From Demonetisation to Monetisation: A Sordid Saga

The Indian economy has turned a full circle in the last five years. The forces unleashed by Demonetization in 2016 have led to the Monetisation 2021, also being called the great Indian asset sale.

The government may still choose to call it another reform and perhaps another ‘achievement’ of the Union government but the key question is: How will this asset sale be financed?

Among what the government wants to put up for sale are 50 railway stations, 150 trains, telecom assets worth Rs 40,000 crore, almost 7,000 kms of roads, power transmission assets worth Rs 27,000 crore, sports stadia worth Rs 20,000 crore, stake in airports, petroleum pipelines and shipping berths in ports. This is expected to be in addition to the “few banks” that the government wants to privatize.

It would only be fair to state that most of these assets were not created during the last six years of the Modi government and would be a part of their ‘inheritance’ from governments of the past but that is unlikely to stop the government from putting up a yard sale.

The government, however, is trying other steps to either save money or raise additional resources through astronomically high levels of tax on petroleum products and both may end up making economic recovery all the more difficult.

The move by NITI Aayog to raise Rs 2.5 lakh crore through asset sales is an indicator of the mess that India's economy finds itself in. The NITI Aayog had earlier moved a proposal to cut down food allocations under the Right to Food which could help the government save up to Rs 47,229 crore.

The middle and the working class are buying their petrol at close to Rs 100 per litre but it is simply not enough as the government faces a serious shortfall in revenue. Taxes on petrol, diesel and LPG are not going to be enough to fill the crater that government finances find themselves in. Taxes from petroleum products generate an additional Rs 2.25 lakh crore per annum but may not provide enough fiscal space to the Finance Minister.

The FM could have looked at the RBI to provide some relief as additional dividend but the government has already used up that lifeline two years ago as it got Rs 1.76 lakh crore from the central bank. In FY20, the central government got Rs 57,128 crore as dividend from the RBI and though the government wants RBI to pay more, there is little space if the contingency risk buffer is kept at 5.5 per cent.

The government is in serious trouble because its disinvestment plans have delivered very little. The NDA government had set itself and ambitious disinvestment target of Rs 2.1 lakh crore but it could only raise Rs 21,302 crore, just about 10 per cent of its disinvestment target, lowest in the last seven years. FM Nirmala Sitharaman had kept the disinvestment target for FY 2022 at Rs 1.75 lakh crore which would include two public sector banks and one insurance company.

The government would like us to believe that the Monetization drive is caused by the Covid pandemic but fact is, this is not the first time this has happened. While earlier disinvestment drives were said to increase efficiency, selling railway stations and trains are unlikely to provide any additional value to citizens, perhaps only raise costs of usage.

It would be interesting to see how this ‘Monetisation’ would be financed as most corporates would have limited cash reserves, following the downswing in the economy and almost a year of reduced economic activity. The government would want banks to finance these asset sales but then it would have to contend with rising NPAs -- which are expected to touch 13.5 per cent by September 2021, the highest in the last 22 years.

We are now reaching a point where balancing the fiscal math is going to become increasingly difficult if tax collections do not magically rebound to pre-covid levels and that too was not enough to meet the government’s increased spending. The tight fiscal space notwithstanding, the government went ahead with announcing schemes like PM Kisan Nidhi which played a big part in the re-election of the government.

Prime Minister Narendra Modi had announced demonetisation of high-value notes in November 2016 and that started a series of events that led to economic growth slipping down to 3.1 per cent in March 2020 quarter. While the pandemic has made things worse, the fiscal mess that the government finds itself is partly of its own making.

It is only an irony of fate that Demonetization has ended up in ‘Monetization’.