Modi needs an Operation Twist

By: |
August 27, 2020 6:20 AM

Govt needs to spend Rs 10-12 lakh crore & finance this with a bond that is redeemed by timely sale of PSU shares

For several decades, Icrier professor Ashok Gulati has been talking of how an active futures strategy is a better alternative to carrying millions of tonnes of extra stock with FCI; the use of Aadhaar-based payments can help save Rs 30,000 crore every year in terms of food subsidies.For several decades, Icrier professor Ashok Gulati has been talking of how an active futures strategy is a better alternative to carrying millions of tonnes of extra stock with FCI; the use of Aadhaar-based payments can help save Rs 30,000 crore every year in terms of food subsidies.

The central bank is absolutely right when it points out, in its annual report, that most of the levers of growth—whether exports or investment or even private consumption—were slowing even before the Covid-19 pandemic and that there are few workable solutions in the short run. In the event, while arguing for more reforms, RBI wants the government to spend large sums on infrastructure to revive sentiment. Since any large spending, say Rs 10-12 lakh crore, to be funded by borrowing would drive the markets into a tizzy, and the resultant increase in interest rates would crimp whatever little corporate investment there is today, what is needed is a viable financing plan.

RBI suggests its own version of Operation Twist—selling short-duration securities and buying long-duration ones—in the sense that this long-term capital creation be funded by selling “assets in steel, coal, power, land, railways and privatisation of major ports” … this public investment will not only create demand in the economy, as RBI puts it, it will “crowd in private investment”. While that is a laudable suggestion, if the funding is to be dependent upon asset sales, it could take forever; not even one PSU has been privatised since Narendra Modi became prime minister.

Ideally, instead, since the government holding of PSUs is worth around Rs 20-21 lakh crore—including the value of LIC—it should fund this expenditure using this. Issue bonds worth Rs 12 lakh crore, say, and commit to selling Rs 1 lakh worth of PSU shares every year on a fixed date, in addition to whatever other privatisation plan there is. Once the market knows there is a time-bound plan to retire the debt, it will no longer be as skittish as it would be otherwise; but the plan to invest has to be announced simultaneously with the debt-retirement plan.

More than this, the government needs to be creative and come up with timely plans to resolve problems; the economy is on the verge of a collapse—Nomura is projecting a contracting GDP till the end of the March 2021 quarter—so the government needs to act quickly. Waiting for the Covid-19 pandemic to come under control before the next stimulus package is announced—this is the official line—for instance, makes little sense; if businesses go under in the next three months or so, what use is a package that comes after that?

Indeed, the government needs a Covid-task force whose job is to identify urgent and innovative steps and then get the government to move on them fast. In the case of telecom, for instance, while nearly a decade has been lost—first by the UPA and then the NDA—there are still enough solutions to try and fix things. Apart from cutting licence fees and spectrum charges, one solution could be the government buying Vodafone Idea’s shares so as to give the telco an immediate cushion when it comes to paying the AGR and other dues. As the telco revives, the government can hope to make money through the capital appreciation.

But, why do this given the moral hazard is the obvious question that will come up. The answer is equally obvious: if this is not done, the government stands to lose a large chunk of the Rs 2.5 lakh crore that Vodafone Idea owes it, for the AGR dues as well as for the spectrum it had bought on a deferred-payment basis. But for the solution to fly, the government has to believe in it, and once it does, it needs to make sure it is finalised soon, not at the glacial pace at which most things move in the government.

A good example of the glacial pace of decision-making is the much-awaited privatisation of Air India. In 2018, when the government first decided to sell Air India, it left a significant chunk of debt on the beleaguered carrier’s books, it wanted to retain a stake in the airline and it didn’t do anything to alleviate the concerns about Air India’s staff. Not surprisingly, no one bid for the airline. It is not certain if anyone will buy it now that, post-pandemic, the industry is in a terrible shape globally, but if the government is prepared to be reasonable this time around—in terms of not retaining equity, taking on all the debt, etc—why didn’t it do this in 2018? And, why not just tell potential buyers that all Air India’s staff they don’t wish to retain after a year can be repatriated back to the government? This was done when the Delhi and Mumbai airports were privatised.

In order to help finance infrastructure projects, the finance minister announced that a credit enhancement company would be set up in the FY20 budget; apart from the fact that the company still hasn’t got set up a year later, why not look at similar structures in other sectors. Nearly a third of the 23,600 MW of solar-power projects that were to be set up, FE reported on Tuesday, are in serious trouble because the Solar Energy Corporation of India (SECI) that conducts the bidding has not been able to sign power purchase agreements with various state electricity boards (SEBs) for this power. But, if the government is serious about green power, why not give SECI a budget that allows it to take on the commitments on its own balance sheet or which allows it to subsidise the power and sell it to the SEBs? If this is not done, the country’s renewable power drive is soon going to come unstuck.

There are several other such initiatives that, if actioned quickly, can yield quick results. For several decades, Icrier professor Ashok Gulati has been talking of how an active futures strategy is a better alternative to carrying millions of tonnes of extra stock with FCI; the use of Aadhaar-based payments can help save Rs 30,000 crore every year in terms of food subsidies. If the government restructured the gold bond scheme in a way that it mimicked gold—it should be available on tap and be bought/sold at the market price—a large part of India’s gold imports could be avoided; certainly the portion that comprises gold coins and biscuits for investment purposes. While gold imports were $28 bn in FY20, they were a much higher $56.5 billion in FY12.

If there is no strategic thinking on such issues, coupled with the ability to ensure it is implemented immediately, India will recover from the pandemic, but is unlikely to even look at growth rates of more than 5-6% for several years at least.

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