By Moksha Grover
Finance Minister Nirmala Sitharaman announced on Monday that the Indian Government intends to monetize ₹6 lakh crore worth of state-owned assets over the next four years under its asset monetization pipeline. The union government has said that they’ll allow the private sector to bid for operating the assets for 25 years, and with a lump sum payment upfront, but without giving away title to the underlying assets. The Centre aims to sell off gas pipelines, roads, railway assets, and warehousing facilities among a host of other assets with the help of the National Monetisation pipeline (NMP). The private sector can operate these assets for 25 years but they have to calculate what they can earn from it in various ways, over the next 25 years; discount that cash flow to its ‘present value (PV), deduct from that their profit margin, and pay the balance amount as an upfront rental to the government.
Lets us assume the value of the said asset is Rs 100. And return to the asset in real terms is 4% per annum (net of inflation). The present value of the 4% earnings, discounted at the real rate of interest to such an operator, assuming it is 6%, (again real as opposed to nominal rate) would be Rs 51.3. Let us round it off to 50. Rs 50 represents the PV of an annuity of Rs 4, over 25 years, discounted at 6% per annum. In effect for every Rs 100 of assets monetized, the cash flow yield from the asset that the operator can expect is Rs 50. From this, he must deduct the return that he expects from his investment, the risk premium attached to the earning, and the general uncertainty of dealing with a capricious government. Assume the operator wants a minimum of 50% return on his equity. He will then be willing to pay Rs 35 (rounding off the calculation) for the Rs 100 assets. One doesn’t know if the Rs 6 trillion number is indeed the market value of the assets. But assuming it is, then the total value of upfront rental it can expect from such monetization will be in the region of Rs 2.1 trillion or less. In fact, given normal discounting rates of 50% in such cases (100% return on capital), the government should expect no more than Rs 1.5 trillion.
WHY IS THE GOVERNMENT DOING THIS?
The Indian government has been facing a silent budgetary crisis. This crisis resulted because of disasters like demonetization, tax cuts for corporates, and GST made by Modi. Because of these serial disasters, the GDP growth of the country has fallen drastically. As a result of GDP falling, Modi had to steeply hike the prices of inelastic commodities like petroleum products to pay for corporate tax cuts. The price hike and hike in direct taxes burden the lower and middle-class people, indirectly, and hence, they have to reduce their consumption. So their consumption falls dragging GDP growth down even further. As a result of all these events, the economy tanked by sinking GDP by 28% in one quarter. The GDP for the full year fell by 7%, the highest of any major economy. All the government revenues are left plummeting and deficits soaring, thus necessitating record borrowings to pay for government expenses. Presently, the government debt as a percentage of GDP now stands in the region of 90%. Government tax and non-tax revenues are expected to be 22.7% of GDP, and the combined government deficit is projected at 6.3%. So, the government was left with no choice introduced asset monetization to fill its coffers. As and when, asset monetization will take place it will add up to the non-tax revenues of the government. All this trickery comes in the backdrop of India’s worsening credit ratings, which are just about a notch above junk, with a negative outlook.
FEW POINTS TO KNOW ABOUT ASSET MONETISATION
- Asset monetization involves monetizing brownfield assets and does not include the selling of land.
- “Ownership of assets will remain with the government and there will be a mandatory hand-back,” as said by finance minister Nirmala Sitharaman.
- The infrastructure line ministries included the pipeline—Roads, Transport and Highways, Railways, Power, Pipeline and Natural Gas, Civil Aviation, Shipping Ports and Waterways, Telecommunications, Food, and Public Distribution, Mining, Coal and Housing, and Urban Affairs—along with Secretary (Department of Economic Affairs) and Secretary (Department of Investment and Public Asset Management).
- The estimated value corresponds to 14 percent of the proposed outlay for the Centre under the National Infrastructure Pipeline ( ₹43 lakh crore).
- Asset Monetisation aims at tapping private sector investment for new infrastructure creation.
- Asset Monetisation is important for employment opportunities and generation, which will further help in accelerating economic growth and public welfare of the country.
- The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include: Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%).
- In terms of annual phasing by value, 15% of assets with an indicative value of ₹0.88 lakh crore are envisaged to be rolled out in the current financial year (FY 2021-22). However, the aggregate, as well as year-on-year value under NMP, is only an indicative value with the actual realization for public assets depending on the timing, transaction structuring, investor interest, etc.
- A range of instruments is identified through which assets and transactions identified under the NMP are expected to be rolled out. These include direct contractual instruments such as public-private partnership concessions and capital market instruments such as Infrastructure Investment Trusts (InvIT) among others.
- Union Budget 2021-22 had identified monetization of operating public infrastructure assets as a key means for sustainable infrastructure financing.
EFFECTS OF ASSET MONETISATION
Privatization of assets will lead to the following outcomes: –
- Through the way of consumption or investment, privatization will lead to paring down of government instead of a further increase in government expenditure.
- Efficacy of asset use is improved through lower real interest rates to spur private investment.
- All the money that comes from asset monetization will go back to the government via a circuitous route.
- Asset monetization will not result in any addition to the gross domestic in the economy, either by bringing in foreign savings or by attracting a significant synergy premium.
- Asset monetization doesn’t add up to the share of resources available to the private sector and does not contribute to the growth of the private sector even by a penny.
In conclusion, the idea of selling existing government funds to create new ones is excellent. But in the current situation, there is no such thing, and speaking of the economy as a whole, there will be no other changes except transaction costs go up, and a severely limited government bandwidth is further stretched thin over needless paperwork.
 Sonali Ranade, ‘How Will Asset Monetisation Help the Government?’, The Wire (August 26,2021) < https://thewire.in/economy/how-will-asset-monetization-help-the-government> accessed 27th August 2021.
 there will be no other changes except e, th of the private secto even by a penny. Ibid.
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