Finding balance in growth
The government must strategise to balance its role as a financer and facilitator with key focus on identifying needy sectors
Two keywords that will define the investment climate and encourage more investments in India are 'balance' and 'focus'. And, the common factor between the two keywords is the concept of transparent and rational pricing.
'Balance' refers to the balance between the government's role as a financier and facilitator of investments. While clamouring seems to be for the government to loosen its purse strings and boost infrastructure creation and job growth, one must be mindful that given the size of the Indian economy, there are limitations regarding how much of new investments can be financed utilising government spending. Nonetheless, government spending is essential, but so is the government's role as a facilitator of investments. Therefore, it is vital that the government lays out a plan regarding sectors in which it wants to be the principal financier of assets like perhaps highways, and areas where it will be a facilitator of investments through policy measures such as in urban healthcare infrastructure.
Even in the highway sector, space is limited as the debt burden of NHAI stood at Rs 1.48 lakh crore in September 2018, while the Bharatmala projects will require an additional approximate Rs 2 lakh crore in the next five years. The debt level highlights the need for securing new sources for funding beyond debt and government budgetary allocations, even in sectors such as highways. Monetisation via asset sales and leases of toll-producing highways will have to gather momentum. To succeed with rapid asset monetisation, transparency in the process and rationality around asset pricing hold the key.
For sure, the cornerstone of boosting investment will continue to be on the ability of the government to balance its role as a financier and facilitator of infrastructure. For example, building roads is crucial, but so is efficiently finding avenues to finance the assets. Most importantly, given the investment requirement, expecting the government to shoulder the entire burden of financing infrastructure solely is not feasible in the long-run.
The other keyword that needs attention is 'focus', especially with a view on Public Sector Units (PSUs). While calls have been made for the privatisation of PSUs, the key is to decide on the path forward for PSUs in general. While privatisation for certain businesses makes sense, running PSUs more efficiently must also be an option worthy of consideration. For those PSUs that require privatisation, the attention to transparent and rational pricing is critical. Lessons from the experience of unsuccessful attempts to auction off Air India last year are particularly important. The market requires clarity around both asset quality and business control. Therefore, successful privatisation will need the government to provide clarity around the asset price as well as the transfer of control for the asset to the new investor.
Making an asset appealing does not necessarily mean ceding excessive value to buyers; on the contrary, attractive assets deliver value for both the seller and the buyer. A careful analysis of asset attractiveness will assist the overarching process of privatisation of PSUs. Questions must be asked regarding why a private player will be interested in an asset? Assets encumbered by significant human capital costs and debt will struggle to find takers. Therefore, a transparent auction process that accounts for market value will be essential.
However, not all PSUs have to be privatised to succeed. As the likes of Energy Efficiency Services Limited (EESL) have shown, PSUs can be profitable, innovative and create significant value in crucial areas. The recent results by EESL – where, in fiscal 2019, revenue growth of 37 per cent on a year-on-year basis was registered while net profit increased by 214 per cent – demonstrate that a well-run PSU has significant value-creating potential. Essentially, therefore, decisions need to be taken to delineate PSUs into three categories: (i) those that can be run profitably, (ii) those that have significant social and economic value but may not always be financially profitable, and (iii) finally, those that are better run by the private sector.
As India looks to create an investment climate to boost economic growth in the decades ahead, the government's role will be vital for obvious reasons. A strategy that seeks to balance its role as a financier and facilitator with a focus on the right sectors will go a long way in boosting the capacity of the government to provide a significant impetus to the economy.
(The author heads Development Tracks, an infrastructure advisory firm. The views expressed are strictly personal)
