A monetisation move that doesn’t tick most boxes

The Government haslaunched a National Moneti-sation Pipeline, or NMP

(https://bit.ly/3mLkw9M) to sellpublic assets or, more precisely,their revenue streams over thenext four years. The pipelinemostly includes railway stations,freight corridors, airports, and re-novated national highway seg-ments (yielding toll revenue)amounting to ₹�6-lakh crore, or 3%of GDP in 2020-21.

As outlined in the Union Bud-get, the NMP aims to mobilise re-sources for fi�nancing infrastruc-ture. The other two methods ofraising resources are: setting up ofa development fi�nance institution(DFI) and raising the share of in-frastructure investment in the cen-tral and State Budgets.

Hard questionsThe proposed asset sale (moneti-sation) raises many questions.Conceptually, how is it diff�erentfrom disinvestment and privatisa-tion (D-P) practised for the lastthree decades? Since D-P proceeds(revenues) have seriously missedthe targets almost every year, howbelievable are the NMP targets?And how are they likely to performdiff�erently? Is the NMP a desperateattempt to shore up public fi�nanc-es, after nearly two years of dismaloutput growth, stagnant tax-GDPratio despite the steep rise in taxeson petroleum products? If so, issuch a distress (fi�re) sale desirableto obtain a “fair value” for publicassets? Would the market not fac-tor in the dire state of the economyin beating down the prices, as inany distress sale?

The NMP diff�erentiates “assetmonetisation” from “asset sale” bysaying: “Asset Monetisation, as en-

visaged here, entails a limited pe-riod license/lease of an asset,owned by the government or a pu-blic authority, to a private sectorentity for an upfront or periodicconsideration” (NMP, volume 1,page 5).

Asset monetisation as defi�nedabove is the same as the net pre-sent value (NPV) of the futurestream of revenue with an implicitinterest rate (whether it is a sale orlease of the asset). In a footnote,the NMP document further clari-fi�es: “Sale, i.e. transfer of legal ow-nership of assets is only envisagedin cases such as disinvestment ofstake, etc.”. Again there seems tobe conceptual confusion. Sale ofminority equity does not lead to achange in managerial control.Hence, the offi�cial attempt to diff�e-rentiate its initiative from the ear-lier eff�orts seems feeble andincorrect.

Historic misstepsThe NMP outlines mainly twomodes of implementing the mone-tisation: public-private partner-ship (PPP) and “structured fi�nanc-ing” to tap the stock market. PPPin infrastructure has been a fi�nan-cial disaster in India, as evidentfrom what happened after the eco-nomic boom of 2003-08. Surely,India did create world-class air-ports in Mumbai and Delhi andspeeded up highway roadreconstruction.

However, after the 2008 fi�nan-cial crisis, as the world economyand trade plummeted, and as In-dia’s GDP growth rate sloweddown sharply, hurting demand(and revenues for the indebtedcompanies), many PPP projectsfailed to repay bank loans. Bankswere left holding the non-perform-ing assets (NPAs). Further, as thebulk of the lending was to political-ly connected corporate housesand fi�rms (Bollygarchs as pictures-quely described by James Crabtreein his book, The Billionaire Raj),debt resolution came in the cross-hairs of the political and bankingsystem. India is still reeling from

the legacy of that period withoutany easy and credible solutions insight.

An Infrastructure InvestmentTrust (InvIT) is being mooted as analternative means of raising fi�-nance from the stock market. Inprinciple, InvIT is much like a mu-tual fund, whose performance islargely linked to stock prices. Itmay be worthwhile to jog one’smemory to recall how the disin-vestment process began in 1991 af-ter the initiation of economic re-forms. It was by “off�-loading”bundles of shares of public sectorenterprises (PSEs) to the fi�nancialinstitution UTI, which in turn soldthe bundles in the booming secon-dary stock market to realise thebest price. The euphoria wasshort-lived, however, as the mar-ket crashed in the wake of the Har-shad Mehta scam, stalling and dis-crediting the disinvestmentprocess for almost the entire de-cade.

