Grounded in reality

Going by past record, privatization of Air India looks difficult and that of banks is fraught with perils

Apart from the decision of the Modi government to privatize Air India, reports that the Tata group and Indigo have shown interest in purchasing the debt-ridden airline are surprising. Modalities of the sale and valuations are still not clear. Why would anyone want to buy a company with Rs 52000-crore debt is a puzzle. No foreign operator has shown interest. It is difficult to comprehend how any budget air carrier will be able to digest the catch unless it is the attraction of overseas flying rights and real estate. Sliding prices of crude enabled the PSU to make an operating profit in the fourth quarter of the last financial year. The track record of private participation in such sales is disappointing. Two hotels in Mumbai, owned by AI’s subsidiary, were disposed of to strategic buyers by then NDA regime at the tail end of the bear phase early 2000s. The airport property was re-sold to the Sahara group within months at a fat profit despite a two-year lock-in. An investigation by the UPA government into the proceedings did not find evidence of any wrong-doing, confirming the theory that the discovery price is always a function of the prevalent market environment. The Asset Reconstruction Company took possession of the Juhu outfit, which ceased operations in 2010, due to the inability of the new owner to service debt. An auction early 2014 flopped. The Tatas bought 25% holding for a mere Rs 144 crore in VSNL, a provider of international telecom connectivity, and subsequently increased the ownership to 45%. After morphing into Tata Communications in 2008, it could take possession of the 740-acre land, whose transfer had been stalled, in 2001, when it was valued at Rs 6156 crore. HUL got rid of Modern Bread to a PE firm for an "undisclosed amount" 15 years after the purchase. There has been no response from the private sector to schemes such as own-your-wagon and dedicated freight corridors of the Indian Railways.

Privatization is a difficult path for any government, particularly of a developing economy such as India that has assigned the public sector to the pedestal of "commanding heights". Profit-making enterprises have become vehicles to finance fiscal deficit. The 1991 liberalization largely ignored the issue of stake-sale in government entities. The first NDA government set up the disinvestment ministry. Many were listed by parceling off bits and pieces. No government of a developed economy digs oil wells. The thrust on solar energy is paying off. The plan to switch to electric cars over the next one-and-half decade is to keep the commitment of reducing pollution made at the Paris Climate Accord by curtailing consumption of fossil fuels. Elimination of subsidy on petrol and diesel and daily revision in their prices make the oil and refinery sector ripe for complete withdrawal of the government. Entrepreneur Anil Agarwal bought 51% equity in sick Bharat Aluminium Company  in 2001 and nearly 65% in Hindustan Zinc a year later. He is interested in mopping up the residual government stake and why the transaction is not happening is a mystery. Coal blocks are being auctioned without restriction on use for captive consumption. Eventually, the mining landscape should be devoid of government presence as prices are dictated by market forces.

The Make-in-India campaign pivots around private domestic and foreign investment to make defence gear. Banking is a segment that remains firmly in the government’s grip. There was talk of bringing down its stake to 51% to make the behemoths responsive to the market. Setting up of the Board of Banking Bureau to appoint professional heads and capital infusion, though inadequate, have given the impression that there is seriousness in nursing banks to health before their disposal. The bad debt problem of Corporate India and the inability of banks to pass on the interest rate cuts due to risk-aversion have given momentum to the demand to privatize banks. Not all, however, are convinced, particularly so since the revelation in the last couple of quarters that even private sector banks have non-performing assets. Wrong judgement calls, cronyism and slowdown are not exclusive to the public sector. Financial inclusion cannot be left to profit-oriented private banks. The success of the zero-balance Jan Dhan accounts to receive subsidies and Digital India, an important component of the initiative to crush the parallel economy, hinges on the un-banked having accounts. Despite the mounting pressure, the Modi government should refrain from mass-scale fire-sale of nationalized banks and instead focus on putting them back on track by minimizing interference. The Vajpayee government lost election after introducing on its eve a voluntary retirement scheme to slash PSU banks’ flab.

