While presenting the Union Budget for 2021-22, our Finance Minister, Nirmala Sitharaman said that the union government has set a disinvestment target of Rs 1.75 lakh crore for 2021-22, lower than Rs 2.1 lakh crore it hoped to garner from disinvestment in 2020-21, as adverse market conditions because of the pandemic affected government's disinvestment plans. She said that several strategic sales including IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, Pawan Hans, Air India, among others, would be completed during the year. Moreover, the government would also privatise two public sector banks and one general insurance company in the year. The policy, promised as part of the Atma Nirbhar Bharat package, states the government will exit all businesses in nonstrategic sectors, with only a ‘bare minimum’ presence in four broad sectors. These strategic sectors are — atomic energy, space and defence; transport and telecom; power, petroleum, coal and other minerals; and banking and financial services. In India’s brief but tortuous history of disinvestment since it began listing PSUs on the stock markets through minority stake sales in the 1990s, this is undoubtedly the boldest stance yet.
India’s History with Disinvestments
For the first four decades after Independence, India was pursuing a path of development in which the public sector was expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crores. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. Against an aggregate target of Rs. 54,300 crores to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half). Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crores. The reasons for such low proceeds from disinvestment against the actual target set were unfavourable market conditions, offers made by the government were unattractive to private investors, opposition in the valuation process, lack of political will and no clear cut policy on disinvestment.
In the period from 2001-02 - 2003-04, maximum number of disinvestments took place. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included Bharat Aluminium Co. Ltd, CMC Ltd, HTL Ltd, Maruti Suzuki India Ltd, among others. During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore.
From 2009 onwards, a stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers. The government has year over year since increased their disinvestment targets and is moving away from running businesses reaffirming Narendra Modi government’s philosophy that “It is not the government’s business to be in business”.
Why Governments shouldn’t run businesses?
‘Public sector is not for making profits’. This excuse is offered many times to explain away the losses which a number of public sector entities make. ‘Public sector should be an ideal employer’. This is invoked to justify giving away large share of value added, sometimes even exceeding the entire value added, as salaries and benefit to public sector employees. However, this violates one of the fundamental principles of a business - the value addition should be equal to or higher than the wages to be paid and the charge on the capital employed and if not satisfied in any public sector entity, should result into closer or sale off of such a business; something that is true for most public businesses in India.
Businesses are for-profit organizations and their primary aim is to maximize profits. They may have secondary missions, but they won’t last long if they don't make money for their owners. Public organizations, on the other hand, have no interest in profits. They generally provide “public goods and services,” in many forms, and usually for free. Moreover, the environment in which the two work are very different from each other. Private for-profit enterprises draw resources from markets: capital from capital markets; workers from labor markets; raw materials from commodities or product markets. They sell their products or services in a market in competition with other providers. Money from sales is reinvested, or taken as profit. Public organizations however, draw their resources from politics. Government collects taxes, and tax revenue is allocated through a political process to public organizations. These organizations spend the money to deliver public goods and services demanded through a political process. Elected or appointed government officials make these decisions, not markets. As a result, public organizations are suffused by politics and surrounded by influencers: stakeholder groups, other public organizations, the press, political parties, customers/voters/owners, and others. Politics does not play a similar role in the private sector, so public leadership is necessarily different. Narayana Murthy, founder of Infosys, at Indian Institute of Management, Calcutta’s 54th convocation emphasized on ‘minimum government, maximum governance’. Narayana remarked, ‘Jis desh ki sarkaar vyapari, uss desh ki janta bhikhari’ (when a country’s government conducts business, citizens become paupers).
Moving ahead with budget’s disinvestment plans
It is not clear why it took the Narendra Modi administration so long to articulate this plan or make headway on this front even without such a blueprint, as the PM had declared, back in 2014, that the government had no business being in business. Now that the policy is in place, tactful execution will be as critical as dealing with the usual pockets of resistance that would crop up. While stock markets are on a high, the financial capacity of potential bidders may not be optimal, thanks to the pandemic. Among its multiple challenges, the government will need to create confidence in the sale processes, ensure a semblance of fair valuations, sequence the sales so that the economy does not face shocks or create monopolies, and most of all, manage electoral pressures in jurisdictions where these units would be located. A single controversial transaction could scuttle the momentum behind such a plan and India can ill afford it.
The economic survey is an annual document presented by the Ministry of Finance in the Parliament every year just before the Union Budget. The economic survey is prepared under the guidance of chief economic advisor and presented to both the houses of the Parliament. Although the constitution does not bind the government to present the survey, it has become common practice for the government. The economic survey includes details of the Indian economy over the past year, includes the current state of the economy and the prospects of the economy in the short to medium term.
The economic survey 2020-21 was presented by Nirmala Sitharaman, Minister of Finance on 29th Jan’21 during the budget session of the parliament. It was prepared under the guidance of Krishnamurthy Subramanian, the Chief Economic Advisor to the Government of India. Volume I provides details of major macro-economic issues which requires urgent attention of the government. It showcases the challenges faced by the government in policy making and tools for effective policy making. Volume II deals with previous year’s performance of major sectors of the economy and how the pandemic has affected the growth. This year’s survey has been dedicated to the COVID-19 warriors and highlights the V-shape recovery of the economy.