Hence, it may be worth learningthe lessons from the historical mis-steps before getting enamouredwith the idea all over again by thecurrent stock market boom. Asmany have apprehended, the cur-rently high stock prices seem like abubble with heightened uncer-tainties in the global fi�nancial mar-ket.

With the U.S. Fed committed toreducing its assets purchase pro-gramme (known as quantitativeeasing), the “hot money” infl�owthat has fuelled Indian stock pricesmay dry up throwing up nastysurprises.

In 2020-21, the economy con-tracted by 8% due to the pandemic

and lockdown, as in the annual re-port of the Reserve Bank of India(RBI). The current year is at bestlikely to regain the pre-pandemicGDP level. Aggregate saving andinvestment rates (that is, as ratiosof GDP) have (expectedly) con-tracted. The stock market is ho-wever booming, dancing to short-term foreign capital infl�ows, withlittle connection with the real eco-nomy. Given its distressed state,the asset monetisation eff�ort ap-pears nothing short of a fi�re sale.

Other solutionsThus, it seems unwise to anchorthe acutely needed investment re-vival strategy on a discredited PPPmodel or on fi�ckle Foreign Institu-tional Investors (FII) investment ina frothy stock market. Instead ofassets monetisation, why not mo-netise debt, with committed bor-rowing from the market and thecentral bank? With the fi�nancialsystem fl�ush with liquidity with notakers for bank credit, why not fi�-nance the proposed investment —as envisaged in the Budget — by go-vernment borrowing. The usualobjections against such an idea arethree: cost of borrowing, “crowd-ing-out” of private investment,and the infl�ationary threat.

The RBI’s annual report showsthe weighted average cost of cen-tral government borrowings in2020-21 was 5.8%. And the infl�a-tion rate as measured by the con-sumer price index (CPI-combined)was 6.2%. Thus, with a negative0.4% real interest rate (real inter-est rate is nominal interest rate mi-nus infl�ation rate), domestic bor-rowing in home currency is a steal.Chances of crowding-out privateinvestments are remote with a li-quidity overhang in the market.Infl�ation risk is also limited withlittle aggregate demand pressures(barring temporary bottlenecksdue to localised lockdowns).

The rising public debt to GDPratio is often red-fl�agged as a po-tential risk to rating downgrade bybond rating agencies. If the debt isproductively used to expand GDP

(the denominator), such risksseem minimal. Moreover, risingexternal debt by fi�ckle portfolio in-vestors perhaps carries a greaterrisk to external instability. Foreignportfolio investment has skyrock-eted by 6,800% in 2020-21, overthe previous year, to $38 billion (asper RBI data released in May).This, perhaps, poses a greater fi�-nancial hazard than the potentialrise in debt monetisation in dom-estic currency used for productivepurposes.

In perspectiveTo sum up, the NMP is an ambi-tious “retail” sale or lease of reve-nue yielding public capital pro-jects — with the potential threats ofallegations of corruption and cro-nyism derailing the process — torevive investment demand and tohalt the economic decline. Themain instruments proposed forimplementing the NMP are public-private partnerships and a stockmarket-based investment trust (In-vIT). Both have serious shortcom-ings, as experience demonstrates.The NMP document seems silenton how to overcome past mis-takes. Hence, the NMP appearslike a fi�re sale which may not helprealise the best social value for pu-blic assets to kick-start investmentdemand.

If reviving investment demandquickly is the real goal, debt mone-tisation seems a better option thanasset monetisation. It is a “whole-sale” business with lower operat-ing and transaction costs, and at acurrently negative interest rate.With excess liquidity in the fi�nan-cial markets, and low aggregatedemand, the infl�ationary threatseems minimal. Such targeted bor-rowing, if quickly funnelled intoinfrastructure investment pro-jects, could crowd-in (or bring in)private investment igniting a virtu-ous cycle of investment-led eco-nomic revival.

R. Nagaraj is with the Centre forDevelopment Studies,Thiruvananthapuram, Kerala

A monetisation move that doesn’t tick most boxesThe National Monetisation Pipeline may not help realise the best value for public assets to kick-start investment demand

R. Nagaraj

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