Interview | FY22 could be a big year for privatisation: Chief Economic Advisor Krishnamurthy Subramanian

In your chapter on counter-cyclical fiscal policies, you have advocated fiscal relaxation during times of slowdown, like the present. Ahead of the Budget, are these some of the recommendations that the finance minister’s office have taken onboard?

These are part of the deliberations. Fiscal multipliers are much higher during a recession or during a slowdown in growth, especially if spending is on infrastructure that has the ability to crowd in private investment. These are aspects that have certainly been highlighted.

There have been a lot of public discussions on the idea of a bad bank. Is it still on the table?

The idea is being debated. The design of the bad bank though is important. If you have it in the private sector, then the necessary alacrity in decision making is required. You have to deal with restructured assets and you have to make quick decisions and that has to be enabled.

So the design actually is something that has to keep this feature in mind. If you have it in the public sector, you suffer from the three C's and the slowness that it brings. So, the effectiveness of the bad bank actually becomes something which is typical.

On the privatisation front, there were a number of entities on the table such as Air India, BPCL, Concor. However, COVID did dent those plans this fiscal year. How does the privatisation pipeline look going forward?

I think the coming fiscal year could be actually a very seminal year for actual privatisation with the expression of interest that has come in for both Air India and Bharat Petroleum Corporation (BPCL). Both of them will be big signposts in the actual implementation of the privatisation agenda. Air India has lagged for such a long while and stopping that bleeding is something actually that would be a very important signpost.

At the same time, in case a profitable company like BPCL, implementing the idea that government has no business being in business, except in strategic sectors, and the fact that privatisation actually does enable wealth creation, would be very important. Having these entities where there is no strategic interest in the private hands would be good for the economy.

So, in that sense, this could be a very big year. The COVID pandemic did affect it because for several months, some of these processes had to be put on hold, and that is why it is actually spilled over into the current year. Overall, I think this year actually could be a very important year in the history of India's privatisation.

A lot of policy support has been announced to tackle the supply side of the economic downturn. On the demand side what other measures can be expected?

India actually has taken steps on both supply and demand side, because we recognise that this pandemic has impacted both supply and demand. India's only country to have implemented a slew of structural reforms that were intended to take care of the supply side.

On the demand side, we followed a calibrated strategy - distinguishing between demand for essential items and demand for discretionary spending. Also, recognising that even without let's say, no restrictions on economic activities, just pure uncertainty would lead to the precautionary motive to save.

Once the unlock began, then India said now's a good time to basically focus on discretionary spending. That's where, for instance, the wage subsidy program has been done, and a lot of the dues were repaid.

If you look at the capital expenditure spending by the government, in October on a month-on-month basis, it increased by 60 percent. On that higher base, it increased by 160 percent in November. On that even higher base, it actually increased another 60 percent in the month of December, and this is expected to continue this year as well as the next financial year.

So that is part of this program of distinguishing between a period of enormous uncertainty where it did not make sense to focus on discretionary spend, versus a period of much lesser uncertainty and an exit phase from the pandemic, where actually it makes sense to implement discretionary spending.

Keeping that in mind and  in the backdrop of the Prime Minister saying that the Budget should be seen as a continuation of the Atmanirbhar Bharat announcements, are we expecting to see a Budget where there could be demand side interventions? Is the Budget expected to provide a stimulus on the demand side?

It will be a continuation of the measures that are being taken on the demand side and especially focusing on discretionary spend, infrastructure for instance. The NIP (National Infrastructure Pipeline) has already identified the projects that need to be done. Measures along the lines of enhancing infrastructure spend would be something that actually would help in pushing this.

Infrastructure activity enhances construction activity, which has both forward and backward linkages and especially brings in a lot of informal sector jobs and has a lot of spillover effects. Those are actually some things that were recommended.

Your chapter on the rating agencies is quite interesting and that is something that people in the administration have believed for a long time. Do you think it is now time to, if not regulate, then at least oversee the ratings agencies at a G-20 level?

The point we have made is that India's fundamentals are not being reflected in its sovereign rating. And this is not a phenomenon that manifested today, but over the last two decades, this has been the case. And, I think the most telling manner in which this actually gets seen is that if you take all of India's foreign currency debt, not just the sovereign debt. Even if every private sector entity says that they want to repay today, even then the RBI has reserves to take care of everybody. So that is 100 percent ability to repay. Further, if you look at India's willingness to repay, even in 1991, when we face the worst balance of payments crisis ever, we actually shipped gold to honour our obligations and that is what reflects India's willingness to repay. Additionally, I must mention that India's willingness to repay is not driven by economic considerations. It has bipartisan support, that we will never ever default on our debt obligations.

When you put the two together, probability of default is basically just a combination of willingness to repay and ability to repay, both of which are actually 100 per cent. That shows you in a telling manner, how the fundamentals are basically not reflecting the data. This issue of pro-cyclicality that these ratings create, was highlighted after the 2008 financial crisis and has been taken up at the G 20 level. And there is possibly some thought on what you are asking but I think that is something that needs greater thinking, because this is about coordination across countries.