Financing the Stimulus: Privatization

ECONOMY/ GOVERNANCE

Topic: General Studies 2,3:

• Indian Economy and issues relating to planning, mobilization, of resources 
• Government policies and interventions for development in various sectors 

Financing the Stimulus: Privatization

Context: As the government announced COVID relief & stimuli package equivalent to nearly 10% of India’s GDP, there are questions regarding the means to finance it

Overall Stimulus provided by Atmanirbhar Bharat Package is as follows:

Can government find the money through increase in fuel tax?

• Government has already increased the excise duty on petrol and diesel by Rs 3 per litre in March, hence the space for further increase is less
• Also, such a move would contradict the very idea of a relief and stimulus package. This is because an increase in the fuel price would affect purchasing power especially that of poor

Can government fund the package through borrowings?

• The rupee is at its lowest level compared to the US dollar and any borrowings will 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 are generally the only two reliable options to pay back debt.
• However, with inevitable global slowdown there will be consequent drop in exports which impacts India’s debt repaying ability
• More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment ratings
• On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs

Privatization as a route to finance the relief package

• Governments across the world are resorting to privatisation to fill budgetary gaps
• According to India’s new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four PSUs
• Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue (from GST among other things) was declining
• Today, the government needs this money to fund the relief package without excessively crossing the fiscal limits
• Government is planning the privatization of BPCL, Shipping Corporation of India, Container Corporation of India, THDC, NEEPCO and Air India among other PSUs

Challenges with regard to Privatization

• Revenue from privatisation is a one-off benefit 
• Generally, only profit-making PSUs are sold at a good price.
• Successful privatisation requires a prospective buyer. In the present slowdown times, Industrialists are facing problems running their own business
• Excessive political interference with the private sector makes owning an ex-government entity even riskier thus discouraging participation in privatization process
• A handful of Indian capitalists who are capable of buying big PSUs leads to sectors of economy coming under the influence of quasi-monopolies
• Buying of PSUs by few Capitalists could also foster crony capitalism and may even result in the making of oligarchs.

Conclusion

Funding has to come from privatisation, taxation, loans and international aid.

Connecting the dots:

• 1991 LPG reforms – Critical Analysis
• Investment Models