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Finance Secretary TV Somanathan has said that scaling down of disinvestment targets does not imply that the government is shying away from either disinvestment or privatisation. Rather, it is making a shift in the short term to have better value realisation in the medium and long term. In an interview with BusinessLine, he also made it clear that whatever money is required for vaccination, it will be provided. Excerpts:
Public expenditure is high but private investment is still low. Where is the problem?
The biggest problem has been the pandemic. People think the solution to every problem is government expenditure or taxation, which is not true. If we keep Covid restrictions and say markets are closed, night curfew, don’t travel, reduce flights, then there will be a reduction in demand and consumption. Till such time as these pandemic-induced physical restrictions on shopkeepers, restaurants, cinemas, concerts and airlines remain, there is a limited role for physical intervention. These interventions cannot cure Covid.
But even before the pandemic, private investment was not coming
At that time, there were supply side constraints. Banks were in a bad shape. There was an inability to expand because balance sheets were very stressed; there was a twin balance sheet problem. But today, the balance sheets of both –companies and banks are much better. Now, the only issues are likely to be capacity utilisation and demand. Earlier, that was not the issue. As demand will pick up now, capacity utilisation will increase and we will reach apoint where capacity expansion will have to follow. The pump is being primed through public expenditure now.
Public capital investment will trigger demand increase from any company — when we do one rupee of capital expenditure, two to three rupees of demand is created. That will filter through into companies, their suppliers, their component manufacturers and then the component manufacturers’ suppliers. When they gather more workers, they will have to eat — there will be some idli shop, tea shop, restaurant, and they will employ some people. All these will start a virtuous cycle of consumption. When that happens, investment intention will begin to fortify. This is the first thing.
Secondly, things like privatisation have a big impact on investment. Take the example of Neelachal Ispat Nigam Limited — DIPAM Secretary is anticipating that ₹5,00,000 crore investment will come in the next five years as they (the buyer) are trying to increase 1 million tonnes to 5 million tonnes. The bids are much higher than reserve price. The private sector sees more value in the asset than when it was in the government’s hand. That triggers investment. So, it is the multiplicity of methods and there is not much more that one can do. Certain amount of protection has also been given to the domestic industry.
PLI is another way of triggering domestic investment. As and when PLI application gets accepted, we hope there will be big uptake in private investment.
“Higher borrowing means impact on interest rates impacting private investment”. How true is that?
Deficit has to be financed. If everybody wants to kickstart the economy and spend, money has to come from somewhere. I do not think the kind of private investment we are seeing is so interest rate sensitive that 0.25 per cent or 0.5 per cent increase in interest rates (will affect it). If it were, there should have been a lot of private investment when rates were low but it didn’t happen. I think interest rate sensitivity of private investment for a small shift in yield is very low. So, I don’t think this shift in yield will affect private investment.
Private investment is much more influenced by demand and expectations of future growth than by interest rate. So, if we can boost the rate of growth through higher capital expenditure, that will do more for capital investment ,han keeping the interest rate low.
Will higher borrowing crowd out private investment?
I don’t think so. I think in this kind of situation, crowding-in will exceed crowding-out. Theoretically, in Economics, both are possible. Crowding-in is a situation where, because somebody is doing something, others will join. Crowding-out means the room is very crowded and people leave. We are, right now, not in a crowding-out situation precisely because the private sector is not investing. If the banks were running out of money, that would be a crowding-out situation.
We need the private sector to crowd-in. So, the balance is between keeping yields low with low public investment and slightly higher yields with higher public investment. The government’s opinion has been reflected in the Budget — higher public investment is the better strategy. It may have some impact on yields but it is not catastrophic. In fact, much before the borrowing number was made public, yields had gone up. Yields can not be managed by the Central government alone. There are global factors and many others which filter into G-sec yield.
Has the Budget factored in all global factors such as winding up of loose money?
All these were considered while preparing the Budget. We cannot predict what will happen. There are risks we are aware of such as Federal Reserve taper, quantitative tightening, several interest rate increases and higher oil prices. Normally, you would expect quantitative tightening to result in a drop in commodity prices which would help us in terms of oil prices, fertiliser inputs and raw commodities. So, there are two possibilities — adverse and favourable.
Alternatively, one is adverse and the other will remain adverse because of geo-political tensions. However, geo-political tensions do not seem to be everlasting; economic fundamentals tend to assert themselves. So, if the US interest rate goes up substantially, then we would generally see some offsetting benefits in commodity prices and asset prices. We have thought of all these and we have taken very conservative assumptions of growth. We are aware of threats to growth as well.
Does lower disinvetment means the government is shying away from privatisation?
A lower number does not mean that the government is going away from disinvestment or privatisation. The number is not lower because of not pursuing policy, it is lower because we are shifting emphasis. Ambitious targets affect the stability of fiscal management as resources are to be allocated to Ministries and Departments and if the target is not achieved, then there will be an issue.
Secondly, higher targets also affect public sector shares because the market anticipates that in order to plug deficits, shares will be sold. We wanted to get away from these; we are now part of new PSE policy. Earlier, disinvestment was primarily a fiscal policy. It was done to raise resources to reduce the fiscal deficit. The intention was not to privatise anything but rather to sell part a of the holdings.
Now, we are saying that we shall privatise, sell or dispose of assets in the non-strategic sector. Air India is done, NINL is almost done, and a few more are in the pipeline. To do that, we have to free DIPAM from the obsession of meeting targets.
They have to do the best transaction for the economy, which may not be best fiscal result. Take the example of NINL — the Centre is not getting anything but CPSEs and State’s PSEs, who are shareholders, will get money. Is it worthwhile transaction? Yes, it is as it is creating value. There is shift to realism in estimation and focus on mpleting the strategic transactionthregardless of their fiscal short-term impact. The rush to get the fiscal number was affecting the valuation of PSU shares. So, our strategy is shifting from a fiscal tool in the short term to have value creation in the medium term and benefits in the long term.
Why just ₹5,000 crore allocation for vaccination in FY23?
We do not make the vaccination policy. Instead, the Budget follows the vaccination policy. As of now, whatever decisions have been taken are fully funded in the Budget. As the vaccination policy changes, necessary provisions will be made accordingly. We have not speculated on the vaccination policy. Last year, the amount was for vaccinating the entire population twice over. Next year, in the worst case scenario, the entire population may need to be given vaccines once. This means the maximum requirement will be half. We have allocated based on the current vaccination policy where the booster is for a limited segment of population. It is not for me to decide what the vaccination policy will be. So, if more is needed, it will be provided.
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