Since the 1991 balance of payments (BoP) crisis, India has witnessed bouts of economic crisis — current account deficit, inflation, fiscal deficit, banking — of various magnitudes. For the first time in a generation, the country faces a different kind of crisis it’s not used to: a growth crisis. The National Statistical Office (NSO) has forecast an expansion of 5% for the current fiscal, an 11-year low. Depending on where one stands, this could not have come at a better or worse time. For policymakers, it’s a nightmare ahead of the budget. For lobbyists, it’s the right time to push their agenda.
In keeping with pre-budget tradition, the beauty parade of industrialists, economists, investment managers and other experts has started in earnest. They have identified the cause of the problem and have solutions in hand.
For the industry lobby, it is GST. So, the magic wand is lowering the tax rates so that goods and services become affordable. Economists would say GoI’s imprudent financial management that crowded out private investment is the root cause of all ills.
Investment managers fixated on outperformance on returns from stocks and bonds have identified banks’ risk aversion in doling out loans to corporates and NBFCs as the Gordian Knot. To revive growth, they recommend doing away with dividend distribution tax (DDT) and securities transaction tax.
All of these are beneficial. But they address pockets of the economy. The catch is that GoI’s balance sheet looks more like a debt-laden Indian conglomerate’s than that of a frugal Indian saver. So, borrowing your way out is not an option without a bigger crisis two years down the line. Many solutions are piecemeal. This is the time for a surgery, not band-aids.
At last week’s Suresh Tendulkar Memorial Lecture in Mumbai, Singaporean policymaker Tharman Shanmugaratnam touched upon the ‘big picture’ problem and likely solutions. The problem, according to him, is that ‘statism is still hanging over the economy’. And to overcome it, there is a need to ‘reorient the role of the government’. Approach to economic policies has changed substantially since 1991. But it remains limited to private sector freedom. Rules governing financial resources utilisation and the State’s visible hand in business via the Leviathan public sector banks (PSBs) and metal makers remains.
Financial repression has been less talked about. Investment rules for Employee Provident Fund Organisation (EPFO), insurers and banks tailored to fund government borrowing needs to change. More than half the savings through these vehicles end up funding the state budget. It’s a double whammy. It eats up investments, and deprives savers higher income in their retired life.
Some of the biggest buyers of Indian assets are retirees from Canada and Scandinavian countries. The likes of Canadian Pension Fund, Blackstone and GIC of Singapore are earning as high as 14-16% from Indian roads and power transmission assets. On the other hand, Indian pensioners earn 6-7% from government bonds. Letting these long-term funds to structure and buy income-earning assets could provide higher returns for savers and relieve GoI from stretching its balance sheet. Slowing growth has led to calls of higher GST. But higher indirect tax rate not only conflicts with a record low corporate tax rate, but would also worsen already weak demand.
When options are limited, ‘reorienting’ the State’s priorities is applicable to the businesses it owns. When capital was scarce, taxpayer money was funnelled into building steel factories, power plants, telephones and even tractors and watches. When distressed corporations and individuals sell off assets for a better financial future, why should it be any different for a State?
Over the years, many of these have lost value because of private competition. But some still carry value, and could turn bigger like Hindustan ZincNSE -1.51 %, or VSNL that is now with the Tatas. The longer the State holds on to these corporations, the steeper the value erosion for entities like Air India, BSNL and PSBs.
Privatisation not only raises resources for the State to provide a social safety net, but it also frees up space for it to create capacity in social infrastructure.
Attempts so far have been half-hearted. Instead of merely conducting accounting exercises — like selling Hindustan Petroleum to ONGC, or Power Finance Corp buying Rural Electricity Corp — to fill the budget gap, the aim should be to transfer private resources to the State through outright sale.
Monetisation of assets first came up during the BoP crisis, and finance minister Manmohan Singh began by selling small stakes in State-run companies. It can’t be the same today. This may be the time to complete the circle with a determined policy to exit businesses, leaving it to entrepreneurs while the State provides better schools, hospitals and retirement plans.
Views expressed here are the author’s own, and not Economictimes.com’s