Divestment may patch fiscal hole, but economic growth is critical
The govt appears to be racing against time to meet its divestment target for FY20
Mumbai: Prime Minister Narendra Modi’s government is facing a tough choice between saving economic growth and mending its fiscal balance sheet.
Much like Keanu Reeves in the Hollywood action thriller, Speed, Modi has to save a bus from exploding because of a rigged bomb. In the movie, the catch is that the vehicle cannot drop speed below a threshold else the bomb goes off.
India’s economy is that bus and its fiscal position is that bomb. The economic growth is dropping speed and a last-ditch effort to defuse the fiscal bomb is on as the government is hawking five of its own companies to strategic investors to achieve its divestment goals.
While there is a fair chance the government may meet its budgeted target of ₹1.05 trillion for disinvestment, analysts are doubtful that this would be in FY20. Those at SBICAP Securities Ltd note that, historically, divestment processes have taken 6-12 months. With just four months left for the financial year to end, the government has raised just about ₹17,000 crore.
“There may not be enough time to conclude all the strategic deals but, as before, the government could still bank on secondary sales where there is now over $50 billion of headroom," analysts at Jefferies India Pvt. Ltd said in a note.
However, here’s the crucial bit. “India’s FY20 fiscal accounts appear in disarray even if the government meets the ₹1.05 trillion divestment target," said Jefferies analysts.
Simply put, whether the government gets money or not is debatable because getting it before it closes its books for FY20 looks difficult.
The markets are already bracing for a fiscal slippage to a deficit of 3.6-3.9% of gross domestic product (GDP) as against the budgeted 3.4%. This is assuming ₹1.05 trillion comes from disinvestment. However, in all the obsession with the fiscal bomb, the bus should not be forgotten. The fuel is running out for the economy as seen by the sharp drop in fund flow to the commercial sector earlier this year. The crunch that non-banking financial companies are in is well known.
The Q2 GDP data due later this week will show to what extent the speed has dropped from an already slow pace of 5% in the June quarter. The country’s largest lender, State Bank of India’s research team believes the growth has slowed to 4.2%. Others have pegged GDP growth at 4.4-4.7%.
Indeed, a slowing economy depresses tax revenue and the government is sure to undershoot its goods and services tax collection target. Jefferies warns that the shortfall in gross tax collections could be as high as ₹2.5 trillion.
Add the off balance sheet borrowings by government enterprises and the fiscal picture turns ugly. According to Nikhil Gupta, chief economist at Motilal Oswal Financial Services Ltd, the total fiscal deficit including borrowings of public enterprises came to a massive 6.3% of GDP for FY19.
“What matters to the financial markets is the total borrowing done by the government and its agencies. And this is huge," said Gupta.
No wonder some analysts feel the fiscal bomb has already gone off.
The government could do with a helping hand from the private sector on growth. “For GDP growth to bounce back, the private sector contribution has to revive. Private capex has to revive because public spending can only do so much," said an economist requesting anonymity. However, this will not happen overnight. The September quarter performance of companies has only added to the fear that private sector contribution to growth was waning.
In general, the overall outlook isn’t improving for Indian corporates. “The Nifty’s earnings growth momentum remains soft. The asking rate for H2FY20 earnings is now quite high. Given weak domestic demand, we think earnings downgrades risks are quite high," said analysts from Edelweiss Securities Ltd in their September quarter results review report recently.
Plus, with divestment, the government needs to use the money prudently. “The proceeds from these disinvestments if used for plugging a fiscal hole and that too of revenue shortfall is not the best use of disinvestment," said Ritesh Jain, a global macro investor.
As such, this balancing act between the fiscal position and growth is full of uncertainty for the Modi government. In Speed, Reeves ends up saving people but crashing the bus. For the government, the task is more onerous.