Impact due to COVID and its response
According to the report India’s response was derived from extensive research on epidemiology especially by looking at Spanish flu of 1918 as an example. Key findings included to flatten the pandemic curve as it reduces the spread of the virus as well as gives time for the health and testing infrastructure to be set up. As a result the government decided to implement a 40 day lockdown period to save human lives and enable quicker recovery of the economy. The lockdown resulted in 23.9% contraction in GDP in Q1 but since then the recovery has been a v shaped one with 7.5% decline in Q2. The report argues that even if lockdowns weren’t implemented people would have not gone out thus affecting contact based sectors the most. So even without lockdown the pandemic would have impacted the economy but lockdown ensured safety of human lives and enabled v-shaped recovery. The pandemic impacted both the demand and supply. The government focused on providing the basic necessities where almost 18 crore people were provided with free food. Emergency credit and liquidity measures were announced while the country was facing the threat of the pandemic. During the unlock phase Aatmanirbhar Bharat phase II and III measures were announced focusing on capital expenditure, increasing private participation in numerous sectors, increasing FDI in defence sector, wage subsidy programme etc. In order to avoid loss of productive capacity, a number of structural reforms were announced in order to increase supply in the medium-long term. The reforms mainly focused on agricultural markets, labour laws and redefining MSMEs to help them grow thereby able to create jobs in the primary and secondary sectors. Public investment programmes like the National Infrastructure Pipeline will likely accelerate the recovery.
Inequality, Debt Sustainability & Sovereign Rating
The survey analyses relationship between inequality and economic growth. Past studies on advance economies show little to no impact on inequality due to income per capita, which reflects impact of economic growth. But unlike advance economies, India’s economic growth and inequality converge in terms of their effects on socio-economic indicators. Thus the author argues that the only way to reduce inequality is by economic growth. To alleviate people from below the poverty line or redistribution of wealth is only feasible if the size of the economy grows.
To be able to recover from the pandemic and kick start growth another important question raised was whether the government borrow and spend money or should take a more conservative approach. The survey points out that debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD) i.e. the difference between the interest rate and growth rate. In a developing nation like India where growth rate is more than the interest rate, debt sustainability shouldn’t be a problem. Due to substantial amount of debt to support fiscal expansion, credit rating agencies have rated India poorly. A fifth largest economy has never been rated at the lowest level of the investment grade (BBB-/Baa3) where India is currently rated. The survey questions these ratings and suggest that rating methodology should be made more transparent as it does not give true picture in this case. India has a zero sovereign default history. These ratings may impact the pool of investors who are willing to invest in India and also affect commercial banks as they indulge in international trade.
Healthcare has finally taken the centre stage and COVID 19 has showcased how a health crisis transformed into an economic and social crisis. The survey showed that an increase in public health spending from 1% to 2.5% of GDP can reduce out of pocket spend from 65% to 30% of overall healthcare spending. Further suggested that National Health Mission (NHM) must continue in conjecture with Ayushman Bharat as it played a critical role in increasing access of pre-natal and post-natal care to the poorest. The survey also recommended to set up a healthcare sector regulator to ensure that quality healthcare is provided at reasonable prices in the private sector and several steps to monitor the healthcare providers and health of patients. And as the country moves to become digital healthcare industry should harness telemedicine to the fullest by investing in internet connectivity and related infrastructure.
Banks were provided with relaxation in terms of regulatory forbearance during the financial crisis of 2008. Though intended to be only during the crisis the forbearance was extended for 7 years. Under the forbearance regime banks pretended that their non performing assets were performing by calling them restructured assets. Thus bank took the liberty of window dressing their balance sheets. This led to several unintended effects as banks kept lending to unhealthy firms, lent more to save loans from defaulting and did not keep enough reserves to absorb any shock due to payment defaults. RBI withdrew the forbearance on asset classification effective April 1, 2015 and shortly after this they began their asset quality review to determine the real stock of bad loans. Due to this NPAs went up from 4.62% in 2014-15 to 7.79% in 2015-16 and were as high as 10.41% by December 2017. Given the current COVID crisis regulatory forbearance has again been provided and the survey wants to highlight an important lesson of avoiding recurrence of the same issues that manifested following the global financial crisis. Further it recommends the government and policymakers to lay out a threshold level of economic recovery at which such measures must be withdrawn. Following this an Asset Quality Review (AQR) must also be carried out.
For the first time since the start of the Global Innovation Index in 2007, India joined the top 50 innovative countries in 2020 and ranked first in Central and South Asia. The total gross domestic expenditure on R&D (GERD) stands at 0.65% of the total GDP which is lowest amongst the top ten economies (1.5-3%). The survey encourages the private sector to invest heavily in R&D and innovation. The government contribution of the total GERD is 56% which is almost three times the average of top ten economies. Further only 36% of the patents are held by Indian residents as compared to 62% in the top ten economies. Despite higher tax incentives for creativity and access to venture resources, this condition has prevailed. Continued engagement and commitment to innovation, especially from the private sector, will fulfil India's dream of becoming an innovation leader.
