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25 March 2022

Easy Street: A Cherry-Picked Liberalisation

India was once the world’s single largest recipient of aid. In 1991, Manmohan Singh set it down a path of economic liberalisation, shifting the economy from a state-led Soviet style economic model to an increasingly market based one. Since the reforms, inflation has reduced, GDP has grown by nine times, and services have grown as a share of GDP, while agriculture has done the opposite. The country’s government hails a promised new wave of economic liberalisation as 1991 reincarnate, but does it have what it takes to realise such ambitions?

A legacy of its command economy, India has many state-owned enterprises which it is beginning to divest, with plans to sell US$81bn, or 3% of GDP, of state assets over the next four years. Such a move is welcomed by the success of the previous privatisation spree in the late 1990s, where many of the divested companies have become successful players in their respective markets. The profit motive often ensures private companies are more efficient and innovative than their public counterparts, and a widescale shift of public assets into private hands should allocate them more productively with macroeconomic benefits. Such is the intent of India’s Chief Economic Advisor, who expects the reinvestment rate to reach 40%, and growth to resultantly accelerate.

In its reforms, the government may soon learn a lesson applicable to all walks of life: that partial commitment leads to partial improvement at best and, at worst, a growing problem. In its review, New Delhi identified 18 strategic sectors where it will retain a presence, admittedly with a limit to the number of public companies in each one. A liberal use of the word ‘strategic’ seems to have been applied, with warehouses, export credit guarantees, IT, banking, and insurance, as well as consultancy services related to all strategic industries being deemed in need of a state presence. A wide web of industries with public companies contradicts the promise and essence of a privatisation drive.

Though the headline figures for asset sales appear promising, they believe the truth of the matter, where many of the sales are for minority stakes in existing assets, with the government retaining control over them. A vast pool of assets from highways, railways, and airports, to pipelines, ports, and hundreds of coal mines, exists with no indicated intention to sell. One can point to the sale of Air India to the Tata Group as a symbolic step in the right direction, yet the state had been trying to sell it as far back as 2018. Moreover, it has dragged its feet on promises to privatise other large companies such as the Life Insurance Corporation of India, which has had its IPO valuation delayed, and progress on current divestments has been glacial.

One sector in much need of reform is India’s banking sector. Two of the twelve state-owned banks are being privatised, Modi having announced the intention to oversee more, and insurance companies can now be completely foreign owned. The state bank of India is well run, and one of the country’s largest, but it is the exception rather than the norm, with the remaining sector being marred by inefficiency, political pressure, and a vulnerability to scandal. These factors have culminated in a non-performing asset ratio (the proportion of assets that fail) forecast to reach 9.8% by March 2022.

This article was taken from the Winter 2022 issue of 1875. To continue reading please visit the publication.
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Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Easy Street: A Cherry-Picked Liberalisation
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