Government can't keep sitting on decaying PSU Firms

https://www.bloombergquint.com/union-budget-2018/2018/02/03/union-budget-2018-government-cant-keep-sitting-on-decaying-psu-firms-says-manish-chokhani

3 February 2018, 12:06 PM

Manish Chokhani

The government has no business sitting on assets which are decaying with time.

That’s what Manish Chokhani, director at Enam Holdings told BloombergQuint in an interview after Finance Minister Arun Jaitley presented the Union Budget. “If you can monetise that $3-5 billion which you are sitting on, it drops your interest outgo, it drops interest rates in the economy, it sparks an investment revival and also it gives you money to create infrastructure,” he said.

Here are the edited excerpts of the interview.

Is it a thumbs up for Union Budget 2018?

At its very heart, it is a political document. It has delivered what the politics needed. From an individual perspective, I pay more taxes, so I can’t be too happy with it. But I don’t think it was unexpected. Mr. Kishore Biyani calls India -- India 1, India 2, and India 3. So, naturally, India 1 has to pay more to help India 2 and also India 3.

The big question is whether India 1 has made enough money in the last few years to keep paying for India 2 and India 3? The finance minister is also worried about the outbound capital investment, and I don’t know what options he is looking at.

From a structural perspective, I don’t think we are doing the right things in the long term. It is not to do with this budget or this government, but generally as a country. Maybe it is an issue with our politics that it doesn’t allow us to do so. The reality of life is that government’s collections all put together are 9 percent of GDP.

So, let’s say they collect Rs 9. Out of Rs 9, they have a deficit of Rs 3-3.5 which is a staggering amount if you treat it as a company. That Rs 3-3.5 is met by borrowings. Coincidentally, that also happens to be the interest payment of the Government of India. So, you are borrowing money to pay interest. So, you end up spending from the Union Budget about 1 percent of GDP on infrastructure creation because you will spend 3-4 percent on defence, salaries of government staff. You will spend 3 odd percent on social schemes. You will spend another 1-1.5 percent on subsidies.

So, it doesn’t leave you with any room. Every year, you hear about crisis on the fiscal side and we end up discussing decimal points. At the end of it, you don’t get the roads, ports, rural roads you deserve. For all the crying about agrarian crisis, the reality is you will not solve this crisis by doling out some money here and there or by giving them cheap power or fertiliser. The reality is that the economics of agriculture globally has shrunk because it is a commodity business. Only way out of it is to have value addition by putting in food processing plants etc. Unless deep structural changes are made to the economy, this incrementalism of running it more efficiently or targeting one section or the other at the expense of someone else, will get us to 7-8 percent, but it is no way close to the potential of the economy. And the magic bullet for that, in my opinion, coming back to 3.5 of GDP being spent on interest.

It stems from the fact that the government in 1950s built up public sector assets because there was no capital in the country, and they were supposed to be the temples of modern India. At a certain time, we had a BSNL worth Rs 100,000 crore, now I don’t think it is worth a fraction of that. Air India was worth a lot of money when it was the only airline in India and now it is at negative Rs 40,000. You contrast that with when they sold off Maruti and Hindustan Zinc. I don’t understand what is the great social cause which is being served by holding on to Steel Authority of India or Nalco or BHEL, when you can sell those assets which give you nothing except the dividend which is a meager amount.

If you can monetise that $3-5 billion which you are sitting on, it drops your interest outgo, it drops interest rates in the economy, it sparks an investment revival and also it gives you money to create infrastructure. And to create soft skills – it’s the need of the hour to create jobs.

If you have to discuss the budget on the contours of how it is presented, then it is well done. But in the context of what needs to be done, we are completely missing the plot in our country.

What about what the budget did or did not do to bring down the bond yield?

If our expenditure is going to be pegged at 13 percent of GDP, your expenditure side is so inflexible – there are salaries, defense, subsidies, social schemes which is never going to go away – and you are not going to increase your taxes because how much will you take away from that 2 percent of India which pays taxes.

The only way out is to monetise your assets.

