The National Monetisation Pipeline may not help realise the best value for public assets to kick-start investment demand The Government has launched a National Monetisation Pipeline, or NMP (https://bit.ly/3mLkw9M) to sell public assets or, more precisely, their revenue streams over the next four years. The pipeline mostly includes railway stations, freight corridors, airports, and renovated national highway segments (yielding toll revenue) amounting to ₹6-lakh crore, or 3% of GDP in 2020-21. As outlined in the Union Budget, the NMP aims to mobilise resources for financing infrastructure. The other two methods of raising resources are: setting up of a development finance institution (DFI) and raising the share of infrastructure investment in the central and State Budgets. Hard questions The proposed asset sale (monetisation) raises many questions. Conceptually, how is it different from disinvestment and privatisation (D-P) practised for the last three decades? Since D-P proceeds (revenues) have seriously missed the targets almost every year, how believable are the NMP targets? And how are they likely to perform differently? Is the NMP a desperate attempt to shore up public finances, after nearly two years of dismal output growth, stagnant tax-GDP ratio despite the steep rise in taxes on petroleum products? If so, is such a distress (fire) sale desirable to obtain a “fair value” for public assets? Would the market not factor in the dire state of the economy in beating down the prices, as in any distress sale? Explained | Why is there a push for asset monetisation? The NMP differentiates “asset monetisation” from “asset sale” by saying: “Asset Monetisation, as envisaged here, entails a limited period license/lease of an asset, owned by the government or a public authority, to a private sector entity for an upfront or periodic consideration” (NMP, volume 1, page 5). Asset monetisation as defined above is the same as the net present value (NPV) of the future stream of revenue with an implicit interest rate (whether it is a sale or lease of the asset). In a footnote, the NMP document further clarifies: “Sale, i.e. transfer of legal ownership of assets is only envisaged in cases such as disinvestment of stake, etc.”. Again there seems to be conceptual confusion. Sale of minority equity does not lead to a change in managerial control. Hence, the official attempt to differentiate its initiative from the earlier efforts seems feeble and incorrect. Historic missteps The NMP outlines mainly two modes of implementing the monetisation: public-private partnership (PPP) and “structured financing” to tap the stock market. PPP in infrastructure has been a financial disaster in India, as evident from what happened after the economic boom of 2003-08. Surely, India did create world-class airports in Mumbai and Delhi and speeded up highway road reconstruction. National Monetisation Pipeline | Here's the breakup of the govt’s big privatisation push However, after the 2008 financial crisis, as the world economy and trade plummeted, and as India’s GDP growth rate slowed down sharply, hurting demand (and revenues for the indebted companies), many PPP projects failed to repay bank loans. Banks were left holding the non-performing assets (NPAs). Further, as the bulk of the lending was to politically connected corporate houses and firms (Bollygarchs as picturesquely described by James Crabtree in his book, The Billionaire Raj), debt resolution came in the cross-hairs of the political and banking system. India is still reeling from the legacy of that period without any easy and credible solutions in sight. An Infrastructure Investment Trust (InvIT) is being mooted as an alternative means of raising finance from the stock market. In principle, InvIT is much like a mutual fund, whose performance is largely linked to stock prices. It may be worthwhile to jog one’s memory to recall how the disinvestment process began in 1991 after the initiation of economic reforms. It was by “off-loading” bundles of shares of public sector enterprises (PSEs) to the financial institution UTI, which in turn sold the bundles in the booming secondary stock market to realise the best price. The euphoria was short-lived, however, as the market crashed in the wake of the Harshad Mehta scam, stalling and discrediting the disinvestment process for almost the entire decade. Hence, it may be worth learning the lessons from the historical missteps before getting enamoured with the idea all over again by the current stock market boom. As many have apprehended, the currently high stock prices seem like a bubble with heightened uncertainties in the global financial market. With the U.S. Fed committed to reducing its assets purchase programme (known as quantitative easing), the “hot money” inflow that has fuelled Indian stock prices may dry up throwing up nasty surprises. In 2020-21, the economy contracted by 8% due to the pandemic and lockdown, as in the annual report of the Reserve Bank of India (RBI). The current year is at best likely to regain the pre-pandemic GDP level. Aggregate saving and investment rates (that is, as ratios of GDP) have (expectedly) contracted. The stock market is however booming, dancing to short-term foreign capital inflows, with little connection with the real economy. Given its distressed state, the asset monetisation effort appears nothing short of a fire sale. Other solutions Thus, it seems unwise to anchor the acutely needed investment revival strategy on a discredited PPP model or on fickle Foreign Institutional Investors (FII) investment in a frothy stock market. Instead of assets monetisation, why not monetise debt, with committed borrowing from the market and the central bank? With the financial system flush with liquidity with no takers for bank credit, why not finance the proposed investment — as envisaged in the Budget — by government borrowing. The usual objections against such an idea are three: cost of borrowing, “crowding-out” of private investment, and the inflationary threat. The RBI’s annual report shows the weighted average cost of central government borrowings in 2020-21 was 5.8%. And the inflation rate as measured by the consumer price index (CPI-combined) was 6.2%. Thus, with a negative 0.4% real interest rate (real interest rate is nominal interest rate minus inflation rate), domestic borrowing in home currency is a steal. Chances of crowding-out private investments are remote with a liquidity overhang in the market. Inflation risk is also limited with little aggregate demand pressures (barring temporary bottlenecks due to localised lockdowns). The rising public debt to GDP ratio is often red-flagged as a potential risk to rating downgrade by bond rating agencies. If the debt is productively used to expand GDP (the denominator), such risks seem minimal. Moreover, rising external debt by fickle portfolio investors perhaps carries a greater risk to external instability. Foreign portfolio investment has skyrocketed by 6,800% in 2020-21, over the previous year, to $38 billion (as per RBI data released in May). This, perhaps, poses a greater financial hazard than the potential rise in debt monetisation in domestic currency used for productive purposes. In perspective To sum up, the NMP is an ambitious “retail” sale or lease of revenue yielding public capital projects — with the potential threats of allegations of corruption and cronyism derailing the process — to revive investment demand and to halt the economic decline. The main instruments proposed for implementing the NMP are public-private partnerships and a stock market-based investment trust (InvIT). Both have serious shortcomings, as experience demonstrates. The NMP document seems silent on how to overcome past mistakes. Hence, the NMP appears like a fire sale which may not help realise the best social value for public assets to kick-start investment demand. If reviving investment demand quickly is the real goal, debt monetisation seems a better option than asset monetisation. It is a “wholesale” business with lower operating and transaction costs, and at a currently negative interest rate. With excess liquidity in the financial markets, and low aggregate demand, the inflationary threat seems minimal. Such targeted borrowing, if quickly funnelled into infrastructure investment projects, could crowd-in (or bring in) private investment igniting a virtuous cycle of investment-led economic revival.