Financing the stimulus

Context – Govt will utilise disinvestment proceeds from public sector enterprise to fund the stimulus, but it needs to explore more avenues.

Recent Disinvestments

• 2020: Disinvestment target of 2.1 lakh crore rupees in current fiscal year of which 1.2 lakh crore rupees from Central PSUs and recently announced Public Sector Enterprises Policy (PSEP)  which intends to rationalise the public sector.

• 2019: Privatisation of BPCL and the Shipping Corporation of India and selling stakes in the Container Corporation of India, THDC and NEEPCO.

Need of Privatisation

• Before COVID: Declining revenue which only partly can be filled by alternative sources of tax revenues 
• Presently: to contain the fiscal deficit

Issues with Disinvestment

• Revenue from privatisation is a one-off benefit: only profit-making units are sold at a good price.
• Issue with getting good buyer: could foster crony capitalism and result in the making of oligarchs.

• Policy uncertainty: Excessive political interference with private sector makes owning an ex-government entity riskier

Sources of Govt revenue and related issue

• Enhanced excise duty on diesel and petrol: contradicts the very idea of a relief and stimulus package as it would affect the purchasing power.

• External borrowing: 

• Hard to pay back: as the borrowed capital will not drive high GDP growth and generate revenues due to recession.

• Exports: cannot be a reliable option to pay external debt as exports will drop due to global slump in international demand and over-regulated imports by other nations. 
• Foreign reserves (or gold reserves): Devaluation of Rupee will make it an expensive option to pay back the debt.

• Overseas borrowing by Indian industries: these borrowings combined with the industry’s already high debt status, could lead to rating agencies downgrading India’s investment prospects.

Positive side for India

• All-time high India’s foreign reserves: could be strategically used to finance its needs.
• India is receiving fund from World Bank, ADB and Japanese ODA.
• The rest may have to come from privatisation, taxation, loans and more international aid.