Modi’s Rs 2.5 lakh cr Asset Sale Plan Needs a Transparent Approach

The Prime Minister Narendra Modi has set a target of monetising 100 government-owned assets across sectors. As he said: “We have a target of 100 assets from oil, gas, airport, power, which we plan to monetise. This has the potential for investment opportunities of Rs 2.5 lakh crore.”

This is in continuation of the idea that the finance minister Nirmala Sitharaman had presented in her budget speech on February 1, 2021. As she had said:

“Idle assets will not contribute to Atmanirbhar Bharat. The non-core assets largely consist of surplus land with government Ministries/Departments and Public Sector Enterprises. Monetising of land can either be by way of direct sale or concession or by similar means.”

Hence, a lot of this idle assets are government owned land or will involve land in some form or other. This is a good and an innovative idea which some of the previous budgets lacked.

Many large Indian cities have a lot of government land lying idle while the cities on the whole are stretched for land. Hence, freeing up some of this land and earning some money in the process is a good idea.

Let’s look at this greater detail pointwise.

1) If you are the kind who likes walking around India’s big cities, you would definitely see a lot of government land lying unused bang in the middle of cities. Close to where I live in central Mumbai is the Bicycle Corporation of India, in one of the by lanes of Worli. In the one and half decades I have walked past the company, I haven’t seen any economic activity happening. Peepul trees now grow from the walls.

This is land bang in the middle of Mumbai, some of the most expensive real estate in the world, lying unused. This is criminal to say the least. Another great example of unused real estate are all the MTNL offices, all across Mumbai and Delhi.

The Heavy Engineering Corporation (HEC) in the city of Ranchi where I was born and raised, has acres and acres of land lying unused, while the city itself hardly has any land going around. This is land that has been lying unused for decades and needs to be put to some use.

2) It’s not just the big cities that have all this excess land lying unused. Even a place like Ooty, has acres and acres of land lying unused thanks to the Hindustan Photo Films Manufacturing Company Ltd., which is largely not functional. There are quite a few such public sector enterprises which are no longer relevant, all across the country.

Given this, one of the first things that the government needs to do is to make an inventory of all this land and put it up in the public domain on a website. It needs to do so with all the other assets that it plans to monetise as well.

Of course, this inventory is not going to be made overnight and will take time. But it is important that this is done in the most transparent way, given that corruption/crony capitalism and land/asset sales, almost go hand in hand.

This is even more important because the government considers this route as an important source of revenue in the years to come. As the finance minister said in the budget that over the years the government hopes to earn more money “by increased receipts from monetisation of assets, including Public Sector Enterprises and land”. Hence, getting the process right is very important.

This becomes even more important given that there will be great opposition to the process from those who benefit from the status quo and even otherwise. The government selling its assets to raise money to do other things is not seen as a good thing. Hence, even a hint of corruption or any other controversy can threaten to derail the entire process, something the government cannot afford at this point of time.

3) In cases where the land was taken from state governments to start a public sector enterprise, it is important that the land be returned to the state government and let the state government decide what it wants to do with it. In the years to come, state governments will also be running short of money to meet their expenditure.

Also, this is the right thing to do. The state government can also use the land to attract more investment into their state. In some cities where there aren’t enough public parks, some land can even go to develop such infrastructure. The aim shouldn’t be to maximise the money earned all the time, but maximise the general well-being.

Again, this is something that will need some amount of thinking and the government’s thinking on this should be clear and out in the public domain.

4) There is another factor that needs to be kept in mind here. Real estate prices in most big Indian cities have remained and continue to remain high. One of the major reasons for this lies in the fact that the land prices remain expensive across Indian cities. Hence, it is important that some of this land be sold to build affordable housing. Only if land prices come down, will home prices come down.

And by affordable housing I mean homes which can be sold profitably in the range of Rs 10-20 lakh per unit and not affordable housing as the way the RBI defines it, which isn’t really affordable housing at all, but just a fancy moniker to help banks meet their priority lending targets.

Other than helping people buy affordable homes to live in, the real estate sector has the ability to create a large number of jobs very quickly. It also has the capability to have a multiplier effect across many other sectors. Building real estate requires cement, sand, steel, bricks, pipes, etc., and so on. Once real estate has been built in, moving into a home requires its own set of purchases. Buying homes also gives a fillip to the home loan business. And of course, people living in homes they own, enhances general well-being.

