The Budget has been widely praised for avoiding populist freebies before the coming state elections and focusing instead on a big investment thrust to accelerate economic growth and lift all boats. The black spot is the failure of privatisation this year and diminished hope for the future.
The current privatisation approach is a proven disaster. We need something different. One solution would be to sell 1% of the shares of selected PSUs every month at the going market price. That would avoid accusations of under-pricing and cronyism. Right now, we hear constant fears of what might go wrong and how structures and procedures must be devised to avoid scam accusations and ensure a good sale price. By all means address those issues, but meanwhile keep selling 1% per month so that money for fresh investment keeps rolling in and is not hostage to constant roadblocks from vested interests. Niti Aayog suggested an approach of this sort in the Arvind Panagariya era.
In many cases, fresh legislation is required to permit privatisation, creating procedural delays and inviting heated political and trade union opposition in each case. Instead, the government should pass one omnibus law authorising sales of any of its assets, overriding the original laws that gave it ownership. This will speed up sales and reduce political sensitivities.
Last year, the Budget projected asset sales of Rs 175,000 crore. The revised estimate is now just Rs 78,000 crore. In what looks like a despairing loss of confidence, the estimate for next year is even lower at Rs 68,000 crore.
Despite the spurt in GST collections and the attack on black money, the overall trend in revenues is simply not buoyant enough. Sitharaman’s Budget speech said there was “fiscal space” for a big investment thrust, but this was based on a bounce-back from Covid, and cannot be sustained. Rathin Roy, former member of the PM’s Economic Advisory Council, says there is an ongoing fiscal crisis demonstrated by the tax to GDP ratio, which was targeted at 8% from 2017-18 onwards but keeps falling short. Meanwhile, the ratio of interest to GDP rises inexorably as government debt keeps mounting. The only way forward is large-scale asset sales, but these have now foundered.
Finance Ministry sources are ambiguous about whether the Rs 78,000-core figure for asset sales this year includes proceeds from the IPO of the Life Insurance Corporation which officials hope to complete by March end. Maybe this will fetch a bonanza. But none should confuse an IPO with privatisation. The latter is a real structural reform ensuring a new management that improves future performance.
Almost two years ago the government decided to privatise heavyweights like BPCL, Container Corporation of India (CCI) and Shipping Corporation of India (SCI). Many hailed this as a breakthrough. Almost two years later, none of the three have been sold.
This is not the stuff that reforms are made of.
Last year’s Budget speech promised privatisation of two banks and one insurance company. This year’s speech was deafeningly silent on that.
Last year, Sitharaman announced a National Monetisation Pipeline that would sell a whopping Rs 600,000 crore of old infrastructure (such as ports, roads, airports, and rail routes) over four years to finance new infrastructure. Many of us hailed that as revolutionary. But what has actually happened? The Budget gives no clue about sales this year or next, or why the huge promised inflows have not materialised. It says nothing of the railway routes fiasco. The government called for bids for 151 privately-run passenger trains on 109 routes. It failed to get a single acceptable bid. Among other things, bidders had no faith in the proposed regulatory structure to give them a level playing field with government-run competition. Entrenched bureaucratic interests do not want loss of turf.
Government surrender to the farm agitation seems to have taken the wind out of the sails of radical change. Privatisation seems to be a casualty. If the BJP fares badly in the UP state election, it will unfortunately give further impetus to BJP factions that favour the promotion of communalism over economic change as the way forward.
Sitharaman needs a time-bound plan for asset sales, with bureaucratic responsibility clearly fixed and heads rolling after any serious failure. The government is often criticised for being too authoritarian, but asset sales require more toughness, not less.
In addition, she should announce a scheme to sell 1% of shares of select public sector undertakings every month. That will keep revenue rolling in while political sensitivity fades, setting the scene for eventual outright privatisation.
This article was originally published in The Times of India on February 5, 2022.