After experiencing a severe wave of Covid-19, India is turning to the private sector to fuel its post-pandemic growth.
The country is planning to raise much-needed funds to spend on development, by offering the private sector opportunities to lease state-owned infrastructure and buy government-run companies. But analysts call New Delhi's targets ambitious and say that how successfully it manages to generate private sector interest remains to be seen.
The country's finance ministry this month unveiled its “national monetisation pipeline” that aims to raise 6 trillion rupees ($81 billion) over the next four years by leasing assets across sectors including power, roads and railways, to private companies.
Separately, the government is seeking to raise up to 1.75tn rupees in the current financial year by privatising companies including Air India and Bharat Petroleum.
founder and chief executive of Dexter Capital Advisors
“Fundraising through the monetisation programme will essentially help the government to expedite infrastructure development in the country, which is required to serve the dual purpose: sustainable economic growth and job creation,” says Binod Modi, the head of strategy at Mumbai-based Reliance Securities.
At the same time, the scheme offers investors further access to several sectors that were once controlled by the government. India, which has recorded the highest number of Covid-19 infections after the US, is in need of funds to boost its public finances that have been battered by the impact of the pandemic. India's gross domestic product in the last financial year to the end of March contracted by 7.3 per cent. In this fiscal year, the government is aiming for a budget deficit of 6.8 per cent but many economists believe that New Delhi could miss this target following the deadly second wave of infections that recently hit the country.
“The pandemic has not helped public finances,” says Devendra Agrawal, the founder and chief executive of Dexter Capital Advisors. “To minimise the deficit and raise the requisite capital, the sale of public sector assets to the private sector is important.”
He adds that expanding the role of the private sector could bring a range of benefits, including “helping in output increase, quality improvement, unit cost reduction, public spending control and cash raising to reduce public debt”.
While the government plans to sell assets such as its debt-laden carrier Air India, along with IDBI Bank and Shipping Corporation of India, among other entities, it has stressed that under its national monetisation pipeline, companies will only be given projects on lease – with opportunities for coal, airport and port operations – and that they be handed back to the government once the lease is over.
Despite this, the Narendra Modi-led government has come under intense criticism from the opposition for selling off national assets.
“Ultimately, the success of the national monetisation pipeline will come down to its implementation,” says Sonal Varma, the chief economist for India at Japanese investment bank Nomura. “The interest for some assets will be much higher than for the others, depending on their revenue-generation capacity from the private sector’s perspective.”
Ms Varma says that the appetite of the private sector will also depend on factors including the duration of the leases, the ability to operate the projects at commercial rates and regulatory and tax issues.
“Asset monetisation is ultimately not necessarily a novel concept – India has tried monetising in the past with varied levels of success in roads, airports and telecom,” she explains. But it has never been planned at such a large scale.
The latest move is “a welcome step to formalise these efforts” but “we will still need to carefully monitor the extent to which the government will be able to meet the ambitious annual targets that have been set,” she adds.
But many industry leaders are also optimistic about the scheme's success.
The scheme could help “upscale the development of the Indian infrastructure and is likely to increase FDI [foreign direct investment] and the domestic capital flow, lower the deficit, [and lead to a] higher India rating and higher GDP for the economy”, says Sanjay Dutt, managing director and chief executive of Tata Realty and Infrastructure.
It will “help the country to establish a stronger avenue for additional revenue that would help more public centric developments”.
There are mixed views on the levels of success that India will have when it comes to its privatisation plans for this year but some companies will be easier to sell off than others, analysts say.
“For Bharat Petroleum, it is a large, profit-making enterprise and the primary reason it is being sold is to finance the widening fiscal deficit and meet the divestment target,” Mr Agrawal says. “Selling Bharat Petroleum would be relatively easier for the government, despite the pandemic.”
The possible privatisation of Air India is also being closely watched. The debt-laden airline has been on the block before, but has failed to attract a bidder. Since then, the government has relaxed conditions, including reducing the debt and allowing a potential buyer to acquire 100 per cent of the airline. But the pandemic has delayed the process with the deadline for submitting bids having been extended a few times.
Given the challenges of the current environment, it could prove tough to sell Air India this year, some analysts say.
“Air India is facing a double whammy of losses due to [the] pandemic, as well as massive internal inefficiencies,” says Mr Agrawal. “The airline has become a huge drag on the government resources and the earlier it is sold, the better. However, selling Air India won’t be an easy task.”
However, other experts are confident that Air India will get a buyer and that its privatisation will be positive for the wider industry.
“We believe that privatisation of Air India – which is most likely to be successful – will lead to a real market-based approach to India's aero-political settings,” says Kapil Kaul, chief executive of Indian subcontinent and Middle East at aviation consultancy Capa. “In addition, the government is expected to address the other policy, regulatory and fiscal distortions that have plagued Indian carriers for decades.”
He adds that following privatisation, “a commercially-oriented, well-run Air India has the potential to be a genuine global carrier”.
In the past, India has executed two major rounds of privatisation. The first was in 1991, when the government at the time launched an economic liberalisation programme, which is widely credited with boosting the country's economy. The next was in 1999 to 2004, when India decided to privatise several underperforming companies.
“While the list of privatisations is not big in India, most privatisations have been beneficial for shareholders, and companies flourished under new managements,” says Mr Modi of Reliance Securities.
He cites the example of VSNL, a state-owned telecommunications company which was sold to Tata Group in 2002, and car manufacturer Maruti Udyog, which was also privatised in 2002, with Japan's Suzuki becoming the majority owner.
India is still an attractive market to many foreign companies, despite some operational challenges. International companies are eager to invest in India, given the scope for economic growth in the country. It is a market that many do not want to miss out on, regardless of the risks, according to analysts.
“India has improved its judicial system over the years,” Mr Modi says. And continued improvement in the ease of doing business in India and a number of reforms undertaken by the government to attract investments should attract more foreign investment, he added.
With India’s increased focus on raising capital from state-owned assets, Mr Modi believes that this could be a win-win for the country and its private sector.
