Modi govt’s plan to ‘sell family silver’ a fallout of slashing corporate tax rates; will squeeze common man

Finance Minister Nirmala Sitharaman’s Rs 6 trillion ‘National Monetization Pipeline’ (NMP) exposes the mess the Indian economy and government’s financial situation find themselves in. The government would not have needed to sell the family silver (or lease it) had it not reduced corporate tax rates in 2019.

Considering the crisis the economy is in, it seems unlikely that even this would restore government’s financial health. Apart from raising questions about how we landed in a spot where we are forced to ‘monetize’ our assets, a softer word for selling and leasing assets, it is important to understand the true dynamics of what this government intends to do.

The most interesting items in the list of assets it wants to monetise is Railway Stadiums. These include Railway Sports Complex in DLW (Varanasi), Chennai, Kolkata, Raebareli, Maligaon in Guwahati, Kapurthala and Secunderabad; Indoor Stadium at Parel in Mumbai and Patna, Railway Stadium in Bhubaneswar, Bahala in Kolkata and Mahalaxmi in Mumbai; Cricket Stadium at Yelahanka in Bengaluru and Lucknow; and Gorakhpur Stadium in Gorakhpur,” according to a news report published in The Hindu.

We have seen conspiracies for commercial development of sports facilities in countless Bollywood films but nothing has ever been attempted at this scale. While details of how these properties would be developed, how the government plans to monetize them and how much money the government will collect is not clear, it seems almost certain that these properties don’t have too much to offer unless the government is looking at the real estate value.

The value of assets being monetized and what terms the government puts forward is going to be subject to a lot of discussion in the near future, but we also need to look at the highways component of the plan. The government plans to monetize highways for Rs 1.60 lakh crore over the next four years using the Toll Operate Transfer model, which would perhaps require an upfront payment of money.

This may provide some relief to the NHAI which has seen its total debt rise to Rs 3.17 lakh crore at the end of FY21 which is expected to go upto Rs 3.7 lakh crore by the end of the current financial year. Private investments in the highways sector has almost dried up and the debt servicing costs have gone up from 11.33% in 2017-18 to about 15% in 2018-19.

With toll incomes declining by nearly 4%, it remains to be seen if investors are going to line up to spend the Rs 1.6 lakh crore as the government thinks they would. The bigger question would be if the banks would be willing to lend.

The government plans to raise Rs 20,782 crore through the monetisation of airports and the sector has its own financial problems as they posted a loss of Rs 7,000 crore during the pandemic against a profit of Rs 5,160 crore but this was mainly in the larger airports which handle bulk of the passenger traffic.

The ‘monetised assets’ would make about 18% of the total holding of the AAI but AAI accounted for almost 69% of the total losses and it remains to be seen if these monetisation plans offer any serious value to the investors.

While each sector would have its own challenges and meeting the investment target of Rs 6 lakh crore over the next four years is not going to be easy, it would be important to understand how the government put itself in a corner by cutting down corporate tax collections.

The change in the tax structure has seen corporate tax collections plummet from Rs 6.63 lakh crore in 2018-19 to Rs 4.57 lakh crore, a decline of over Rs 2 lakh crore.

The effective tax rates were brought down to around 25 per cent for existing companies and to around 17 per cent for new companies in the manufacturing space. Corporate tax collections levied on profits of firms contracted 18 per cent in 2020-21 while personal income tax collections fell by only 2.3 per cent, The Print had reported.

The biggest question, however, is if the Indian banking system is robust enough to at least partly finance the monetisation plan. Estimates at the beginning of the year indicated that NPAs could rise to 13.5% by September 2021 and RBI had expressed fears that we could be touching 1997 levels if things don’t improve.

The Union Government’s ‘Asset Monetisation Plan’ may be its last throw of the dice to rescue its economic narrative. With economic recovery still years away, companies not very keen to invest and banks still stressed, it would be difficult to see a scenario where companies will go deep into their pockets to invest in brownfield assets. Since the move is linked to future government investments in the infrastructure sector, it might create more problems than it would solve.

If someone still thinks that monetisation is a good idea, consider this: it’s the consumer who finally pays for it as parking rates at airports will go up, private sector would have to increase toll rates on highways and a whole lot of hidden costs are going to rise.

And to make matters worse, as Union Minister Hardeep Singh Puri has said, petrol and diesel prices will come down only when international prices come down. In short, life is going to get a little more difficult.