While the relief and stimuli package announced last week represents — as per the government’s claims — 10 per cent of India’s GDP, the government is obviously anxious to contain the fiscal deficit. It is apparently hopeful that money could come partly from a new privatisation programme. Finance Minister Nirmala Sitharaman, while announcing the fifth tranche of the Rs 20 lakh crore stimulus package, said that privatisation — a policy that had already gained momentum in the last budget (with Air India and Life Insurance Corporation on the top of the list) — would now be the order of the day. According to 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.
Sitharaman has presented the new PSEP as a strategic move intended to rationalise the public sector. But the way India is trying to quickly raise revenue by selling government entities, it looks like an emergency move. Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue (from GST among other things) was declining, and this void 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.
Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India, in addition to selling stakes in the Container Corporation of India, THDC and NEEPCO. The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year. It now wants it completed earlier. Some estimate that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore. Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.
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.
Secondly, privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers? Most industrialists are worried about running their current businesses. Policy uncertainty has time and again 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.
A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs. If they were 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.
Where else can the government find the money it needs? It already increased the excise duty on petrol and diesel by Rs 3 per litre on March 13 — the steepest hike since 2012. The government imposed additional taxes while global crude oil prices fell. As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
Such a move would contradict the very idea of a relief and stimulus package anyway. 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 before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle. And that’s why their investment rate had never been this low, in the 21st century at least.
Even if some privatisation helps India financially, it seems that the country 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 wisely using borrowed capital to drive high GDP growth and generating revenues, which is unlikely to happen any time soon as a recession is round the corner.
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 (the third one being borrowing more to pay back the previous debts — a slippery slope) 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 “atmanirbharta” 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 — deterring foreign investments in the process.
On the positive side, 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. India may help others, but it needs aid too.
This article first appeared in the print edition on May 20, 2020 under the title ‘Financing the stimulus’. Jaffrelot is senior research fellow at CERI-Sciences Po/CNRS, Paris, professor of Indian Politics and Sociology at King’s India Institute, London. Jumle is a project officer at TRAFFIC WWF India. Views are personal.