Sitharaman’s ambition: National Monetisation Pipeline

On Monday, finance minister Nirmala Sithraman launched the Rs 6 lakh crore National Monetisation Pipeline. Under this, for the next four years, the government plans to lease out public brownfield infrastructure(Like Railways, Power, Road, etc) to private groups with aims to raise more capital and  to augment and maintain the existing infrastructure. In this article, I will assess this ambitious plan with respect to the current economic situation of the nation and address questions around the benefits of the plan, challenges to the government and implications of it on the future.

Plan amidst the Covid Crisis

Since the second lockdown has been lifted and the economy is trying to regain its original pace, the NMP plan could aid in its revival. Due to the lockdowns, private investments in the market fell by huge margins, relaying an extra burden on government expenditure to prevent the economy from a complete collapse. Though investments have been increasing again over the past few months, there is still a huge way to go for the complete revival of economic growth. By monetising brownfield, de-risked assets, the government is providing the private sector with low-risk investment opportunities. As most of the public assets have inelastic demand among consumers (like Railways), it acts as an incentive for private players to purchase the lease, as it would equip them with access to a huge consumer base. As there is an opportunity for a constant income stream, there would be fierce competition to acquire the lease, which would result in high levels of revenue for the government.

The revenue that the government would collect could be used for a variety of purposes. First of all, it would ease the government’s financial burden by providing it  with alternative sources of revenue. This extra revenue could also be utilised to repay the debts that the government had to take during the pandemic. Further, it allows the government to increase their expenditure in the development of infrastructure in other areas of the economy (like the Military).

This shows that the monetisation plan has the potential to increase both government expenditure and private investment in the economy. Right now, 5.8% of India’s GDP is invested towards  infrastructural development. This plan provides us with an opportunity for an annual increase of this figure by 2 to 3%. Though it might not appear huge, it can boost economic growth to double digits in the corresponding periods according to NITI Aayog’s estimates. Such high growth levels in short to medium periods are essential to full economic recovery post-crisis.

Other Benefits

As mentioned above, NMP would aid the economy by allowing for increased investment in infrastructure. However, this is not the only benefit of this plan. The plan would also help in increasing the efficiency of the assets underutilized by the public sector. As governments face little to no competition, they have little incentive to augment the infrastructure and improve their efficiency. However, once they are leased into the open market, there will be competition among private players to acquire the lease. And even when someone acquires them, they can only hold onto it for four years. Hence if they do not improve the efficiency, they face the risk of losing it after the contract expires. This would drive private owners to invest in the infrastructure, which would improve productivity. This would ameliorate the assets and consumers could experience better quality products.

Furthermore, with increased investment, job opportunities would be created in the market. Due to Covid, the unemployment rate has pivoted up in the economy and stands at 7.9% as of August 2021. Such high rates prove that production in the nation is nowhere near its full capacity. The monetisation plan could help with this issue. As investment would increase and new infrastructure would be developed, it would create jobs in the economy. This increase in employment would have a direct impact on economic growth. As more people would get employed, their income and consequently, consumption in the economy would increase. This would increase the aggregate demand in the economy, which would stimulate economic growth.

In addition to this, the most important point that the finance minister, Nirmala Sitaraman, raised is regarding the monetisation of “rights” not “ownership”. It means that at the end of the contract, the assets would be handed back to the government. This suggests that even after leasing assets into the open market, the leash would still be in the government’s hands for it to monitor and intervene when (ideally before) the private player starts exploiting their consumers. Furthermore, the government would not be just monitoring to prevent any abuse of power. Sitharaman also signified the importance of high performance of the assets as certain standards would be set along with strict KPIs (key performance indicators). Private players would have to abide by these standards as if they fail to do so, they bear the risk of losing their contracts. Hence, under the NMP, Sitharaman guarantees improved quality, with the consumers welfare in mind.

Challenges

With the benefits aforementioned, the NMP appears to be the quintessential plan our government could come up with. However, this is far from true. The major issue lies within the construction of contracts.

Any private firm will be only willing to enter the contract if they see a net profit over their investments. By making contracts too strict, the government will be increasing the opportunity cost for private firms. If the opportunity cost exceeds the potential benefits, it can discourage private players from purchasing the lease. Further, the NMP would reflect in the economy in the long term and so, the government needs to reissue the contracts after they expire in four years. If private firms didn’t make satisfactory profits, they will have no incentive to repurchase the contract. If this situation arises, the pipeline will end up as a failed project. This makes Niti Ayog’s job hard, as while constructing the contract, they will have to keep both consumers and private participants in their mind. Simultaneously, while making the contract attractive enough for private investors, there is a high possibility that the government might have to make trade offs with consumer welfare.

This trade-off will result in inflation. With an increased level of investments and spending in the economy, the inflation rate is bound to increase. This will reflect in the leased-out assets as the price of their consumption will increase. The point to keep in mind is that some of these assets come under the basic necessity bracket (like railways for cheap transportation). Now the government used to run trains on losses, however, the private contractor will have no such obligations. Though the government might prevent them from increasing the price levels, their level of influence might not be decisive. If prices rise by even a small margin, it could have adverse effects, especially on the poor/working class.

In addition to this, the government will face huge challenges in the implementation process. The biggest bump on the road will be the time lags. Huge time lags between approval and clearance of the contracts, along with the timings of the transactions, can reduce the efficiency of the assets. Further, it will also result in a bad impression of the government, which could demotivate private firms to participate in the future.

Implications on Future

As of today, both the benefits and the challenges seem to weigh equally, making a conclusive statement premature. Even if the NMP plan succeeds in increasing investment in infrastructure and aids in improving the economic growth, if it happens at the cost of consumer welfare, then the whole plan will be a failure. However, this doesn’t imply that the challenges to the MNP cannot be dealt with. If the government faces inflation above their expectation, they can resort to contractionary monetary policies like increasing interest rates. It may discourage spending and go against the interest of the NMP; nevertheless, it will be a necessary evil.

Still, if the inflation is maintained within the set bracket, then the NMP can improve the living standards of the consumers in the nation as they will be able to enjoy better quality of public infrastructure and services. Additionally, it reduces the overhead fiscal burden of the government. Hence, after keeping all factors under consideration, the best we can do now is to trust in our finance ministry to stick by their words.

Hemang is a third-year student at Ashoka University majoring in Economics and Finance.

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