Information available so far suggests that coal and power will be a crucial part of immediate government efforts. It is rumoured that Coal India Ltd (CIL) will be broken up into smaller, state-specific units with the respective state governments holding a stake in each of these. This is expected to ensure that state-level roadblocks to coal production are easily overcome, resulting in higher mining efficiency and higher production. The ultimate aim is the revival of power plants lying idle for want of coal, which will, in turn, go a long way in plugging India's power deficit.
Although this is a perfect example of the fresh perspective the new government brings to old problems, it comes with some challenges. The least of these is the manner in which state partnerships are structured. Granting an equity stake to state governments will result in a messy ownership structure and the possibility that the financial benefits of this ownership will be used for wasteful expenditure by the states. Although the proposal does align the incentive of the states with the Centre, it does nothing to address a key roadblock to the development of the power sector in India; financially unsound state electricity boards (SEBs).
Transforming this proposal from good to great needs just a small tweak. Instead of allowing state governments an equity stake in the proposed state-specific coal producers, assigning a share of their revenue to the respective SEBs will double the potential benefits. While retaining the core benefit of aligning state and central interests, it contributes directly to the financial health of the respective SEB, allowing it to drive further growth in the sector. It has the additional benefit of maintaining purity of ownership, which will be extremely important for ensuring professional management and extremely valuable if the government chooses to dilute its stake further in coming years.
Another proposal doing the rounds is that of a holding company for all public sector undertakings (PSUs). The core benefits behind this are numerous; freeing PSUs from ministries, encouraging professional management and, ultimately, diluting government stake in the holding company to raise the capital required for infrastructure and other developmental initiatives. Once again, it's a wonderful idea that would go a long way in unlocking the wealth created by the PSUs and using it to invest afresh in areas where we have fallen behind. However, financing these initiatives in the absence of a robust financial sector will prove to be extremely difficult.
As things stand today, the non-performing asset (NPAs or sticky loans) situation in the public sector banks (PSBs) presents an existential threat to our financial sector. Again, a simple tweak has the potential of doubling the benefits of this proposal. If the first tranche of funds raised from diluting the government's stake in the holding company are used to create a "Bad Bank" which buys all impaired assets from the PSBs, the potential benefits are enormous. In one stroke, all potential impediments to increasing the investment capacity of the economy and its financial sector are removed, and the potential multiplier significantly enhanced.
For this to work, the holding structure will need to be two-tiered, with a parent and subsidiary holding companies. The subsidiary holding company would hold all PSU stakes and transfer the proceeds of any dilution to the parent, which will use them to fund the "Bad Bank". The "Bad Bank" would be a distinct subsidiary and would use these funds to buy impaired loans from PSBs, freeing them from the burden. The Specified Undertaking for the Unit Trust of India could be used as the "Bad Bank" to avoid reinventing the wheel and lowering costs. Assets so acquired may then be allocated to existing asset reconstruction companies for recovery on an agency basis, and the money recovered transferred back to the parent and used for developmental initiatives.
The third significant proposal being discussed is unbundling the Food Corporation of India into three entities; one each for procurement, storage and distribution. The three entities would then have distinct goals to focus on, bringing in efficiency. However, without the participation of state governments and the subsequent alignment of interests, execution efficiency will remain poor. Here, unlike CIL, state-level participation would be best achieved by allowing states to manage some of the stages independently.
Of the three distinct activities, procurement and distribution may be handed over entirely to states with the central government retaining exclusive control over the storage entity, which will act as a clearing house. The storage entity will also be entrusted with reducing rotting and waste, targeting a major source of existing losses. With the central government deciding the minimum support price (MSP) for each item, states will have the option of increasing this MSP from their own funds, but not reducing it. Once procured, states can transport food-grains to the nearest storage hub and become eligible for reimbursement from the centre, based on the quantity they deposit in these hubs.
Similarly, for distribution, the Centre decides the public distribution system (PDS) price for each item with individual states free to sub-vent it. States will place orders on a centralised portal for withdrawing grains from the storage entity and become liable to pay the storage entity an amount based on the quantity withdrawn at the central PDS price. With states becoming an integral part of procurement as well as distribution, interests of all stakeholders will be aligned and costs managed more effectively.
And while the potential for misuse still exists in this system, a well-designed technology-enabled platform can serve to reduce it significantly. Of course, the ultimate aim to end dependence on a government-run structure to achieve these goals must be kept in mind at all times.
The challenges facing our new government are enormous. While fresh thinking is essential for addressing them, the desired impact can be achieved only by ensuring a multiplier for the impact of each initiative. History suggests that truly bold measures are best taken by governments in the first few months of their existence. So the weight of expectations is squarely on Modi's shoulders.
The writer is Director & Business Head Portfolio Management Services & Product, Pramerica Asset Managers
These views are personal
These views are personal