Moolah Mantra: Monetise Sarkari Silver For Real StimulusBloombergQuintOpinion
Money does not grow on trees. The wisdom wrapped in the old maxim though has not detained governments from latching onto expediency and printing money. To paraphrase Keynes, as facts change, conviction yields to circumstance and political convenience.
The circumstance is compelling. In a world adrift in uncertainty, governments have emerged as the last entity on the deck. The state aka government is the payer and lender of last resort. In their quest to save lives and livelihoods regimes locked down economies and engineered a tsunami of trillions as stimulus. Ceyhun Elgin, a scholar at Columbia University who is tracking fiscal stimulus packages, estimates the score currently stands at $7.2 trillion.
Last week India unveiled the promise of a stimulus package, estimated at 10 percent of gross domestic product or Rs 20 lakh crore. The consensus view is that the fiscal input in the stimulus is just around 1 percent of GDP or under Rs 2 lakh crore. The package failed expectations and has been described as fiscally frail, a lost opportunity, and even miserly.
Context Of Comorbidity
Timidity is rooted in trepidation. In India’s case, the big if is about a rating downgrade – India is just one step away from junk status.
The world over the accepted wisdom is that the greater risk to economies is not too much but too little spending.
Ideally, the sequence should have been:
- Monetary measures for stability and precluding systemic risk;
- Fiscal spending to preserve life and livelihood;
- A plan and matrix of funding the stimulus;
- Laying out the runaway of reforms for growth to inform investors and rating agencies.
Context is critical for policy. The gap between promise and pronouncement—belatedly dressed in ideology, of a regime against dole culture—is a consequence of comorbidity stemming from a slowing economy with GDP growth slowing quarter on quarter. This led to a deeper deficit and higher borrowings.
On Feb. 1, the Government of India announced that it would borrow Rs 7.96 lakh crore. On May 8, it clarified that gross borrowings would touch Rs 12 lakh crore. In other words, government borrowing would rise from Rs 2,181 crore per day to Rs 3,287 crore per day. Add the rise in states' borrowings, from Rs 6.4 lakh crore to Rs 10.6 lakh crore. Central and State governments together will borrow over Rs 22 lakh crore or over Rs 6,000 crore a day or Rs 250 crore an hour.
Fiscal vulnerability is exacerbated by poor visibility on revenues. On the expenditure side, the perpetual centre-state teeth-grinding on pending dues is aggravated by an inexplicable flow of steps. States have been corralled by conditions and forced to borrow at rates much higher than what it would have cost had the centre borrowed and distributed.
With the economy under Lockdown 4.0 and the unknowns ahead, the cost to be borne by the government is bound to rise further – particularly for funding health care, public works programmes, and managing systemic risks as the runway on earnings is yet clogged. The big question is how India will fund preservation and thereafter propulsion of the economy.
Borrowing Out Of The Trough
Can India borrow and spend its way out? Even if legislative constraints were to be set aside, mind you the one-time pause has already been triggered, there is the question of market mathematics, rather where the money will come from. Data on government borrowings makes it daunting, given that the government is already crowding out private India.
The politics of economics on borrowing is lathered in postulates. In theory, the government can sell paper to RBI to raise funds – for instance, to overcome the gap between income and cost, the U.S. Federal Reserve bought treasury bonds worth $2 trillion even though debt was at a historic high. Theory also suggests governments can print their way out. The theories though are caveated by the ‘conditions apply’ asterisk.
Ivory tower orthodoxy of the austere Austrian kind has it that if deficits and debt cause problems and hinder growth. Main-street orthodoxy sees rising borrowing as a social curse. Orthodoxy though has been challenged by a new heterodoxy that made its appearance in a seminal work by Olivier Blanchard, MIT economist, and luminary in public policy.
In January 2019, Blanchard, who has studied the implications of public debt, in his presidential address at the American Economists Association seeded the new thought. “High public debt is bad but may not be catastrophic. It is not as if I want more debt but I want to say if we raise more debt it is not the end of the world.”
