Long and short of NMP

In Budget for 2021-22, Finance Minister, Nirmala SitharamanThe government had announced the government’s decision to monetize operational public infrastructure assets, declaring it as an important financing option for creation of new infrastructure. He announced that a “National Monetization Pipeline” (NMP) would be launched to achieve this objective (https://bit.ly/38KdR7s). A few months later, the NMP was unveiled, indicating that Government intends to raise ₹6 lakh crore By monetizing several “core assets” over the next four years. The term asset monetization is not new in the lexicon of this government. It has been used during the proposed disinvestment of Air India and other public sector enterprises. Thus, asset monetization is actually the “privatization” of government-owned assets by another name.

trying to differentiate

One possible reason for the change in terminology is the strong political undertones associated with the term “privatization”. NITI Aayog’s two-volume report (https://bit.ly/3h7gFQt), which serves as the “Asset Monetization Guidebook”, states that the NMP will help “develop a common framework for monetization of core assets”. will help and it will help differentiate it from privatization. But is there a functional difference between asset monetization and privatization?

The NITI Aayog report describes asset monetization as a “transfer of performing assets…” to unlock “dormant” capital and reinvest it in other assets or projects that offer better or additional returns. . In our See, asset monetization raises three types of questions. First, are assets identified for monetization “dormant” or “performing”? Certainly, they cannot be both. Second, can ordinary citizens of the country expect to receive the so-called “additional benefits”? And, finally, could the government have found other avenues to raise resources rather than sell off taxpayer assets?

explained | Why is there a push for asset monetization?

The government has identified “performing assets” to be transferred to private entities and these are both strategic and important. These include over 26,700 km of highways, 400 railway stations, 90 passenger trains, 4 hill railways, including the Darjeeling Himalayan Railway. In addition, existing public sector infrastructure in telecommunications, power transmission and distribution and petroleum, petroleum products and natural gas pipelines have been included in the NMP. If such assets were not offered, would the private sector be interested in taking possession of them?

some data

Under the NMP, the government intends to lease or disinvest its rights on these assets through long-term leases, which may be advance and/or periodic payments. Thus, the expected financial flows from leasing out or disinvestment of the government’s share in these entities would be a huge advantage for the central government, which is in the grip of a financial crisis. At the end of 2020-21, the debt to GDP ratio of the central government had exceeded 60%, from 48.6% a year earlier. Current expectations are that this figure will be closer to 62% in 2021-22. Given this situation, the NMP is being projected as the government’s ability to mobilize resources and come out of the fiscal impasse.

significant impact

The most surprising aspect of the Finance Minister’s announcement regarding NMP is that the government has refrained from mentioning the consequences of asset monetization on the common citizens of the country. To understand this issue, two clear dimensions need to be considered. First, the assets that are being offered for lease or disinvestment are all created through substantial contributions by the tax-paying public who have a stake in the operations and management. Second, these assets have hitherto been managed by the government and its agencies, which act in the public interest and are not operated with a view to making a profit.

Therefore, the fees borne by the public for using these assets have been reasonable. With private companies getting the sole responsibility of running all these assets, from highways and railways to all major utilities like electricity, telecommunications and gas, the citizens of this country will be subject to double taxes. Previously, they paid taxes to build assets, and will now pay higher user fees.

The reason for this is simple. Unlike public sector entities, private companies are mandated, and quite justified, to maximize their profits and maximize the returns received by the shareholders. In other words, it is not the social benefits, but the higher private returns that drive the corporates. Therefore, as the government prepares to transfer “performing assets” to private companies, there is a responsibility to ensure that user fees do not drive consumers out of the market. This important dimension is also not explicitly mentioned in the policy report. It is clear that the interests of consumers can be protected only if the government, through regulators, can curb the profit-maximizing tendency of companies.

In past episodes of privatization of utilities, there have been instances of regulatory capture instead of effective regulation, resulting in exploitation of consumers. Take for example the privatization of the electricity distribution system in the nation’s capital. The then Congress government privatized power distribution, and this resulted in a steep increase in electricity tariff, which not only cost the poorer classes but also adversely affected the middle class. Providing cheap electricity was one of the main election promises of the Aam Aadmi Party, which was fulfilled by giving subsidized electricity to the consumer. But the voters of the capital have little realization that the government is subsidizing out of the taxes it collects. This implies that city taxpayers are either paying higher taxes and/or paying foregoing public services to “benefit” from “cheap” electricity tariffs, while companies continue to make profits as promised. Huh.

exploit the tax route

Finally, since the proposed asset monetization has resulted from the resource crunch faced by the government, a pertinent question is whether there were other avenues that could have been used to bridge the resource gap. One possibility was to increase tax revenues, at 17.4% in 2019-20, as India’s GDP ratio was relatively low compared to most advanced countries. Improving tax compliance and plugging loopholes has long been emphasized as the safest way to improve tax revenue, but little has been done, as the following example shows. Since 2005-06, the government has been providing data on profits declared and taxes paid by companies filing returns electronically. This data shows that in 2005-06, 40% of these companies declared that they were not making any profit, and this figure increased to over 51% in 2018-19. Furthermore, the share of companies reporting profits of Rs 1 crore or less in 2005-06 was 55%; In 2018-19, this figure had come down to 43%. These numbers lead to only one conclusion. Big companies in India are taking advantage of loopholes to report lower profits and avoid tax net. But why have successive governments been so generous?

on the efficiency of the public sector

According to NITI Aayog, “The strategic objective of the asset monetization program is to unlock the value of investment in public sector assets by harnessing the capital and competencies of the private sector”. The objective of NITI Aayog recognizes that public sector enterprises are inefficient, which is contrary to reality. In 2018-19, while 28% of these enterprises were making losses (https://bit.ly/3jLPHQ7), the figure was 51% for large companies. Is it realistic to assume that asset monetization programs will deliver efficiency?

Biswajit Dhar, Professor, Center for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi