Land sales

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.

India might grow by 30% early next year, but that won’t mean much.

छोड़ो कल की बातें, कल की बात पुरानी
नए दौर में लिखेंगे, मिल कर नई कहानी
हम हिंदुस्तानी, हम हिंदुस्तानी
— Prem Dhawan, Usha Khanna, Mukesh and Ram Mukherjee in Hum Hindustani. 

The Indian economy contracted by 7.5% during July to September 2020, in comparison with the same period in 2019.  When compared with a contraction of 23.9% during April to June 2020, a contraction of 7.5% looks significantly better.

Hence, there has been a lot of song and dance from the establishment and its supporters, on how quickly the Indian economy is recovering, especially when most economists expected the economy to contract by 10% during July to September and it contracted by only 7.5%. Terms like a V-shaped recovery have been bandied around a lot, over the last few weeks.

Nonetheless, India continues to remain in the bottom quartile, when it comes to economic growth/contraction of countries between July to September this year. Greece with an economic contraction of 11.7% is right at the bottom.

In fact, the song and dance of the establishment is likely to continue in the months to come and will reach its peak sometime in the second half of the next year, after the gross domestic product (GDP) figure for the period April to June 2021, is published. GDP is a measure of the economic size of a country.

It is worth remembering here that the GDP during the period April to June 2020 contracted by nearly a fourth. The GDP during the period was Rs 26.90 lakh crore. In comparison, the GDP during April to June 2019 was at Rs 35.35 lakh crore.

So, the GDP during April to June 2021, will grow at a pace which has never been seen before. If it comes in at Rs 30 lakh crore, the growth will be around 11.5%. Given that, the GDP during the period July to September 2020 was already at Rs 33.14 lakh crore, the GDP during April to June 2021, is likely to be higher than that.

At a GDP of Rs 35 lakh crore, the economic growth during April to June 2021 will come in at a whopping 30.1%. Nevertheless, this is just an impact of what economists like to call the low-base effect.

A central government which can use a contraction of 7.5% to market itself, imagine the possibilities of what it can do if the economic growth rate crosses 30% in the first quarter of the next financial year.

While, some song and dance can do no harm to the economy, the real story needs to be understood and told as well. The real GDP in April to June 2021 will be more or less where it was during April to June 2019. In that sense, we will be where we were two years back.

Hence, the economic slowdown which started in mid 2018, along with the contraction that has happened post the spread of the corona epidemic, has pushed the Indian economy back by at least two years. Obviously, this can’t be good news.

Other than talking, the central government hasn’t done much to get the Indian economy going. Between April and October 2020, the government spent a total of Rs 16.61 lakh crore. In comparison, it had spent Rs 16.55 lakh crore during the same period in 2019. The difference being, this year we are in the midst of an economic contraction.

In a scenario where the corporates as well as individuals are going slow on spending money, government spending becomes of utmost importance. Between March 27 and November 20, the non-food credit of banks has gone up just Rs 26,496 crore.

Banks give loans to the Food Corporation of India and other state procurement agencies to buy rice and wheat, directly from the farmers. Once these loans are subtracted from the overall lending of banks what remains is non-food credit.

In comparison, the deposits of banks have gone up by Rs 8.03 lakh crore during the same period. This means just 3.3% of the fresh deposits that banks have got post March have been lent out.

What does this tell us? It tells us that both corporates and individuals are largely sitting tight and saving money. This is an indication of the lack of confidence in the near economic future. While the corporate executives might keep going gaga in the media about an economic revival, these numbers tell us a different story.

What hasn’t helped is the fact corporates have reported bumper profits by driving down their raw material costs, input costs and employee costs. This basically means that along with employees, the suppliers of corporates have also seen an income contraction. This can’t be good news for the overall economy.

The government’s inability to spend, comes from the lack of tax revenues, something that is bound to improve in 2021-22. Other than that, the government hasn’t gotten around to selling its stakes in public sector enterprises. Of the targeted Rs 2.1 lakh crore just 3% has been achieved. This is bizarre given that the stock market is at an all-time high-level.

Hopefully, the government will make up on this in the next financial year. Also, it can look at selling some of the land that it owns in prime localities in Indian cities.

All this can be used to put more money in the hands of consumers through an income tax cut and a goods and services tax cut, encouraging them to spend.

People who pay income tax may form a small part of the population but they are the ones who actually have some purchasing power. And once they start spending more, the chances of it boiling down the hierarchy are higher. Do remember, at the end of the day, one man’s spending is another man’s income.

A slightly different version of this piece appeared in the Deccan Herald on December 20, 2020.

