The missing policy

Economic activity in India is picking up from the lockdown lows and some of the high-frequency indicators suggest that the level of contraction is reducing. But a more meaningful recovery is still a long way off, going by the concerns over the uncertainties ahead. Once the spread of the virus subsides, the nature of the economic recovery would depend on policy support. The government in May announced an economic package worth about 10 per cent of gross domestic product (GDP), along with various other initiatives. To the government’s credit, action has been initiated on most elements of the package announced by Union Finance Minister Nirmala Sitharaman. The only exception is the new public sector enterprise (PSE) policy, which is a critical reforms measure. According to the announcement, a list of strategic sectors that would require the presence of PSEs is to be notified. The private sector would be allowed in strategic areas but at least one enterprise will remain in the public sector. In all other sectors, PSEs are to be privatised. This is a big policy move and, if implemented, will have a significant positive impact on the Indian economy, especially in the present circumstances. It is not clear why the government has not spelled out the details of the policy so far, as any further delay will only increase speculation about putting it on the back burner.

The policy must be announced with a tentative medium-term road map. This would help the Indian economy in multiple ways. For one, a clear policy on privatisation with a realistic timeline would boost market confidence. The government owns a large number of loss-making businesses, which affect its finances. For instance, according to a 2019 report of the Comptroller and Auditor General of India, in 2017-18, there were 184 public sector companies with accumulated losses worth over Rs 1.4 trillion. The net worth of over 70 companies had been completely eroded. Business Standard Research Bureau numbers show PSEs have seen a sharp drop in their market capitalisation, and continue to underperform the broader market. In the last 10 years, the combined market-cap of the top 17 PSEs that were part of the BSE 200 index (excluding banks and financials) has declined over 40 per cent, against a 91 per cent rise in the Sensex. It is also worth noting that over 70 per cent of the PSE profits in 2017-18 came from sectors such as petroleum and coal, where the presence of the private sector is limited. This clearly shows that PSEs are not run efficiently. Also, apart from efficiency gains, privatisation would help raise resources and contain the fiscal deficit. Part of the proceeds can also be used to increase expenditure in the infrastructure sector, which would help economic recovery.

India’s debt-to-GDP ratio is expected to go up by well over 10 percentage points in the current financial year, while the medium-term potential growth is estimated to have declined. Judicious use of public sector assets can help contain the economic damage of the pandemic. A revamp of government ownership in PSEs will also help re-allocate resources to key areas such as health and education. The NITI Aayog has a ready list of PSEs that can be put on the block. The government should take that into account and come up with a clear road map soon.

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