted and the effectiveness with which it is executed. The government is looking at the Real Estate Investment Trusts (REITs) model for monetisation of assets.
Under REITs, the land assets are transferred to a trust providing investment opportunity for institutional investors. The National Highways Authority of India and Power Grid Corporation of India have been asked to sponsor one infrastructure investment trust to attract Development Finance Institutions and Foreign Institutional Investors.
The government has another option to lease or rent out the assets instead of going for monetisation. The first option may yield a stream of periodic income as non-tax revenue. But the government has opted for another option, which is monetisation, and it will generate one-time non-debt capital receipts.
The government expects monetisation will generate ₹2.5 trillion in non-debt capital revenue. The objective of asset monetisation is to raise resources for future investment into the sector. The Prime Minister has already stated that the amount garnered from monetisation will be put to public use.
A pipeline monetisation plan for Indian Oil, GAIL, and Hindustan Petroleum has been drawn up by the government. It is expected that the government will raise ₹0.17 trillion by selling stakes in these three companies.
To handle effectively the task of monetisation of assets, the government should constitute an independent commission clothed with requisite powers and staffed by professionals and researchers to formulate and implement its monetisation initiative.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.