One crore houses for the rural poor by 2019 and another two crore for the urban poor by 2022, five crore subsidised LPG connections for the rural poor over the next three years on top of 3.5 crore already given out last year, 100 km of rural roads built per day over the past two years as compared to 73.5 km in the last three years of the UPA, 12 km per day of highways in FY16 versus 8.5 in the last two years of the UPA, 139 lakh toilets in the last year which is just a bit lower than those built by UPA in three years, nearly 12.5 crore insurance policies with a cover of Rs 2 lakh already issued … as the audacity of the prime minister’s ambition strikes you—on the computer screen, via power points made by various BJP luminaries during the two-year celebrations—the obvious question is where the money is going to come from.
While there is no one place where you can get the answer from—possibly NITI Aayog will discuss this in its perspective plans—the picture gets more than a bit disconcerting when you try to put together the pieces based on what various news items report.
As a baniya, it is easy to appreciate that a lot of money just gets wasted in the float and the BJP is trying to mop up that. There is no reason, for instance, why cash-rich PSUs should simply be sitting on cash and earning money on fixed deposits; if they can’t invest the money, it has to be returned to shareholders. Similarly, if the EPFO has Rs 30,000 crore in unclaimed deposits—because it made it so difficult to withdraw savings, poor people had no option but to abandon their hard-earned money—perhaps it makes sense to use this to fund insurance for the poor with the caveat that, if and when these people make a claim, the government will have to make it good. Yet, the answer isn’t quite that simple and part of the purpose of this column is to get someone in the BJP to do the math and put together a reasonable explanation for the sources of finance.
LIC, for instance, has a lot of money and so it can be argued that there is no harm if a portion of this is lent to the Railways to help finance rolling out its network—after all, the Rs 150,000 crore, over five years, is being lent at a rate higher than what LIC gets when it invests in government bonds. But what if the Railways is not able to pay back the money? After all, social returns from projects and hard cash from passenger/freight revenues are two different things. And, in any case, this is not restricted to funding the Railways. LIC is being regularly asked to buy shares of PSUs being divested when there are no other takers and has even been shoring up the equity of PSU banks while there is no certainty that they will revive in the future. Even electricity finance firms REC and PFC (see graphic) have invested Rs 3,300 crore in bonds of banks though there is no obvious reason for them to do so.
LIC, it is true, has made a lot of money on its investments in PSUs in the past, but let’s keep in mind the funds with LIC are not ‘public’ monies any more than those with Unit 64 were, they are the hard-earned savings of millions of individuals whose lives depend upon LIC making money from the investments. Perhaps, the most frightening in this context are the newspaper reports that LIC has been asked to contribute to 10% of the R40,000 crore corpus of the National Investment and Infrastructure Fund (NIIF).
NIIF is meant for ‘patient’ money like that of pension funds such as LIC, and will invest in long-term infrastructure, possibly even in buying stressed assets, but if these assets don’t pan out, will the government be guaranteeing LIC’s private sector investors their money? According to the plan, NIIF will buy existing infrastructure assets and, after nursing them to health, will sell them at a profit—but given how only a small fraction of the infrastructure assets put out by firms over the last few years have been sold, LIC’s wait may be quite long.
Banks lending to the Punjab government for buying foodgrain also thought this was safe, but RBI has asked them to provision for this. While this was still a few thousand crore of rupees, banks who lent over R4 lakh crore to state government-owned electricity boards have taken an even bigger hit—a cut of 5-6 percentage points in their lending rates on three-fourths of this—due to this same misconception of an implicit government guarantee, rudely shattered by Piyush Goyal’s UDAY ‘turnaround’ scheme for the power sector. As an aside, if banks lending to SEBs could be forced to take such a haircut, you can’t blame Vijay Mallya for feeling victimised since his problems would be over if he could also renegotiate with banks on his terms.
Asking government-owned banks to take a haircut to save government-owned SEBs seems okay since they are both owned by the larger ‘government’, but it gets complicated when LIC is buying into the same banks with funds that it holds in trust for millions of private individuals. Asking LIC to invest in NIIF may be within the prudential norms, but when you add the investment in PSUs and banks and loans to the Railways, it does get a bit worrying.
Or take the proposal that EPFO is working to provide low-cost housing, probably an integral part of the government’s low-cost housing plan. Under what is being talked of, a member will be allowed to take a loan from her current balances—this is quite legitimate—and also use future EPFO payments to substitute for the EMI on the loan. Does this make sense since, apart from lowering the eventual retirement corpus, what happens if the individual doesn’t have a job for some time in the future? In any case, EPFO’s expertise is not in the lending business.
To be certain, some of the schemes make sense. The government, for instance, plans to sell 104 existing toll-road projects for R60,000 crore or so, and use this money to fund new projects—but how far can this securitisation go if, as is happening now, the bulk of the funding for road projects including for PPP ones has to come from the government?
Belaboring a point doesn’t necessarily make it more right, but it would be reassuring if the government explained its financing plans—especially those involving LIC and EPFO—and then had a discussion on whether these make sense. Using RBI balances to fund the recapitalisation of banks, for instance, sounded like a great idea when the Economic Survey presented it in February, but it made a lot less sense when RBI Governor Raghuram Rajan explained this would rob the central bank of its ability to manage liquidity.