5) Finally, it is important that the money earned through this route be used for a specific purpose and not just for bringing down the fiscal deficit, which has ballooned to Rs 18.49 lakh crore or 9.5% of the gross domestic product (GDP) this year. Even in 2021-22, the fiscal deficit target has been set at a high Rs 15.07 lakh crore or 6.8% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends and is expressed as a percentage of the GDP.

It is important that money coming from land sales be allocated towards specific infrastructure projects, preferably in the very state where land is being sold. This will make it easier to sell this idea to the state governments, whose cooperation is very necessary to make this idea a reality.

To conclude, the monetisation of excess government land in particular and other assets in general, is a good idea. Having said that, it needs to be executed in a proper process driven and transparent way.

This is an updated version of an article that first appeared on Firstpost on February 2, 2021.

More Than Half of Govt Taxes Will Go Towards Paying Interest on Past Loans

As I keep saying, the union budget at its heart is the presentation of the financial accounts of the government or to put it simply, on what it plans to spend money on, during the course of a year and how does it plan to earn and arrange for that money.

Given this, a lot of analysis happens on the issue of what the government plans to spend money on, during the course of a particular year. A similar thing has happened this time around as well, with journalists, analysts and economists, digging into the budget in trying to figure out where exactly is the government planning to spend money in 2021-22 and where it has spent its money in 2020-21.

The trouble is that like previous years this year as well most analysis has missed out on the biggest expenditure item in the government budget, which is interest payments. Almost every government spends more than what it earns and the difference is referred to as the fiscal deficit. This deficit is largely financed through the government borrowing by issuing bonds. An interest needs to be paid on these bonds every year.

This interest is the largest expenditure in the government’s budget, even though it rarely gets talked about.

Take a look at the following graph, which plots the interest payments on the outstanding borrowing of the union government.

Source: Centre for Monitoring Indian Economy.
2020-21 – Revised estimate.
2021-22 – Budget estimate.

As can be seen from the above chart, the interest payments have been going up over the years and are expected to be at around Rs 8.1 lakh crore in 2021-22 . Now Rs 8.1 lakh crore on its own sounds like a large number, but just looking at the absolute number is not the right way to go about things in this case.

Let’s look at what proportion of overall expenditure of the union government have interest payments formed over the years.

Source: Author calculations on data from Centre for Monitoring Indian Economy.

As per this graph, interest payments in 2020-21 formed a little over one-fifth of total expenditure and this is an improvement on the situation that prevailed before. But this interpretation is wrong, simply because the overall expenditure of the government also includes money that it does not earn.

Hence, a government can always borrow more and spend more in a particular year leading to a higher expenditure number and thus, the interest payments as a proportion of overall expenditure will come down. But that doesn’t mean things have improved.

Let’s look at another chart. This plots the interest payments as a proportion of net tax revenue earned by the union government. Net tax revenue is what remains with the central government after sharing a certain proportion of the gross tax revenue (or to put it simply overall tax collections) with the state governments.

Source: Author calculations on data from Centre for Monitoring Indian Economy.

The above chart gives us a clear picture of the prevailing situation. In 2017-18, the interest payments formed 42.6% of the tax revenues earned by the union government. They have been rising since then and in 2020-21 and 2021-22 are expected to touch 51.5% and 52.4%, respectively.

What does this mean? It means that more than half of the government’s taxes are going towards paying interest on its outstanding loans, leaving very little money for anything else, unless the government earns money through other ways or borrows money or uses other ways to finance the fiscal deficit.

One way for the government to earn more money is through the sale of its stakes in public sector enterprises. In 2020-21, the government had hoped to earn Rs 2.1 lakh crore through this route. This turned out to be a very ambitious target and the government is now hoping to earn Rs 32,000 crore through this route during 2020-21.

The disinvestment target for 2021-22 has been set at Rs 1.75 lakh crore. It is very important for the government to earn this money else it will have to borrow more to meet the expenditure. This will mean higher interest payments in the years to come which will either lead to the government having to cut expenditure or having to borrow even more to meet the expenditure. More borrowing will lead to even more interest on the outstanding debt.

This will have to be paid by implementing higher taxes on the taxpayers and many of these taxpayers will be newer ones, just entering the workforce. This is precisely the way the current generation passes on its liabilities to the next one.

Also, as the outstanding debt matures and needs to be repaid, the government will have to borrow more to repay this debt. Hence, a greater proportion of the borrowing will just go towards repaying debt which is maturing. This will become a debt spiral and needs to be best avoided.

There is another thing that is happening and needs to be brought to notice. The government finances a major part of the fiscal deficit through borrowing. So, let’s take the case of 2020-21. The fiscal deficit for the year is expected to be at Rs 18.49 lakh crore.

