Upside to asset sales

To say that the Rosneft-Essar Oil deal, and similar asset sales, only benefits the companies and not the economy is a wrong way to look at these deals

One valid criticism of the $13 billion deal for the sale of Essar Oil to a consortium led by Russian oil company Rosneft is that it creates no new assets in India. The only beneficiary will be the Essar group, which will use the money to cut unsustainable debt.

There have been similar doubts raised about other asset sales. That is the wrong way to look at these deals. The money that comes in will not only help companies deleverage but also make matters easier for banks that hold the debt of large infrastructure companies. It is thus no surprise that shares of a lender such as ICICI Bank Ltd that has a large exposure to the Essar Group rallied on the first trading day after the deal with Rosneft was announced.

The dual problems of excess corporate leverage and fragile bank balance sheets are not only the biggest risks to economic stability right now, they are also an impediment to the revival of corporate investment. Asset sales will ease these two problems—and that is why they are important.