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Dear Readers,

Asset monetisation & privatisation: Finance Minister, Nirmala Sitharaman has planned to monetise brownfield infrastructure projects and collects about Rs. 6 Trillion/Lakh Cr. to partially fund an ambitious pipeline of infrastructure projects up to FY25. This will be doneby leasing out public assets without transfer of ownership. Key sector assets are airports, roads, power generation & transmission, mining, natural gas pipelines, telecom, warehousing, railway stations, ports, urban real estate, stadiums and others. Monetisation will help the government earn much required funds, while putting unutilised or underutilised assets to productive use for the growth of the economy. Banks’ idle surplus liquidity will also be better utilised, generating revenue by way of lending to private sectors. Credit uptakes will improve. Further, as a way to spur bank lending, ensure credit growth and increase revenue, the Government is also firm on its stance of privatisation of PSUs as part of its reform agenda. Both are good indicators of the government’s resolve to unleash reform and growth. 

Wealth creators’ risk appetite: In a recent announcement, Prime Minister Narendra Modi has asked India Inc. to enhance its risk taking appetite to take advantage of many economic decisions and reforms carried out by the government. This announcement recognizes that risk is central to business investment, innovation and growth. It stems from the fact that despite many positive indicators for the overall economic outlook, business recovery and employment growth are still soft in many areas, especially when measured by credit growth, capital formation and other subtle markers. There seems to be a risk aversion prevalent in the economy and a low risk appetite is often indicative of lower investments and vice versa. The PM has also said, “I firmly believe that trust will strengthen between the governments and the industry. The government is ready to take big risks in national interest”.

This sentiment must be complemented by India Inc., but this is being constrained due to a number of factors.

Businesses’ growth and success are usually indicative of their founders’, managers’ and promoters’ passion and talent for wealth creation along with risk taking ability. So when these are subdued or turn negative, they have a negative impact on business growth and economic expansion. The reasons for this could be many. Sudden downturns in business from unforeseen events such as the pandemic, could wipe out actual and potential investments. Negative externalities like a global downturn, excessive regulation, litigation and other legal burdens such as lengthy and slow liquidation proceedings, can all play a role, as well as the natural booms and busts of business cycles. In addition, today, any negative publicity — genuine or unsubstantiated, including malicious media or cyber-attacks can upend or undo years of investment, equity and goodwill in a day. Add to this, a sense of constant threat from enforcement agencies, who do not distinguish between malafide intentions and genuine stress from any of the other problems that a business faces, and the business sector is bound to become risk averse. Each time there is such an event, there is business and economic contraction even though the fundamentals remain sound. Often businesses cannot recover from such assaults, which is a shame, as this wastes capital in all its forms, along with wealth creation and entrepreneurial spirit.

Debt can be the answer, but in the current scenario with so much uncertainty, most businesses are deleveraging. Banks, hugely burdened with their own historic and current stressed assets have also become averse to lending. Despite the government’s significant efforts at easing credit and liquidity in the economy, credit growth has been weak. This is also indicative of a trust deficit between businesses, lenders, regulators and the government.

To overcome this, and for the Prime Minister’s words to come to fruition, both regulators and business have to meet on a more positive territory. Regulators have to exhort banks to transmit liquidity into the real economy, while businesses too have to keep their end up in understanding the spirit of regulations, norms, and being accountable to their stakeholders.

Growth versus inflation quandary: Finance Minister has also said that both the government and Reserve Bank of India will continue to prioritise growth, as the economy has not yet recovered, and growth projections are lower than estimates before the second wave hit, i.e., 8.4 -10.1% rather than 11% or greater. The RBI has not given indications about draining excess liquidity. The ministry maintains that the economy has not yet come to a point of a growth vs. inflation debate. Steps will be taken to contain inflation at the right time. However, the WPI was at 12.94% in May 2021, pushed by higher fuel and commodity prices, and a low base effect; and translated into a six month high retail inflation of 6.30%, crossing the inflation target of 4+/-2 % set by the RBI. This means that the day of a tightrope walk between inflation and growth may not be too far off. 

Further, with monetary policy reaching its limits, growth may now have to be addressed fiscally. The Finance Minister has indicated that the government will maintain capital expenditures, but move towards improving efficiency, reducing wasteful or redundant expenses.

For FY22, the government has planned capital expenditure of Rs.5.54 Trillion/ Lakh Cr. It proposes to invest this fund in national highways, roads, railways, urban infrastructure, shipping, waterways and ports. On 15th August 2021, PM Modi re-iterated the government’s grand plans to spend Rs. 100 trillion on holistic, sustainable, infrastructure growth. However, a glaring omission in this plan, is the lack of any significant program for rural housing development, which would not only give a huge boost to the rural economy, but also shore up distressed sectors like construction and capital equipment that could benefit many MSMEs, in addition to improving the quality of life for the rural households.

Separating victims from wilful defaulters: Another very important point meriting attention is the issue of cost overruns, many resulting from the pandemic and the associated lockdowns. As many as 483 infrastructure projects each worth Rs.150 crore and more, have been hit by cost overruns totalling more than Rs.4.43 lakh crore. This has also affected private sector stakeholders, including some intermediaries and NBFCs involved in

these infra projects. As a result of mismatched finances, leading to delayed payments, they are either being considered wilful defaulters for no fault of their own, or are in danger of tipping into default, and are coming under investigation, which is causing further stress on their financial health. Once again, the lack of adequate distinctions between wilful defaulters with malafide intent, and organizations that are victims of circumstances, with finances in temporary disarray, is causing unnecessary stress in the economy, and stopping productive deployment of resources.

For employment and economic growth, it is now imperative that organizations in default/delay in payment of debts due to external factors,be handled differently. Organizations with sound fundamentals, and strong records of past performance must be given due diligence and support for restructuring and to emerge from a crisis not of their own making. Such companies are also vulnerable to predatory organizations keen on acquiring distressed assets at excessive discounts, through insolvency proceedings. It must be remembered, unnecessarily big haircuts are a disservice to the economy, as they lead to drastic undervaluation of assets. In recent times, such excessive haircuts occurring between banks and third party buyers under restructuring deals and insolvency proceedings have reached as high as 90%.

Instead, lenders should be directed to restructure debts with moratoriums for collateral haircuts of 10-15%, which would include high and penal interest rates and other charges. The ensuing liquidity in the form of credit generating revenue will benefit the economy. Further, while the economy is still recovering from the impact of the pandemic, foreign flows into the Indian market which were at an all-time high in the past year, are draining away.  Since July, there have been outflows of USD 800 million from the Indian stock market. Net inflow by FII-s was USD 7.28 billion against USD 23.37 billion last year. The external valuation of the market appears to be nearing its full. Therefore, more than ever before, releasing liquidity and sustaining capacity by means of revival measure through domestic financing is necessary for growth. It is not good to depend on foreign capital.

Conclusion: Overall, while the economy is emerging from the pandemic, it is important that full support is provided to the business sector to enhance their risk taking capacity in order to fulfill the government’s prime goal of growth, and above all, to restore trust among stakeholders. This will require concerted efforts between the government, regulators, banks, lenders and businesses. Genuine distress must be distinguished from wilful default or fraud, and accordingly, businesses must be given a chance to restructure, save their assets, reputation which has been built over the decades even staking family and deploy them more productively to benefit all.

From September 2021, Business Economics becomes a monthly magazine. It was a fortnightly magazine earlier.