Context

The Government has launched a National Monetisation Pipeline, or NMP  to sell the revenue streams of public assets over the next four years.

About NMP

• Financing infrastructure: As outlined in the Union Budget, the NMP aims to mobilize resources for financing infrastructure.
• Type of assets: The pipeline mostly includes railway stations, freight corridors, airports, and renovated national highway segments amounting to ₹6-lakh crore, or 3% of GDP in 2020-21.
• The other two methods of raising resources are: setting up a development finance institution (DFI) and raising the share of infrastructure investment in the central and State Budgets.

Concerns

1) Not different from Disinvestment-Privatisation (D-P)

• Asset monetization as defined in NMP 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).
• Missed targets: 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?
• If the NMP attempt to shore up public finances, such distress (fire) sale would find it difficult 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?
• The NMP document seems silent on how to overcome past mistakes.

2) PPP mode of implementation

• The NMP outlines mainly two modes of implementing monetization: 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.
• After the 2008 financial crisis, many PPP projects failed to repay bank loans leading to the piling up of non-performing assets (NPAs) of banks.
• Further, the bulk of the lending was too politically connected to corporate houses and firms.
•  India is still reeling from the legacy of that period without any easy and credible solutions in sight.

3) Stock market crash threatens the success of InvIT

• 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.
• The disinvestment process began in 1991 in which the bundles of shares of public sector enterprises (PSEs) were sold by UTI in the booming secondary stock market to realize the best price.
• 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 exploring the idea all over again by the current stock market boom
• At present, the U.S. Fed committed to reducing its assets purchase program (known as quantitative easing), the “hot money” inflow that has fuelled Indian stock prices may dry up throwing up nasty surprises.

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.

Suggestion: Monetise debt

• With the financial system flush with liquidity with no takers for bank credit, finance the proposed investment — as envisaged in the Budget — by government borrowing.
• 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.
• No Crowding out: Chances of crowding-out private investments are remote with a liquidity overhang in the market.
• Low inflation risk: Inflation risk is also limited with little aggregate demand pressures (barring temporary bottlenecks due to localized lockdowns).
• Rating downgrade risk:  If the debt is productively used to expand GDP (the denominator), rating downgrade risk due to the rising Debt-GDP ratio seems minimal.
•  Moreover, rising external debt by fickle portfolio investors perhaps carries a greater risk to external instability.

Consider the question “How the National Monetisation Pipeline seeks to implement the asset monetisation? What are the challenges in asset monetisation?”

Conclusion

If reviving investment demand quickly is the real goal, debt monetisation seems a better option than asset monetisation.

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