The govt needs to think out of the box to finance public investment

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 column in the Financial Times that “the case for investment applies almost everywhere”.
And given that private investment is slowing down, the government needs to increase public investment seems to be the prevailing view. This becomes even more important with the International Monetary Fund recently deciding to revise global growth downward by 0.3% in 2015 and 2016 to 3.5% and 3.7% respectively.
The Indian government seems to be thinking of giving a push to public investment. The finance minister Arun Jaitely said so a few days back: “I think we have to take some special steps as far as public investments is concerned.” In yesterday’s column I had argued that the government needs to be careful about how it goes about financing the public investment programme that it may unleash in the next budget.
The recent evidence in favour of a public investment programme is not very strong. Many emerging market countries tried increasing public spending in the aftermath of the financial crisis in the hope of creating economic growth, only to see it not work and lead to other major problems.
As Ruchir Sharma author of Breakout Nations explained in a recent column in the Wall Street Journal: “Before anyone rushes to spend, however, it is worth noting that the big emerging nations, including China, Russia and Brazil just tried a full-throttle experiment in stimulus spending, and it failed. The average growth rate for emerging economies excluding China has fallen to 2.5% today, from more than 7 % at the height of the spending campaign. That is the lowest growth rate in four decades, outside of a global recession. For leaders in these countries, stimulus is now a bad word.” The Chinese growth also recently touched a 24 year low of 7.4%.
So what went wrong? “Emerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red, from an aggregate surplus equal to 1.5% of GDP in 2007 to a deficit equal to 2% of GDP in 2014. To pay for this deficit spending, public debt has risen significantly, throwing the books out of balance,” wrote Sharma. This is a point that Jaitley in particular and the Indian government in general should keep in mind, before they go on to take “special steps as far as public investments is concerned”.
The rating agencies and the foreign investors are watching India closely after Jaitley said in his maiden budget speech that “my roadmap for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” In the current financial year the government is aiming for a fiscal deficit of 4.1% of the GDP.
Given this, it is important that the government has a clear idea of how it will go about financing the “special steps” for public investment. One way out is to resort to asset sales. Asset sales does not just refer to the government disinvesting its shares in public sector units as well as other companies.
Take the case of Indian Railways, which owns huge tracts of land all around the country. Some of this land can be sold to generate revenue for revitalization of the Railways. Given the shortage of land in cities, this move can garner a good amount of revenue. Also, it is important to carry out some sort of an exercise which tells the government clearly how much land does the Railways actually own.
Over and above this, the Railways can also look at raising money by branding trains and stations. This is a move that has been tried in the past at least with Mumbai local trains. Also, stations on the Rapid Metro route in Gurgaon are sponsored by corporates. This can be one way of raising some “easy money” for the revitalization of Indian Railways. Also, it is worth pointing out that Railways is not the only department sitting on a huge amount of land.
If the government puts its bureaucrats and advisers to some use, such out of the box ideas will come out. Further, there is some low hanging fruit that the government can easily cash in on. One such low hanging fruit is the shares that the government owns through Specified Undertaking of Unit Trust of India (SUUTI) in ITC and Larsen and Toubro which as of January 28, 2015, were together worth Rs 45,386.86 crore (Rs 32,497.29 crore for ITC and Rs 12,889.57 crore for Larsen and Toubro and based on the shareholding pattern as on December 31, 2014). For reasons which can be best explained only by the government this holding hasn’t been sold till date.
These asset sales can directly finance public investment. As economist Sajjid Chinoy writes in the Business Standard: “So what the government needs is a predictable plan – say of 0.8-1 per cent of GDP for the next 2-3 years of asset sales that are directly ploughed into public investment such as highways, roads, bridges, ports, airports – to offset the private sector’s inability to finance this infrastructure.”
Further, the government needs to sort out the mess that it has made of the disinvestment programme over the last few years (I mean the government in general and not the Narendra Modi government which took over only in May 2014).
Over the last few years, the government has assumed that disinvestment of its holdings in public sector units will bring in a lot of money. But that hasn’t turned out to be the case. Take the case of the last financial year when it was assumed that the government will raise Rs 54,000 crore through disinvestment. It actually managed to raise only Rs 19,027 crore.
For this financial year, Jaitley has projected that the government will raise Rs 58,425 crore through disinvestment. But only Rs 1,700 crore has been raised so far, with only around a little over eight weeks left for the financial year to end.
News-reports now suggest that the government is really trying hard to push disinvestment through. Instead of waking up at the end of the financial year, the government along with a big disinvestment target also needs to have an annual plan where it goes about disinvesting shares all through the year. This is a better way of approaching the issue and Jaitley should look at it seriously in the next budget.

(The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Jan 29, 2015)