Global Economy

The $5-trillion milestone: How to unlock economy’s value


By Srinivasan Subramanian and Prithviraj Srinivas

A $5-trillion GDP target is not only a desirable goal it is indeed achievable and that too by 2025. The Union budget in our view is broadly neutral in terms of its growth impact so there is a genuine lack of demand drivers in 2020. We believe policy is running the risk of not thinking big and bold. We highlight three policy options that the government can unleash to attain target GDP.

1) IMPROVING CAPACITY TO TAKE RISK THROUGH PUBLIC AMC

A TARP-like public AMC can be set-up with the help of RBI seed capital and run by professionals that would drastically reduce risk aversion by quarantining toxic assets. This is not a bail-out for businesses but for PSU banks and other NBFCs like IL&FS. We strongly believe this would lead to conditions that improve risk appetite of lenders.

The public AMC with its patient capital can work with businesses to restructure and recover dues over time. Importantly, this will not adversely impact credit costs in the economy during this period. Such solutions have been implemented in the US (1988, 2007), Sweden (1991), China (1998), Indonesia (1997), Hungary (1991), Poland (1992) and the Czech Republic (1996). Even in India, the Stressed Assets Stabilisation Fund (SASF) created in 2004 to take over ?90 billion stressed assets from IDBI provides lessons to improve recovery. Through this measure, policy makers would be avoiding disruptive real price adjustment which can vitiate investment sentiment.

2) BOOSTING ANIMAL SPIRITS THROUGH PRIVATISATION

The business of the government is not to be in business. As a sovereign the government need not hold shares (not even a golden share) to effect public policy through business organisations. First, announce an end to all efforts to raise funds through incremental sale of PSU company shares. An endless and tranche-wise disinvestment of PSU shares whether through the ETF or direct routes keeps PSU share prices and valuations in check.

We believe that our policy options for the government to realise the full potential of value created in the public sector (including public sector banks) should move from disinvestment to privatisation. And it should move boldly from privatising loss-making units like Air India and token sales of BPCL, Concor and SCI to a full-fledged privatisation drive. Once the government announces its clear intention to privatise and then goes through actually selling public sector companies we believe the value of the entire public sector pack will move up several fold.

Capitalists are interested when there is genuine opportunity to unlock value either through change in management of an asset or change in the operating environment. The value unlocked will multiply and trickle down without intervention and hence become socially desirable. In the case of Air India, Concor and BPCL the operating environment had changed a long time ago. So the value unlocking will mainly happen through improving efficiency of the asset. There is greater benefit to be had by changing the operating environment entirely. DBT replacing food and fertiliser subsidy is an example. Another idea proposed by the economic survey was disbanding the Essential Commodities Act and drug pricing control which would completely change the operating environment for the supply chain in food and pharmaceuticals bringing in more capital into the sector. We can also ponder over why an International Financial Hub needs to be a physical location. It could be a set of institutions that operate in a separate regulatory environment. For example, a department in a financial institution or a startup. Creating such a regulatory sandbox would lower entry barriers as firms leverage existing social and physical infrastructure.

3) ATTRACT RISK CAPITAL BY OPENING UP

The Indian economy is not fully benefitting from the structural decline in inflation, institutionalisation of inflation target and fiscal deficits broadly in check. The steep decline in inflation has lowered nominal revenue growth of companies from the high teens to the mid-single digits post 2013. Since debts were incurred on historically high nominal revenue growth, indebted companies are finding debt servicing more burdensome under the new normal for nominal growth. If interest rates had fallen significantly (only two-ppt fall on outstanding debt since 2014), then debt servicing would have adjusted to lower nominal growth levels. This did not happen partly because of restrictions on the capital account which did not boost domestic savings at a time when domestic incomes and hence savings/profits of households and corporates were growing more slowly.

Moreover traditional arguments against opening up the capital account are breaking down so there is reason to move faster. As long as there is confidence in the long-term growth story of India and macro management, risk capital remains invested despite fluctuations in the real economy. Take the example of FPI flows into equity where only a few restrictions remain, foreign equity participation is 4x of debt and less volatile. Recent budget measures to increase foreign participation in debt are steps in the right direction.

In conclusion, India will need to continuously reform to unlock value which will invariably create friction in the short-term as seen with GST, the antiblack economy campaign and digitisation of supply chains. The antidote for this friction is lower cost of capital by boosting India’s domestic savings with foreign savings. However, before we start this process we need to first clear some clutter by locking away toxic assets in a garage for the time being.

(Srinivasan Subramanian is head of equities & Prithviraj Srinivas is economist at Axis Capital)





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