Bridging the gap

The outlook for the current fiscal year remains fairly uncertain. Even as some private sector forecasters are increasing their estimates of how much the economy would shrink, the government believes that things on the economic front are not that bad. While the final output number for the financial year will depend on a combination of factors, the continued rise in fresh Covid cases and the response of several state governments do not bode well for economic revival. Besides containing the pandemic and bringing the economy back on track, the other big problem for the government is managing its finances. The relief measures announced so far may not be sufficient. Since revenues are likely to contract significantly, additional measures would widen the fiscal deficit further. The government is said to be working on an employment scheme for urban areas and, among other things, will need to recapitalise public sector banks as their asset quality is likely to worsen substantially. The combined budget deficit is expected to go into double digits in the current year. It is also important to note that a tentative economic recovery would not alleviate pressure on government finances.

Therefore, the government would do well to work on a revised medium-term framework for fiscal management. This would require a realistic reassessment of revenue and expenditure. In this context, it makes sense to aggressively look for asset monetisation options. The government can look for opportunities to sell some of the infrastructure assets that have been built in recent years. Assets in the area of railways and highways are being looked at. There could be opportunities in other areas as well. The government is working on a new public sector enterprise (PSE) policy. This would enable it to put a large number of PSEs in the non-strategic sectors on the block. The government already has a ready list of PSEs prepared by the NITI Aayog that can be privatised. It can be argued that the government would not get the right valuation because of economic uncertainties as a large number of domestic companies are financially stressed. The situation is likely to get worse before it gets better. It is possible that most of the potential buyers will be foreign companies. But a sharp recovery in the stock market should help the government disinvest some of the PSEs.

At a broader level, the monetisation plan should be carefully thought through and well-structured as some of the assets may not be financially viable in their current state and need to be dealt with accordingly. The government would do well to avoid a repeat of the Air India experience. To be sure, asset sale or privatisation of PSEs on a large scale will also have political problems. Therefore, the government will need to move forward with full transparency, while making the case why it is important. If the government is not able to move forward and monetise assets in a significant way, its ability to spend will remain constrained and weaken the prospects of economic revival. Continued expansion in the fiscal deficit will push up the debt stock and increase the outgo on interest payments in the coming years. Thus, asset monetisation is crucial for the government to sustain spending in the near to medium term.

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