A bulk of this deficit will be financed by borrowing Rs 12.74 lakh crore from the market. Where does the remaining money to fill the gap come from? A bulk of it comes from the small savings schemes.

The small savings schemes currently in force are: Post Office Savings Account, National Savings Time Deposits ( 1,2,3 & 5 years), National Savings Recurring Deposits, National Savings Monthly Income Scheme Account, Senior Citizens Savings Scheme, National Savings Certificate, Public Provident Fund, KisanVikas Patra and Sukanya Samriddhi Account.

The money coming into these schemes net of disbursements that happen during the course of the year, is used to finance the fiscal deficit of the union government.

This has been rising at an astonishing pace over the years, as can be seen from the following chart.

Source: Centre for Monitoring Indian Economy.

In 2012-13, the amount had stood at Rs 8,626 crore and it has since risen to more than Rs 4.80 lakh crore. While this amount does not end up as a debt of the government, it is a liability that the government does need to repay over the years.

Also, this is money that is coming from the public savings at the end of the day. In order to ensure that money keeps coming into these schemes, the government will have to continue offering a higher rate of interest on these schemes in comparison to bank fixed deposits.

Hence, the perpetual complaint of the bankers is likely to stay, given that the government needs this money to continue financing its high fiscal deficit. The other option is to borrow directly from the market and increase its outstanding debt figure, which the government wants to avoid beyond a point.

What this tells us is that all hasn’t been well on the government finances front over the last few years, and covid has only made it worse. One reason for this lies in the constant fall in the taxes collected by the government as a proportion of the gross domestic product (GDP), over the years.

The net tax revenue of the union government stood at 8.97% of the GDP in 2007-08. It has since fallen and was at 6.67% of the GDP in 2019-20. In 2020-21, it is expected to be at 6.90% of the GDP. The figure is higher in 2020-21 simply because of the size of the Indian economy, as represented by the GDP, is expected to contract more than the taxes collected by the government during the year.

This fall in tax collections and the dependence of the government on other ways of financing its fiscal deficit, also leads to the question whether the size of the Indian economy or its GDP, is being properly measured. Over the years, the informal part of the Indian economy has seen huge destruction and the question is, does this destruction reflect properly in the GDP figures being published over the years. This is a question well worth asking given that if the GDP is growing why have tax collections been falling?

To conclude, it does seem the government understands the financial situation it is headed towards. Hence, an ambitious target for disinvestment has been set. Over and above this, it also has plans of monetising physical assets including surplus land. Hopefully, this will take off soon. .

PS: Of course, you will not find this kind of analysis anywhere in the mainstream media or even digital publications which charge a fee. Hence, it is important that you support my work. You can do it here. 

Budget 2021: Govt’s Claim of a Sharp Increase in Capital Expenditure Doesn’t Really Hold

Good analysis takes time.

It’s been three days since the finance minister Nirmala Sitharaman presented the annual budget of the union government and now my brain has really opened up and can see things that it couldn’t earlier.

On February 2, I wrote a piece which basically looked in detail at the fiscal deficit of 9.5% of the gross domestic product (GDP) and why the government’s claim of spending more this year and the next, to become the spender of the last resort and get the economy going again, didn’t really hold.

This piece is basically an extension of the same idea. Ideally, you should read the February 2 piece before you read this. Nevertheless, this piece is also complete on its own and if you are short on time, then just reading this piece should be enough to understand what I am trying to say.

One of the claims made by the finance minister in her budget speech was that the government was increasing the capital expenditure this year and the next. The mainstream media and the stock market wallahs have also tom tommed this line over the last few days. Nevertheless, as my analysis shows, this claim doesn’t really hold to the extent it is being made out to be.

As the finance minister said in her speech:

“In the BE 2020-21, we had provided Rs 4.12 lakh crores for capital expenditure. It was our effort that in spite of resource crunch we should spend more on capital and we are likely to end the year at around Rs 4.39 lakh crores which I have provided in the RE 2020-21. For 2021-22, I propose a sharp increase [emphasis added] in capital expenditure and thus have provided Rs 5.54 lakh crores which is 34.5% more than the BE of 2020-21.”

Let’s try and understand what the finance minister is saying here pointwise. (BE = budget estimate. RE = revised estimate. When the budget is presented a budget estimate is made. When the next budget is presented a revised estimate is put forward).