Mohan Sule

The low-low land

 

The central bank should stay further policy action till clarity emerges on the economy

Riders swishing on pre-BS IV disposed of scooters and mobikes, buyers frenetically clicking on keyboards to fill their shopping carts with goods with slashed MRP, middle-income home owners pirouetting to outlets with cool-priced ACs and refrigerators, vacationers kicking heels to book low-fare flights. The Indian economic landscape is resplendent with light-footed consumers making the most of slim price tags before the music ends. Housing finance is at a six-year trough and along with the interest subvention is attracting buyers of the thin-margin affordable housing. Cement prices are flat as capacities outstrip incipient demand. Fossil fuel-based power is aplenty but most state electricity boards do not have funds. Solar power prices have plunged with more players rushing in for the tax breaks. FMCG companies have lost the pricing edge due to a crowded market place and finicky users. US clients of tech companies want the discounts offered during the slowdown to be a norm rather than an exception. Airlines are capping costs to keep their noses above water. If the carrot of regional connectivity is a boon or a bane will be known a few years down the line. Free introductory services by a newcomer have resulted in telecom data prices sliding.  Garment makers are catering to the low-end market. Streaming services and brisk sales of large-sized Led screens going cheap have put pressure on multiplexes. Metal prices have softened as China’s growth engine slows. Even pizza makers are facing the brunt of diners’ resistance with digestible food grain and vegetable prices. 

Low inflation is the conclusion of circumstances: Global credit crunch since 2008 and good monsoon in 2016 after two years of drought. Surprisingly, prices have not spurted despite accelerating foreign investments due to a surging Wall Street. Some of the restraint displayed by producers might be voluntary. Slipping crude oil and metal prices have shaved off manufacturing input costs. Many others’ might not be. Tighter emission norms resulted in destocking of two-wheelers at throwaway prices. The specter of higher GST rate prompted retailers of white goods to liquidate their inventory in a hurry. A few might have refrained from taking price hikes on concerns of buyers’ backlash: makers of dairy products. The markets, however, do not appear unduly perturbed by the turn of events. Equities seem to betting on recovery in demand to protect the margins going ahead. Another outcome that is anticipated is consolidation. As such, even valuations of small companies are soaring in the hope of these entities growing their market or being eventually taken over. The debt segment is in a buoyant mood in the belief that coupons have scope to come down by 50 basis points to one percentage point before the festive season starts. Credit also has to be given to DeMo for sucking out excessive liquidity and nudging a significant portion of the population to divert part of their unreported holdings to tax liability. The exercise was timed perfectly: post normal monsoon and festive season that had seen the informal economy making good gains. The next step in the value chain to tame inflation is GST. The regime is going to pull down prices of essential items from the present level. Savings are to be passed on to the consumers. As such, retail inflation is unlikely to climb up. Some of the surplus might even go to higher tax segments such as restaurants and consumer durables that might be reluctant to increase the tab to maintain the cash flow.

The danger is that a low-cost economy propels savings into unproductive assets such as gold and real estate in search of higher yields and as a hedge. The central bank is not in an enviable position. The crucial issue is if a rate cut at this delicate stage will hasten the economy’s passage into deflation or boost consumption. Will Corporate India embark on risk-taking, unsure of the returns? Many distressed assets on the block are not finding buyers. Massive redevelopment plans in Mumbai are stuck for developers. Higher support prices to farmers and waiver of their loans mean increased borrowings by state governments with depleted treasury, putting pressure on liquidity. A thriving economy needs benign inflation. The present real rate of interest of around 4% is moderate. Hasty action either way can trip the economy. Reduction in lending rates will boost equities and bonds into bubble territory. Status quo will create volatility. Instead, the monetary authority should announce a freeze of six months to a year till the next policy action. By then clarity will emerge on the direction of the economy. The move will instill confidence in businesses to utilize their capacities as those waiting for prices to decline further might be willing to open their wallets.

Mohan Sule