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:
Sectors
(Rs. Cr.)
Part 1
Support for MSME, EPF, Liquidity scheme for NBFC/HFC/MFI, DISCOMs
5,94,550
Part 2
Foodgrain for Migrants, Interest subvention for MUDRA loans, Support to Street Vendors, NABARD, KCC
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.
