financing-the-stimulus

Context: In the backdrop of the relief and stimuli package that amounts to nearly 10% of the GDP,  , the anxiety seems to be visible on part of the government to contain the fiscal deficit.

More on the news

  • The government is looking out for the possible avenues to finance the stimulus. 
    • It is apparently hopeful that money could come partly from a new privatisation programme
    • The FM reiterated that privatisation — a policy that had already gained momentum in the last budget would now be the order of the day. 
    • Going by the early indicators of the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.

Need for Privatisation

  • The new PSEP has been presented as a strategic move intended to rationalise the public sector
  • But the manner in which government entities are sold to quickly raise revenues, it seems like an emergency move.
    • Before the COVID-19 crisis, the government required the privatisation money partly because its revenue (from GST among other things) was declining.
      • And this gap could only partly be filled by alternative sources of tax revenues such as that on fuel. 
    • Today, the government needs this money in order to contain the fiscal deficit. So, the privatisation programme has suddenly been expanded. 
      • While the Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year, Rs 1.2 lakh crore is now expected from disinvestment in central public sector enterprises.
      • The government approved the privatisation of BPCL and the Shipping Corporation of India
      • It also sold stakes in the Container Corporation of India, THDC and NEEPCO.
      • Some estimate that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore. 
      • If Air India also finds a buyer, the government could raise over Rs 1,05,000 crore.

Selling Family Silver : An analysis

  • Governments across the world resort to privatisation to fill budgetary gaps. 
  • But revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
    • Further, privatisation is a two-way street i.e. it requires a buyer and a seller. 
  • In the case of India, most industrialists are worried about running their current businesses
    • Policy uncertainty has been highlighted as a hurdle in doing business in India and the government has not alleviated their problems
    • Excessive political interference with the private sector makes owning an ex-government entity even riskier, especially if it is perceived as too big to fail.
    • If a handful of Indian capitalists are allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies. 
      • This could foster crony capitalism and may even result in the making of oligarchs.

Other ways to finance the Stimulus and associated caveats

  • Given that the government already increased the excise duty on petrol and diesel by Rs 3 per litre, the government will not be in a position to use this source of revenue again.
    • An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand. 
  • Even if some privatisation helps India financially, it seems that the government will need to borrow money it has to spend for helping the economy. 
    • External borrowing, however, is problematic. 
    • The only way governments pay back external borrowings is by prudent use of using borrowed capital to drive high GDP growth and generating revenues.
  • Secondly, the rupee is at its lowest level compared to the US dollar and any more devaluation will only make it harder for the government to pay back its debt. 
    • Since external borrowings must be paid back in borrowed currency, exports and foreign reserves (or gold reserves) are generally the only two reliable options to pay government debt. 
    • However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
    • Other countries may also move towards “atma nirbharta” and over-regulate imports.
  • Lastly, Indian industries are already a bit debt-laden. 
    • The risk in the banking sector, tight liquidity in debt markets, comparatively lower international borrowing rates and the RBI’s ECB rationalising measures have all likely compelled them to resort to overseas borrowing. 
    • More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects in turn  deterring foreign investments in the process.

 

A silver lining

  • India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs. 
    • The rest may have to come from privatisation, taxation, loans and more international aid. Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.

Source: https://indianexpress.com/article/opinion/columns/finanacial-package-relief-lockdown-nirmala-sithraman-stimulus-msme-6418147/

Image Source: The Financial Express