- Oct 26 2017
Using disinvestment proceeds to inject public finance into private companies is a great idea.
What was Arun Jaitley’s press conference on Tuesday all about anyway? If the intention was to gain eyeballs, it succeeded. But if it was to allay fears about the Indian economy, it failed. Here is why.
First, the optics were all wrong. The finance minister had just returned from the annual meetings of the International Monetary Fund and the World Bank in Washington. The timing required talking up the economy in a more artful way, drawing on international trends, in rethinking the role of the State in development. Instead, the assembled press corps got drab statistics. The naysayers remain unconvinced that the economy is doing fine. Presenting alternative indicators — other than those already in the public domain — could have helped. For example, the government has reduced risk by conferring residency tax benefits for local administrative offices of multinational companies. Similarly, GST revenue is marginally more than the targets for the first quarter.
Second, the key “announcement” was a proposed outlay of ₹2.1 trillion for recapitalising public sector banks over two years. This was presented as a “bold” step. But how is it going to be achieved without relaxing the fiscal deficit target of 3.2 per cent of GDP this year? The budgeted outlay, this year, for capital support to publicly-owned banks is just Rs 100 billion. Where will the “additional” resources come from? The how and when remains a mystery.
The finance ministry has a long, credible tradition of technical expertise. The Prime Minister can get away with making generic promises. But finance ministers are required to be very precise. They can’t waffle. They must not seem to be led by advice, whispered into their ears, while a press conference is on. This, unfairly, makes the finance minister look feeble, or worse, being led by the nose.
Mr Jaitley fell squarely into these traps. To his credit, he looked decidedly unhappy and uncomfortable while doing so. It is inconceivable that this media jamboree was his idea. Just back from Washington, where “best fit” fiscal practices are the main discourse, resorting to fuzzy announcements, which create high expectations and uncertainty, is not par for the course.
So what explains Mr Jaitley going down this route? After all, the Budget is just three months away. The sanctity of placing new budgetary proposals before Parliament, prior to revealing them to the public, is a sound convention. The only explanation is that the press meet was convened to boost the feel-good factor prior to the Himachal Pradesh and Gujarat elections, due over the next two months.
Recapitalising banks sounds good. Building infrastructure sounds even better. If this was the intention, Mr Jaitley was right to look uncomfortable. Nothing stops the Union government from doing its job, even as state elections are being held. But a red line must be drawn at presenting significant new fiscal proposals, that are not already embedded in the existing fiscal roadmap.
Mr Jaitley’s instincts remain sound. He will try hard not to breach the fiscal deficit target. He will resist reducing the capital outlay. He must also resist forcing cash-rich, listed publicly-owned companies to subscribe to the special recapitalisation bonds proposed to be floated by public sector banks. Listed, publicly-owned companies must be managed by their boards, and insulated from politics, at least with respect to their investments. Anything else is very unfair for the minority shareholders and the Securities and Exchange Board of India is duty-bound to resist such moves — however bizarre that may sound!
Generating ₹580 billion by selling off government equity held in excess of 51 per cent in banks is a good idea for a start. A better idea is to dilute government equity even further to 26 per cent without relinquishing effective control. The government does not need more equity to ensure that the public interest continues to be served. We must resolve the legal obstacles which prevent such dilution of equity.Using disinvestment proceeds to inject public finance into private companies, which create growth and jobs, is a great idea. But doing so via the chosen long route of public sector bank recapitalisation is worrisome. Unless management systems are restructured, politicised loans and NPAs will persist. This cannot be achieved by 2019.
What can be done is to use disinvestment resources to refinance private banks and non-banking finance companies, who in turn finance end-use borrowers, including small and medium enterprises (SME), to scale up operations.
The unmet financing needs of SMEs are estimated at Rs 65 billion. But this could be an underestimate, not least because of their widespread use of cash or unbanked transactions. The share of manufacturing SMEs in GDP is seven per cent, or just under 50 per cent of total manufacturing GDP. Their most immediate financing need is to discount their invoices and thereby reduce the 60-to-90-day payment cycle which saps their cash reserves.
Private specialised companies offering boutique supply-chain financing already exist. The largest is reputed to be the New Delhi-based Priority Vendors Technologies Pvt Ltd. But these early entrants tend to finance only the payables and receivables of large, star-rated corporates who buy from, or sell goods and services to, smaller ancillary firms. There are 5,000 large corporates. Compare this with 1.6 million registered SMEs.
We have barely scratched the surface of the potential for supply-chain financing. Saturation levels of financing can alleviate the cash crunch, at the firm level, caused by the GST regime of advance tax payments coupled with the delays, in “matching” tax credits, earned on purchases, before they can be used by firms, to pay taxes.
India is replete with good ideas. The finance minister could have unleashed an array of nimble steps, which can lubricate the economy, reduce risk and create jobs. But, by not grounding Tuesday’s press meet around a friendly conversation about the nitty-gritty of unleashing private potential and mitigating the hardships arising out of GST, this opportunity was lost. There will surely be another time. But will he be prepared by then to grasp the tide at its flood?
This commentary originally appeared in The Asian Age.