The One Monetization Move That Doesn’t Tick Most Boxes

The government has launched a National Monetization Pipeline, or NMP (https://bit.ly/3mLkw9M) to sell public assets or, more accurately, their revenue streams, over the next four years. The pipeline mostly consists of railway stations, freight corridors, airports and reconstructed national highway sections (paying toll revenue). Amount of ₹6 lakh crore, or 3% of GDP in 2020-21.

As mentioned in the Union Budget, the objective of the NMP is to mobilize resources for infrastructure funding. There are two other ways to mobilize resources: setting up a development finance institution (DFI) and increasing the share of infrastructure investment in the central and state budgets.

difficult question

The proposed asset sale (monetisation) raises several questions. Conceptually, how is it different from the disinvestment and privatization (DP) practice prevalent for the last three decades? Since the DP’s income (revenue) has severely missed the target almost every year, how credible are the NMP targets? And how are they likely to perform differently? Is the NMP a desperate attempt to shore up public finances, after nearly two years of disappointing production growth, stagnant tax-GDP ratios despite huge increases in taxes on petroleum products? If so, is such peril (fire) sale desirable to obtain a “fair value” for the public property? Wouldn’t the dire state of the economy be a factor in bringing down the market prices, as in any distress sale?

explained | Why is there a push for asset monetization?

The NMP distinguishes “asset monetization” from “asset sale” by saying: “Asset monetization, as envisaged here, is a limited term license/a private sector entity owned by a government or a public authority for an asset.” is required for a limited period for advance or periodic consideration” (NMP, Vol 1, p. 5).

As defined above, asset monetization is the same as the net present value (NPV) of a future stream of revenue with an underlying interest rate (whether it is a sale or lease of an asset). In a footnote, the NMP document further clarifies: “Sale, i.e. transfer of legal ownership of the property is envisaged only in cases such as disinvestment of stake, etc.” Again there seems to be ideological confusion. The sale of minority equity does not change managerial control. Therefore, the official attempt to separate its initiative from earlier efforts seems weak and wrong.

historical error

The NMP primarily outlines two ways to implement monetization: public-private partnerships (PPPs) and “structured financing” to tap the stock market. PPP in infrastructure has been a financial disaster in India, as was the case after the 2003-08 economic boom. Certainly, India built world-class airports in Mumbai and Delhi and accelerated highway road reconstruction.

National Monetization Pipeline | Here’s the breakup of the government’s big privatization push

However, after the 2008 financial crisis, as the world economy and trade declined, and as India’s GDP growth slowed sharply, demand (and revenue for debt-ridden companies) suffered, many PPP projects led to bank loans. failed to pay. Banks had non-performing assets (NPAs). Furthermore, since the bulk of the lending was to politically connected corporate houses and firms (bolygarches as illustrated by James Crabtree in his book, Billionaire Secrets), debt resolution came in the cross-hairs of the political and banking system. India is still grappling with the legacy of that era without any easy and credible solution.

An Infrastructure Investment Trust (InvIT) is being offered as an alternative means of raising finance from the stock market. In principle, InvIT is like a mutual fund, whose performance is largely linked to stock prices. It may be worthwhile to recall one’s memory of how the disinvestment process began after the start of economic reforms in 1991. It was by “off-loading” bundles of shares of Public Sector Enterprises (PSEs) to the financial institution UTI, which in turn sold the bundles in the booming secondary stock market to realize the best value. The enthusiasm was short-lived due to the market slump in the wake of Harshad Mehta scam, however, stalling and discrediting the disinvestment process for almost an entire decade.

Therefore, it may be worth learning lessons from historical missteps before becoming increasingly enamored with this idea in the current stock market. As feared by many, the current high stock prices seem like a bubble with heightened uncertainties in the global financial market.

As the US Fed commits to easing its asset purchase program (known as quantitative easing), the “hot money” inflows that have propelled Indian stock prices could throw up nasty surprises.

According to the Reserve Bank of India’s (RBI) annual report, in 2020-21, the economy contracted by 8% due to the pandemic and the lockdown. The current year has the best chance of regaining pre-pandemic GDP levels. Aggregate savings and investment rates (ie as a ratio of GDP) have shrunk (relatively). However, the stock market is booming, dancing to short-term foreign capital inflows, with little to do with the real economy. Given its dire situation, the asset monetization effort looks nothing short of a fire sale.

other solutions

Thus, it is unwise to anchor the much-needed investment revival strategy on a discredited PPP model or on volatile foreign institutional investors (FIIs) investments in a crappy stock market. Instead of asset monetization, why not monetize debt with committed lending from the market and central bank? With the financial system having no takers for bank loans with liquidity, why not finance the proposed investment – as envisaged in the budget – by government borrowing. Common objections against such an idea are three: the cost of borrowing, the “crowd-out” of private investment, and the threat of inflation.

RBI’s annual report shows that the weighted average cost of borrowing of the central government in 2020-21 stood at 5.8%. And the inflation rate as measured by the Consumer Price Index (CPI-combined) was 6.2%. Thus, with a negative 0.4% real interest rate (the real interest rate is the nominal interest rate minus the inflation rate), home borrowing in domestic currency is a steal. Due to the high liquidity in the market, the possibility of crowding out private investment is remote. Inflation risk is also limited with lower aggregate demand pressures (except for temporary constraints due to localized lockdowns).

Rising public debt to GDP ratio is often red flagged by bond rating agencies as a potential risk of rating downgrades. If debt is used productively to expand GDP (denominator), such risks appear to be minimal. In addition, increasing foreign debt by volatile portfolio investors probably carries greater exposure to external volatility. Foreign portfolio investment has grown by 6,800% over the previous year to $38 billion in 2020-21 (as per RBI data released in May). This, perhaps, poses a greater financial threat than a possible increase in debt monetization in the domestic currency used for productive purposes.

in perspective

In essence, the NMP is an ambitious “retail” sale or lease of revenue-generating public capital projects – with allegations of corruption and potential threats of derailing the process – to revive investment demand and stem an economic fallout. The main instruments proposed to implement the NMP are public-private partnerships and stock market based investment trusts (InvITs). Both have serious drawbacks, as experience shows. The NMP documentation appears to be silent on how to correct past mistakes. Hence, NMP appears like a fire sale which may not help in realizing the best social value of public property to initiate investment demand.

If reviving investment demand quickly is the real goal, then debt monetization seems to be a better option than asset monetization. It is a “wholesale” business with low operating and transaction costs, and is currently at a negative interest rate. With excess liquidity in financial markets and low aggregate demand, the risk of inflation seems minimal. Such targeted lending, if quickly funneled into infrastructure investment projects, could crowd out (or bring on) private investment, igniting a virtuous cycle of investment-led economic revival.

R Nagaraja is with the Center for Development Studies, Thiruvananthapuram, Kerala