1) Capital expenditure is basically money spent on creating assets, in particular physical infrastructure like roads, railway lines, factories, ports, etc. Revenue expenditure is basically money spent in paying salaries and pensions, financing subsidies, etc. Over and above this, interest paid on the outstanding debt or borrowings of the government, is also a part of revenue expenditure. In fact, interest payments on outstanding debt are the biggest expenditure in the union budget. In 2020-21, it forms 20% of the total government expenditure and it jumps to 23.3% in 2021-22.

The usefulness of capital expenditure made by the government can be experienced in the years to come as well and it is believed that it adds to economic activity more than the revenue expenditure. Hence, economists, journalists and policy analysts, while analysing the union budget like to look at the money that has been allocated towards capital expenditure.

2) In 2019-20, the government spent Rs 3.36 lakh crore on capital expenditure. In 2020-21, it is expected to end up spending Rs 4.39 lakh crore, which is 30.7% more. But the thing to understand here is that when the government presented the budget for this financial year in February 2020, it had already budgeted to spend Rs 4.12 lakh crore or around 22.6% more.

It is worth remembering that when the budget for this financial year was presented, the fear of covid and the negative impact it would have on the economy, hadn’t been realised as yet. In the aftermath of covid, the capital expenditure went up from the budgeted Rs 4.12 lakh crore (or the budget estimate) to the revised estimate (RE) of Rs 4.39 lakh crore. Hence, the post covid increase in capital expenditure has been around 6.6%.

Given this, the increase in capital expenditure in 2020-21 had already been budgeted for pre-covid and there was a small increase post-covid. Once we know this, things don’t sound as exciting as the finance minister made it sound in her budget speech.

3) How will things look in 2021-22 when it comes to capital expenditure? The finance minister said that the capital expenditure will grow by 34.5% to Rs 5.54 lakh crore in 2021-22 in comparison to the budgeted expenditure of Rs 4.12 lakh crore in 2020-21.

The question is why would you compare next year’s budget estimate with the current year’s budget estimate when the revised estimate number for the year is already available. You would only do it, if you wanted to show a higher jump. Anyway, the finance minister of a country should be using some better mathematical tricks than such an elementary one.

Also, even when we compare next year’s budgeted capital expenditure with this year’s revised one, the jump is substantial. The capital expenditure will jump from Rs 4.39 lakh crore to Rs 5.54 lakh crore. This is a jump of 26.2%, which looks to be very good.

4) So far so good. The trouble is that the finance minister just spoke about the budgeted capital expenditure of the government in her budget speech and not the total capital expenditure of government. You can click on this and go to page 8 to get the numbers for the total capital expenditure of the government, which are also published in the budget.

The total capital expenditure of the government includes what is in the budget plus internal and extra budgeted resources (IEBR). The IEBR consists of money raised by the public sector enterprises owned by the union government through profits, loans as well as equity, for capital expenditure. It also includes the Indian Railways. This is also a part of government’s overall capital expenditure though it is off-budget and not a part of it.

The total capital expenditure of the government in 2019-20 stood at Rs 9,77,280 crore (It will soon become clear why I am using full numbers and not representing them in lakh crore). The revised estimate for the total capital expenditure in 2020-21 stood at Rs 10,84,651 crore, which is around 11% more. A 11% jump year on year sounds decent.

Nevertheless, one needs to take into account the fact that the budgeted capital expenditure of the union government when the budget for this year was presented in February 2020 had stood at Rs 10,84,748 crore.

As I said earlier, the budget was presented before covid struck. In that sense, the revised capital expenditure of 2020-21 is actually slightly lower than the budgeted one. This again punctures the government’s claim of spending more to get the economy going again post covid. They are spending a tad lower than what they had planned to spend before covid struck.

5) How does 2021-22 look? The government is planning to spend Rs 11,37,067 crore towards capital expenditure. This is 4.8% more than the current financial year. This when the government expects the nominal gross domestic product (GDP), not adjusted for inflation, to jump by 14.4% during 2021-22. The Economic Survey expects the nominal GDP to jump by 15.4%.

Once this is taken into account, it is safe to say that if the government sticks to these numbers, there will be barely any increase in capital expenditure between this year and the next.

Of course, the narrative of the government increasing its capital expenditure has been set. That’s what we have been told over and over again over the last few days. The stock market seems to believe it as well.

This entire exercise also tells you how nuanced numbers can get once you start really digging them up and setting them up in the right context. This is something you won’t see much in the mainstream media. Given this, it is very important that you please continue supporting my writing.

PS: I would like to thank, Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC, whose research note on the budget, helped me think through this issue, in a much better way.