Privatisation - A Growth Hack?
In this week's FinMail we will look at how the government will utilize its assets to monetize and further why it is stressing so much to hand over the businesses to private players lately.
On Monday this week, FM Nirmala Sitharaman revealed the 'National Monetisation Pipeline' which she announced in this year's Union Budget. Niti Aayog, think tank of government was entrusted with the task to form the National Monetisation Pipeline which the FM revealed on Monday. Through the Monetisation plan, the government expects to generate revenues worth ₹6 lakh crore over the next 4 years. (FY22-FY25) The Monetisation Pipeline expects to unlock value from the idle assets of the government by inviting private companies in Infrastructure Sectors like Roads, Railways, Power, Telecom, Gas, Mining, Aviation, Warehousing, Ports and Stadiums.
Before we deep dive into today's topic which is Privatisation, let us quickly look over what Asset Monetisation means and also understand how does this small piece of the puzzle fit into the large picture that the government wants to create.
Asset Monetisation and Asset Selling
Asset Monetisation and Selling Assets are not one and the same thing and thus the ₹6 lakh crore that the government expects will not technically arrive from selling the government's assets. So let us help you understand Asset Monetisation with an analogy.
So, let's assume that you have an extra car which you rarely use. And one fine day, you decide to make good use of it to generate some cash. It is an asset but a depreciating one, so you can't really hold onto it forever and wait for it to appreciate. So you have two options basically, you can either sell it and have yourself some hard cash, that is asset selling as we know. Or you can rent it out to someone for a specific period of time, you get rental income plus you still remain the owner of that car. That is called asset monetization - the action or process of earning revenue from an idle asset.
Pretty simple, right?
Asset Monetization Pipeline:
Asset Monetisation is a small piece of the government's big plan to ramp up the economy's growth by substantially investing in Infrastructure. The government believes that Investment in Infrastructure is necessary for the accelerated socio-economic development of a country. And that is why The National Infrastructure Pipeline (NIP) was introduced which aimed to invest ₹111 lakh crore over a five-year period (FY20-FY25). Now, the Asset Monetisation falls under this plan which will help the government finance its Infrastructure Pipeline. Asset Monetisation is expected to fund about 5-6% need of the ₹111 lakh crore investment. About 40% is proposed to be raised through extrabudgetary resources/private sector investment, in form of debt from bond markets/banks/NBFCs, by the way of equity from private developers/internal accruals of PSUs and external aid.
Let's keep the details aside (probably for a whole new FinMail) and bring it down to basics which is that the government will lease out/rent out its idle/underutilized assets under the monetization plan to private entities. And that's not a new thing. Bringing private entities into the game has been an active plan that the current NaMo government has been following. Be it through Public-Private Partnership (PPP), asset monetization or completely selling the assets. It is crystal clear that the government no longer wants to be in the business of running businesses.
And that is what we are going to discuss in this FinMail. Why the heck does the government want to Privatise all the non-strategic sectors? What was the reason they were in their hands at first? And why does this sudden change of mind? All in this one. Let's just start now.
Why is the government is suddenly selling/Monetising its assets?
Privatization has been a focus of the NaMo Government for quite a long time, the government has been clear that it has no plan to be in business and want to carry on with the governance only and indeed slowly and gradually they were getting there to achieve their goal of getting out of running the businesses and handing over the same to private entities. The privatization plan was on track but then pandemic happened. As the lockdown was imposed on economic activities, tax revenues dropped. On the other hand, expenditure on public welfare to revive the economy shot up which created a huge gap between the revenue and expenditure of the government.
Generally, the government spends more than what it earns i.e. Expenditure > Revenue, the difference between expenditure and revenue is called fiscal deficit, in simpler terms - fiscal gap. This gap was 4.59% of the GDP in 2019-20 and touched 9.3% in 2020-21.
And one way to fill up this gap is through divesting the money(Opposite of Investing) from PSUs & assets it owns &/or their monetization.
So ultimately, the government gets the money to fill that fiscal gap we just talked about. And thus, the plan was on track before Covid and after Covid, the process just accelerated. So it's basically a win.
Plus the government no longer has to carry the burden of running those companies and they can focus on their core work which is to make policy-making decisions. Win.
Plus, private entities work with a clear mindset of making money out of the process. Thus, they are efficient and more productive than PSUs. You know that, right? More efficiency = more growth. Win.
So you see, how it's a win-win-win for the government?
That's it? Not at all. Let's further look at how privatization can pull up the development game of India. But, if the government wanted to privatize its assets in the end then,
Why the government itself took the charge to run business in the first place?
When Britishers left, India was not in the position to have sufficient resources and enough private entities to run any businesses on their own. We lacked not only resources but also expertise, and infrastructure so starting a business, setting up industries at that time meant heavy investment and guess who was capable enough to deliver that? Of course, the government.
The government stepped in and kept most of the industrial sectors with itself. Foreign companies were also capable to heavily invest but that was the last thing that India wanted. Fast forward to 1991, Liberalisation, Privatisation & Globalisation (LPG) was introduced under which the government decided to let the businesses run on their own with the least interference possible of the government at that time. Cut to the present, the government realised that they can't just run the country, do the policy framework, deal with the advanced challenges while taking a burden of the companies they are running simultaneously.
We have seen many PSU companies failing due to a lack of advancements and competition from the private sector companies. As a result, many of them have turned into a loss-making machines! Here are some numbers.
Inefficiency of PSUs
In India, 70 PSUs were in a loss as of 31st March 2019, with their total stress amounting to over ₹31,000 crore collectively. Out of these, Air India, BSNL and MTNL were the top three loss-making PSUs in fiscal 2018-19.