The bottom line is it should be done for a reason. Most critical is sustainability – what matters is the cost of debt, interest needs to be lower than the nominal growth rate. For India the conditionality of sustainability is a tough ask – it confounds the risk rewards trade-off.
Can India raise money without flagging deficit and debt on the rating radar?
Economist Ajit Ranade, inspired by a proposition by policy guru Vijay Kelkar, has suggested that government, like promoters pledge its shares to RBI as a repo trade, and raise Rs 10 lakh crore against the shares.
The idea is conceptually interesting but is strategically problematic. There is the question over repurchase by government and the servicing of interest costs – the former may be postponed in perpetuity and the latter may just get monetised. It also lets the government off too easily from the need to restructure – what the government must do and must get out of.
Offload And Monetise Family Silver
Seven decades after the adoption of Harrod-Domar model and a quarter of a century after liberalisation, the government continues to be the biggest business house in the country. This is the most opportune moment to get the sarkar out of vyapar, government out of business.
Successive governments have repeatedly spoken about disinvestment, said what people want to hear but failed in translating words into action. Even the latest pronouncements are stranded in the contextual conundrum of what constitutes strategic.
The crisis is an opportunity to set up an India Investment Corporation, à la Temasek of Singapore, under a professional board accountable to the Comptroller and Auditor General, headed by a professional.
The government must then park its holdings—all 339 strategic and non-strategic public sector enterprises—in this corporation.
As of April 30, 2020, the combined market capitalisation of the PSEs is just over Rs 12.9 lakh crore. In March 2019, last data available, the PSEs paid dividend of over Rs 71,000 crore. India Investment Corporation could issue bonds, perpetual bonds if you please, to investors to raise dollar resources. The world over, pension funds and sovereign funds with over $50 trillion in assets are hunting for long-term paper. These bonds could also be issued to Indian high net worth individuals starving for stable investment options. Back of the envelope calculations reveal that, based on the underlying value of assets, at least Rs 2 lakh crore could be raised. The dividend payout would enable servicing the interest costs.
The underlying assets can be offered for global competitive bids thereafter – for instance, BPCL could be offered to Indian and global petro giants such as Reliance, Cairn, Armaco, ExxonMobil, BP, Total et al. BPCL is currently valued at over Rs 63,000 crore. Oil companies hunting for markets to push surplus oil may part with a premium for total management control and based on the global interest the government could raise substantial monies.
The government should also park the entire holding of SUUTI, in ITC and Axis Bank and other entities, worth Rs 44,000 crore in a silo in India Investment Corporation and call for competitive bids from the companies as also international investors such as foreign financial firms and even British American Tobacco which boasts of a market cap of over $80 billion.
The single most potent signal India can beam of its confidence would be the listing of the Life Insurance Corporation which is estimated to carry a value of between Rs 8 lakh crore and Rs 10 lakh crore. A public issue of 10 percent should first be to the Indian public for it is their company. The public offering could allow investment by foreign institutional investors too. Following price discovery, the government could follow up with a listing on an international bourse.
There will be the usual suspects sponsoring the usual theories about the right valuation and the right time. Fact is, the net present value of what can be realised now, even if at a discount, will be higher than the net present value of what the theorists will imagine the realisable value could be if and when listed.
As for timing, there is no right or wrong – if Reliance can propose a public issue why can’t the government.
This crisis must not be wasted. For over two decades India has suffered due to a strong political consensus on weak reforms. India can scarcely afford to be sanguine. The state of the economy calls for bold steps, not incrementalism – at stake are the lives and livelihoods of 1.35 billion people.
The commission which inquired into the 9/11 terror attacks in its conclusion observed that the attacks were less a failure of intelligence and more a failure of imagination. It is a lesson worth remembering.
Shankkar Aiyar, political-economy analyst, is the author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.