Disinvestment delay may affect revenue inflow

Opinion among analysts is veering round to the view that the government’s disinvestment agenda, which includes privatisation, is likely to get delayed. If this were to happen, it will impose a cost not just on the economy but also on the general level and sense of well-being.

The hope among government circles is that with the ferocity of the second Covid-19 wave abating, the much feared third wave will not turn out to be a lethal one even if it were to make a brief appearance. If this were to happen, the current financial year will see a proper recovery by achieving around 10 per cent growth that will go a part of the way in undoing the damage done by the massive 7.3 per cent economic contraction of last year.

A recovery must go hand in hand with an improving fiscal situation and for that to happen, the revenue from disinvestment will have to live up to expectations (2021-22 budget has anticipated a disinvestment bonanza of Rs 1.75 lakh crore against the paltry Rs 32,800 crore garnered last year). Conversely, disappointing disinvestment revenue will tie the government’s hands and not allow it to go in for the spending stimulus without which a proper recovery cannot take place.

What the government will not do to get resources to spend is to engage in a huge dose of deficit financing by placing bonds with the RBI and getting an accommodation, something that is commonly referred to as printing money. Finance Minister Nirmala Sitharaman has uttered an unambiguous “no” to this idea in Parliament.

So, the government is seeking to garner resources through two main routes — greater tax buoyancy and successful disinvestment. On tax buoyancy, there is a bit of a chicken-and-egg situation. If tax revenue rises robustly, the government will spend well and give a boost to the recovery momentum. But tax revenue will not rise robustly unless there is a recovery momentum.

So, we get back to disinvestment and privatisation which can have a degree of autonomy. Irrespective of how the recovery momentum picks up, disinvestment can go ahead, driven as it is by other factors. Thus we can have a situation where recovery is sluggish but disinvestment makes progress, putting some much needed resources in the government’s hands and enabling it to spend. This will give the recovery a push which will, in turn, bring in more revenue.

Right now, government sources are manfully asserting that the disinvestment agenda will be met, give or take a month or two. Some progress has indeed been made with the government receiving ‘expressions of interest’ from intending bidders, but the overall progress has been slow as bidders have been unable to do due diligence with necessary rigour because of travel restrictions imposed by partial lockdowns.

Three individual cases bear listing. The privatisation of Air India faces uncertainty with Cairn Energy seeking to lay its hands on the national carrier’s international assets. LIC’s IPO (initial public offering) process has slowed down because of Covid-19 related hurdles. And this in turn, has acted as a decelerator to the privatisation of Bharat Petroleum.

But what has really set back the whole idea of privatisation is the vulnerability that the government’s proposal to privatise two public sector banks has developed. Privatising public sector banks was a bold political idea which thereby became high profile. Political opposition to the move is there, but this was to be expected. What is more serious is the heightened balance sheet stress that the banks are facing as a result of the pandemic-induced slowdown in loan recovery. They are burdened with non-performing assets ranging between 9 and 16 per cent. Besides, demand for bank finance and therefore growth prospects have remained subdued because of the economic uncertainty.

NPAs (non-performing assets) belong to the past. What is critical for disinvestment or privatisation to succeed is the future. Can there be investor confidence that under

private management, these banks can be made to turn around and give a better account of themselves? This, in turn, is predicated on their market presence.

Large public sector banks have a wide reach through their massive branch networks and once potential borrowers know that their proposals will be dealt with professionally and promptly, they will eagerly come forward. But speculation over which are the two public sector banks whose privatisation has been proposed by the Niti Aayog indicates that they cannot be called truly large.

The whole issue is whether commercial banking as we know it has a bright future. If it does, then there will be no lack of investor interest. The success of the massive Zomato public issue and the general buoyancy of the stock market indicate that investors have the resources and the willingness to invest, provided they can get enthused by a business.

Right now, there does not appear to be any public enthusiasm over the privatisation of public sector banks and that is putting a damper on the whole idea of disinvestment. Hence, the speculation that a part or a lot of the disinvestment process will get delayed and carried over to the next financial year. This will have adverse revenue implications which will dampen the government’s urge to spend.

This brings us to the cardinal issue of the public’s sense of well-being. Distribution of highly subsidised or free rations is essential to take care of the plight of workers, particularly migrants, who are without income. Plus, small businesses remain in acute need of working capital to get their business going. The absolute priority for the government is to spend adequately in these two areas.

It has to do this either through growing revenue or by printing notes. When note printing is out, recovery is subdued and the disinvestment agenda is uncertain. It does not bode well for consumer confidence and the overall public sense of well-being.