The aggregate loss of the 19 PSU Banks stood at ₹54,854.3 crore in FY19, which was ₹72,547.1 crore in FY18. Meanwhile, the 18 private banks posted an aggregate profit of ₹47,583.82 crore and ₹45,947.31 crore in FY18.
As a result, govt will infuse ₹20,000 crores in Public Sector Banks in the current financial year to recapitalise them. If you are thinking that's a lot, let us tell you that there's nothing new here, government has spent thousands of crores to recapitalise the PSU banks through the years so that they can continue their operations, well, because they are banks and banks shouldn't fail.
A larger section of middle-class income plus the lower ended income class have their bank accounts with PSU banks because, well, they think that their money is safe if it is a government bank and thus they won't run away with their money. So if the government lets a bank go bankrupt, it hurts the publicsentiments andthe government's reputation too.
But the government now thinks that it has had its fair amount of time trying to run inefficient companies, and thus they no longer want to carry on dealing with them.
The government has announced in this year's budget that it will be privatising over 100 PSUs in the upcoming years. And that's what the PM quoted on the issue,
"It is the government's duty to support enterprises and businesses. But it is not essential that it should own and run enterprises. There was a different time when public sector enterprises were established and the needs were also different, There is always scope to reform the policy which was good 50-60 years ago. Now when we are bringing reform, our aim is to optimally utilise public money. We cannot continue with public entities just because they have been operational for so long. The government's focus should be on the welfare of society and policies related to people. It sounds like misusing the talent of our officers to keep them in the business operation of public entities."
What does Privatisation bring to the table for the government?
Well, you probably can answer this yourself but let's go over this question for the sake of understanding. The primary and fundamental difference between a government-owned company and a privately owned company is that the former one's focus is to serve and thus profit-earning takes a back seat while the latter one focuses on profits by serving to the section of customers that is more profitable to them.
Private Companies focus on maximizing their profits and hence also focus on optimizing their usage of assets and resources. And when the primary focus is on earning profits, they don't take over a minute of time to eliminate inefficient resources even if it is an employee. And thus, in this way, they also optimize their quality of service so that they stand out from their competitors to earn more market share. And thus, in the pursuit of profits, most of the time the customer enjoys benefits as well. In short, Private companies take care of their customers, earn profits, ensure quality and thus contribute to creating wealth in society.
While on the other hand, the government companies (you know what we are going to tell, right?) are inefficient, the employees (well) enjoy job security and thus aren't really efficient, the primary focus is on public welfare and thus profits take a hit. If the government is the only entity in a segment, there isn't really any motivation to stay profitable and if there are competitors, well they lose against the efficient private players (consider BSNL & Air India).
So in and out, privatization is meant to add efficiency, profitability, and quality to the concerned sector and thus it is a good thing to implement. We have often heard that the government's business is not to be in business and it is true to some extent as their primary job is to govern, oversee policymaking and diplomacy, do welfare and not really be in business. So our verdict is that it is the right step towards progress. (At least, it seems so)
But if this is so right thing to do? Why is there so much criticism that has been around Privatisation?
So we all have this question, right? That if everything about Privatisation is good then why is there so much criticism around it. Well, let's start by addressing the issue of a major group of critics - PSU Employees. As many as 10 central employee unions called for a nationwide strike against the privatization of PSUs. Employee unions have called the move anti-people and have demanded to call it back. You might have come to know about the bank strike over the last few months, but I guess now you know what was the reason.
The majority of critics of this move are PSU employees and that is because of their fear that their job security would now be gone. Once the private players enter the arena, they are going to demand efficiency and productivity from them and if they fail to deliver, they'd be out looking for a new job. And that's the main thorn that has been pricking them. They will not be able to enjoy those long lunch breaks or moving out early from the offices as they now know that there would always be a watcher watching them (Marvel joke).
And of course, they came to the government company for a Permanent Job and now there will always be a hanging sword on them.
If we talk about the opposition, well this is their job to criticise every move of the ruling government. Even the NaMo government criticised Aadhar when it was introduced as a concept and now they were the ones who introduced them as a working model. So it is a normal thing to do.
Now remaining part of critics like economists, research analysts or experts may be right in some or other points and obviously, nothing is perfect in the real world. Perfection only exists in the books (except AR Rahman)
So there are some points which are true to an extent as well, which is exactly what we are going to discuss now.
Private Companies have only one motive - profits and not the public welfare. So in the process of profit maximization, they can also carry out the exploitation of the public at large if it is in their interest.
Public Entities believes in including all sections of the society and uplift the people who need it. But Private companies cater to only those who are more profitable for them. They don't really try to include a whole section but only which is beneficial for them or in short only those who can pay them.
If a Private Company gets a hand on a sector where it is the sole company functioning in the sector, they could charge any price they want to without really caring as there's nothing people could do but buy their product/service. And thus it could be a nightmare for the public if a private company attains a monopoly. And that is why the government tries to avoid all instances where a monopoly could be created.
The concentration of Economic Power:
Privatization enables wealth generation. If a particular private entity is present in almost all sectors, it could mean that the wealth would start accumulating, and of course, where there is wealth, there is power. So it is really a bad thing if a certain private group gets hold on to economical or political power.
Everything has its pros & cons, we know that but the government has put the thought of 'For the Greater Good' in their mind and has brought Privatisation on the table. Ultimately the goal is to push the economy towards prosperity and create a wealthy society. Talking about the limitations of the plan, its not that it could not be avoided, by having the right framework and the right ethics, it can be tackled with. But all we can do now is to sit back and watch it unfold. Good or Bad - only time will tell. Till then,
That is it for this week's FinMail. Stay safe & keep learning.
If you found FinMail interesting and helpful and useful enough, help us out by telling your friends about us.