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Covid-19 impact: Missing disinvestment targets will have consequences

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
The economic travails this year will be challenging, and from the economist’s perspective, economic growth and fiscal deficit are the two main challenges. The government had embarked on a very ambitious disinvestment programme for the year of Rs 2.1 trillion. It sounded optimistic as we have never delivered such an amount before. The highest was Rs 1 trillion in FY18. The present programme includes the sale of Air India, Life Insurance Corporation of India (LIC) and Bharat Petroleum Corporation Limited (BPCL), which made this very aggressive target look possible.

For disinvestment to take place, there need to be a good number of buyers as well as valuation. Else, like in the past, divestment becomes an exercise of one public sector undertaking (PSU) buying into another. The challenge today is that the conditions do not look congenial and the market is just too volatile. The stock market has touched a new low post the announcement of a shutdown. There seems to be no sign of the shutdown ending or even a plan as to what should be done once this ends. Realistically speaking, FY21 will be a washout. The market is unlikely to reach the January levels anytime soon and unless it is moving in the upward direction continuously for three months, can one be assured that the valuation will be fair?

The other factor is the kind of disinvestment we are looking at. BPCL no longer looks as attractive with the price of oil below $30/barrel and the future of the sector being uncertain. A global recession is for sure, which means that oil prices will be depressed and the sale of such an enterprise will remain unattractive. Next, Air India has been on the block for some time now, and there is no clear plan about how to go about it given the overhang of debt which is around Rs 60,000 crore. To top it all, the future of the aviation industry is in jeopardy following the breakout of the pandemic as movement across countries will remain barred for at least six months after normalcy returns.

The domestic segment, too, looks static and it is doubtful if people will be willing to fly except under extreme conditions post the epidemic. In fact, with business getting used to conducting meetings through webinars, the cost saving involved in not travelling will make sense when India Inc is not expected to do well. Therefore, potential buyers would certainly not get in given the low prospects.

Lastly, LIC was to get in almost half of the targeted amount, which was always going to be a challenge when the Budget announced that the 80C section was going to be optional for taxpayers who could opt for the scheme where one could give up exemptions to join a system of lower tax rates. One can logically interpret this to mean that at some stage all the exemptions would go and insurance would be the last thing on a saver’s mind given that the returns are even lower than bank deposits and small savings.

Not meeting the target has severe challenges for the government and this is where growth comes in. An extended shutdown and lower growth means lower GST (the monthly target cannot be attained). That apart, it will lead to lower corporate, customs (ban on trade), and income (job loss) tax collections.

Overall tax revenue, including those to be transferred, was estimated at Rs 24 trillion and a now a 10 per cent fall cannot be ruled out. Add to this the low level of disinvestment and we can be looking at a shortfall of around Rs 2.5 trillion or so. The fiscal stimulus announced of Rs 1.7 trillion will add to the fiscal deficit further and the fiscal deficit ratio could be at 5.5 per cent.

The problem really is that any slippage in disinvestment combined with other revenue shortfall will mean that the government would have to rework some expenditure numbers, which could mean rolling over some of them. Minor cuts in salaries or MPLAD being withdrawn can contribute a little, but at the end of the day, borrowing will go up. This is probably the reason as to why the market is still skeptical despite the surplus liquidity in the system. The government would necessarily have to borrow more in the market, which will pressurize liquidity over time.
Madan Sabnavis is chief economist at CARE Ratings. Views are personal.

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