What’s should be your strategy for primary market in FY25?

Earlier this month, I wrote an article that talked about the need to grant our taxpayers independence from funding public sector undertakings. The idea was to restrict the government to focusing on what is essential while leaving the rest to the private sector. The government has recently unveiled a National Monetization Pipeline with the objective of raising 6 lakh crores. The idea essentially is to monetize existing public infrastructure with the objective of using the funds for creating fresh infrastructure as envisaged in the National Infrastructure Pipeline.

Let us ignore the political comments that have been made with regards to the government’s plan to monetize existing infrastructure assets. However, we must recognize that India’s former Chief Economic Advisor, Kaushik Basu has expressed some concerns regarding the intervention. In fact, he has given the example of Russia and Russian oligarchs to caution against a regulatory capture. There is no doubt that we must strive to prevent such an institutional capture and Professor Basu makes a valid point.

However, the comparison with Russia is a bit of an overstretch to be honest.

Even Professor Basu agrees that the move for monetization is a good decision. On the concerns of capture, I think a more nuanced discussion is warranted. That is, India has historically had a small subset of narrow industrialists who created wealth in the economy. This wealth was often exercised by some as a means to achieve some benefits that would eventually help in preserving their wealth. This created a crony-capitalist system that got perpetuated since the 1980s.

However, India in 2021 is very different from India of 1980s, or even early 2010s and this is manifested by the fact that India has added a significant proportion of wealth creators over the last decade – and this number is much larger than the corresponding number in any previous decade. Therefore, India’s wealthy are a lot more diverse today than they have ever been indicating that the economy is far more dynamic and competitive than it has been in the past. Of course, one can look at specific sectors to drive home a point of consolidation, but then again, one can easily point at booming new sectors with first generation entrepreneurs to point at competitive dynamism of the Indian economy.

Ultimately, an economy that receives such extensively foreign capital flows is bound to always arrive at a situation where there will be competition for market access. This is true even in the case of leasing of infrastructure assets. Instead of the risks associated by oligarchs capturing our infrastructure projects, Professor Basu should have cautioned us about the political risks that will prevent foreign investors to bid for such projects. By political risks, I am referring to the impact of change of a political party in the government over previously negotiated contracts – something that we saw in recently in Punjab and earlier in Andhra Pradesh and Maharashtra. The solution to the problem highlighted by Professor Basu can be solved by getting more people to participate in such auctions and achieving that requires reigning in regional political parties and the tendency within the opposition political parties to either scrap or renegotiate existing contracts with the objective of rent-seeking.

Luckily, though that most of the projects pertain to the central government so to some extent the political risk is lower, and we may see some degree of interest from global investors. Therefore, an appropriate design of the auction can ensure fair revenues to the government even as being an attractive proposition for the private investors.

The National Monetization Pipeline is effectively a good intervention as it restricts the role of the government to focus on identifying critical infrastructure while allowing the private sector to generate value from the same & share it with the government. This ensures that the government can continue to prioritize on building critical infrastructure, even in areas where there are no positive economic returns, but social considerations require them to be constructed. On the other hand, private sector can focus on valuing them appropriately as they bid to take over the operations of revenue mobilization from these assets. It is indeed the revenue mobilization part where the government fails significantly and thus, private sector’s intervention in this regard will be particularly useful for the overall sector. This will also mean that the government will eventually be able to finance a greater amount of infrastructure as it has more resources at its disposal. This is good news for a country where there is a resource constraint, and a lot of infrastructure is yet to be built.

It is also important to recognize that not all government infrastructure can be considered as an asset – and that it is an asset only as long as it generates a positive revenue stream for the government. Failure to do so can make many potential assets into a liability. The intervention of the private sector is timely as it will prevent many such assets from becoming a liability due to the inefficiencies of the government sector.

The thinly veiled criticism of the decision is particularly disheartening as many of those who have offered criticism were the ones who lamented the government for their inability to privatize. Just as the government is beginning to attempt to find a middle ground between privatization and giving up operational control, we have many express reservations. What is concerning is not that they are expressing reservations, but the fact that the reservations are not about the lack of privatization – but instead about giving up control. This does not behove any serious policy commentator as it illustrates a political bias with regards to policy choices – privatization is good if A party does it but bad if B party does it. Hopefully, such armchair critics will realize how such shenanigans can dampen their credibility as serious commentators on policy matters.

As Professor Basu noted, the idea of monetization of existing assets is a good idea – and it is an idea whose time has come. By now we have adequate evidence in support of restricting the role of the government in the economy – and of the positive result of prior privatisation exercises. Therefore, there is no reasonable justification to not go forward with the monetization exercise. The only wish is that it is done at a fast pace, rather than it getting stuck within the bureaucratic machinery.