The privatisation of public sector enterprises (PSEs) announced in the Union Budget for 2021-22 is a good idea coming at the wrong time, noted economist and former Chief Statistician of India Pronab Sen said on Wednesday, arguing that it may end up dampening growth prospects by crowding out fresh investments.
“For the first time, the word privatisation has been actively used in the Budget,” Mr. Sen said. “I have absolutely no problems with privatisation but I do have a problem with the timing of privatisation,” he added.
“At the end of the day, regardless of what is happening on the stock market, privatisation is best done when the economy is booming. It is a terrible idea when the economy is in a slump,” he said during a discussion on the Budget’s implications hosted by the PHD Chamber of Commerce.
‘Crowd out investments’
Pointing out that investors buying a PSE would do so by dropping other investment plans they may have had, Mr. Sen said this would effectively drive investments to existing assets instead of creating new assets.
“This itself is a depressing element as it brings the economic system down. Privatisation at the time of a recession is a horrible idea and it should be done only when the economy recovers. I think this point should be made very clear because the government is seeing it essentially as a source of finance. It is more than a source of finance… it can actually crowd out current investment in creating new capacities and will hold up growth,” he said.
Funding bad banks
Mr. Sen, now the India programme director at the International Growth Centre, also expressed concerns about the Budget’s bad bank proposal, citing global experience of bad banks working well if they were financed entirely by the government.
“In this case, the intent is for the financial sector to set up a bad bank, offload their stressed assets and then the ARC will get around to disposing those assets off,” he said.
“Think about what will happen — banks themselves will be taking a part of their current resources to fund the bad bank. All else aside, the funds they will have left available for industry’s current demand are going to be further eroded. It’s not a bad idea, I support it... but the timing is wrong,” he said. “In economics, a good idea implemented at the wrong time is a bad idea,” he summed up.