The survey constructs a Bare Necessities Index (BNI) at the rural, urban and all India level. The index consist of 26 parameters to include the 5 dimensions – Water, Sanitisation, Housing, Micro-environment and other facilities (electricity, clean cooking fuel etc.). Based on this index the survey concludes that access to bare necessities in 2018 has increased in all states when compared to 2012. It is highest in states such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura. Access to basic necessities has increased disproportionately more for the poor households both in rural and urban India as well as the disparity between rural and urban has declined. Schemes such as Swachh Bharat Mission, PMAY, JJM, PMUY etc. have contributed to this success and with appropriate strategy can further help in reducing these gaps.
State of Economy and Inflation
Global economic output is estimated to fall by 4.4% in 2020 where advanced economies were hit harder in terms of lives and economic output as compared to emerging market developing economies. India’s GDP contracted by 7.7% in FY2020-21 with 15.7% decline in the first half and modest 0.1% fall in the second half. In the wake of the global pandemic outbreak, fiscal slippage is expected to be reported by the General Government in FY 2020-21, owing to the revenue deficit and higher expenditure requirements. Agricultural sector performed well while contact based sectors, manufacturing, construction were hit the hardest. The survey highlights the v shaped recovery as resurgence in indicators such as power demand, E-way bills, GST collection (crossing the mark of Rs.1 lakh crore consecutively for last three months), steel consumption etc. has been recorded. India also became the fastest country to roll out 10 lakh vaccines in a matter of six days while also emerging as a leading supplier of the vaccine to Brazil and neighbouring countries.
Headline CPI inflation averaged at 6.6% in 2020-21 and stood 4.6% in December 2020 mainly driven by rise in food inflation which increased from 6.7% in 2019-20 to 9.1%. The major driver of inflation has been food and beverages contributing to 59% in 2020-21. Thus steps like banning of export of onions, easing restrictions on import of pulses etc. were taken to stabilise prices of food items. Apart from the short term measures taken the survey recommends medium to long term measures like investment in decentralised cold storage facilities etc. Effective system needs to be developed to reduce wastages, efficient management and timely release of stock. As the pandemic infused economic uncertainties investors turned to gold as a safe heaven. Thus gold prices saw sharp spike compared to other assets.
Monetary Management & Financial Intermediation
The monetary policy remained accommodative in 2020 and the repo rate was cut by 115 bps since March 2020. RBI took conventional as well as unconventional measures like OMOs, LTROs, and Targeted LTRO etc. to infuse and manage liquidity in the economy. Despite this transmission of high reserve money to money supply growth showed impaired liquidity transmission as banks put money back with RBI. Gross NPAs for commercial banks decreased from 8.21% at end of March 2020 to 7.49% at end of September 2020. However this has been observed due to relief provided in asset classification on account of the pandemic. The survey also mentioned the recovery rate of SCBs under the IBC to be over 45 percent.
Agriculture, Food Management, Industry, Infrastructure and Service Sector
Agricultural (and Allied Activities) sector has shown its resilience amid COVID-19 with a growth of 3.4% at constant prices during 2020-21. As a result of the budget announcement on the inclusion of the livestock sector in the Kisan Credit Card in February 2020, 1.5 crores of milk cooperative dairy farmers and milk producer companies were targeted to provide Kisan Credit Cards (KCC) and as of January 2021 around 45000 KCCs have been issued to fishers and fish farmers. Pradhan Mantri Fasal Bima Yojana covers over 5.5 crore farmer applications year on year while under the Pradhan Mantri Garib Kalyan Anna Yojana, 80.96 crore beneficiaries were provided additional food grains.
The strong v shaped recovery was also confirmed through the Index of Industrial Production (IIP) where it has reached the pre COVID levels. As per the Doing Business Report (DBR), 2020, the rank of India in the Ease of Doing Business (EoDB) Index for 2019 has moved upwards to the 63rd position amongst 190 countries from a rank of 77th in 2018. Total FDI equity inflows during FY20 amounted to US$49.98 billion, relative to US$44.37 billion during FY19. FY21 (until September-2020) had a comparable amount of US$30.0 billion with the bulk of the equity inflows coming in the non-manufacturing sector. The survey also focused attention on the Production-Linked Reward (PLI) Scheme launched under Atmanirbhar Bharat by the GoI focusing on the 10 main sectors with the goal of boosting India's manufacturing capability and exports.
India's services business suffered a major setback during the mandatory lockdown of the COVID-19 pandemic. As soon as the first lockdown was declared in March 2020, air passenger traffic, rail freight traffic, port traffic, international tourist arrivals and foreign exchange all contracted sharply. However, there are now signs of a gradual recovery. Despite this FDI inflow into India’s services sector grew by 34% YoY during April-September 2020. The Indian start-up ecosystem has been progressing well amidst the Covid-19 pandemic. India added a record 12 start-ups in the unicorns list last year making the total to 38 unicorns. The survey also highlighted telecom related regulations removed from the IT-BPO sector and consumer protection regulations introduced for e-commerce.