If you have a tiny country like Saudi Arabia, which is one-sixth of our size, able to talk about the trillion-dollar valuation of Saudi Aramco, and probably they will raise $100-200 billion from that. In the context of that, we are talking about $12-14 billion disinvestment target in a government which is presumably sitting on trillion dollars of assets itself. If they don’t sell assets they will not be able to get rates down, because that doesn’t give them money to pay down the debt and lower the market borrowing and preempt it away from the private sector.

The debate in India should be about why this government is sitting on all these business and trying to prove that it can run this business better when it has been proven year after year, that if you contrast a Hindustan Zinc performance with SAIL and Nalco, the answer is very clear. You compare the performance of Air India with IndiGo or Jet Airways, then the answer is very clear.

It just foxes me that we keep discussing fiscal deficit of 3.2 or 3.5 percent, whereas the picture should be that revenue deficit should be zero. We have no business spending more than we earn. And then we are taking away from the crying need to put infrastructure on the ground. Not just hard infra but we need to invest in soft infra too. Clearly, the resources are there. It’s just a question of mindset. At 7.5 percent, nobody is putting up capacity in India.

Are you happy with the way disinvestment targets are getting achieved?

If you sell HPCL to ONGC, it is really left pocket to right pocket. I don’t think the ministers are in any doubt. And they say so themselves, that 10 years from now, India will be driving, for example, electric vehicles. What happens to the refineries which is producing transportation fuels. It is clear that those refineries needs to be converted more and more towards producing plastics and petrochemicals and they are no longer needed for refinery products. If that is the case, we argue that we need cleaner greener environment. We know, 10 years from now, what could be the state of Coal India, BHEL or NTPC if the world has to move toward solar and renewables.

You know that these assets are going to decay in the next 10 years. Instead of transferring a refinery to ONGC, if there was like in the case of Essar oil, some external investors are happy to hold the asset for you, sell it. There is $350 billion at the current market value of public sector undertakings held by the Government of India, on which I don’t think they make more than $3.5 billion dividend. If you monetise that $350 billion over next 5-6 years, you have $50 billion a year coming to you. That $50 billion can be re-invested to create infrastructure for not just cities but also for the farms. You can do that all over the country. With that kind of equity infusion, imagine the leverage potential you have on that. The whole $1 trillion infrastructure being the need of the hour, when will it ever get fulfilled? The answer is obvious, but I don’t know what is the political will to get this done.

How does LTCG tax change the dynamics of investing in India? Do you think a lot of investors will take time to digest it?

Investors are practical people and markets are a discounting mechanism. There are hundreds of people who may be invested, some may not be. It raises your hurdle rate. Because earlier you were making post-tax the whole return and now you will make that much lower by paying that tax. If the company is going to perform and the stock will go up, are you not going to buy it because you have to pay a tax at the end? I don’t think so. For Indian investors, we don’t have the choice. You pay it, live with it and it is the right of the government to ask its citizens to pay tax.

From a global perspective, the country has to get more attractive and receptive. In that context, I don’t know how we stand among the developing world. We like to compare ourselves with developed world when it comes to taxes and compliances, forgetting that we lack the infrastructure and yet the market size and opportunity which those countries have already achieved, and therefore they are charging those levels of taxes. I hope somewhere this will reconcile. We live in hope.

I am fully invested, and I will remain fully invested. I will continue to buy Indian stocks because it is still the best asset class in our country and the only path to sustain wealth creation in the country is to own a business. So, I stay where I am.

What do you think of the revenue estimate?

On the revenue side, I don’t think I have a lot of squabbles. There is buoyancy coming in the country. Last year, we had 11 months of GST revenue and earlier we had a big shock to the system through demonetisation. So, the country’s base is starting from a low level.

Because of the global recovery, conditions are better. Oil and metal prices are up. So that itself will start giving a boost to earnings and therefore to taxation. I don’t have a quarrel with revenue number. If you miss a few decimal points in the context of GDP, they will end up with 9 percent of GDP as the revenue number. Coupled with proceeds coming through disinvestments or telecom spectrum, the net revenue will be about 10 percent of GDP for the Centre and you can swing a couple of basis points here and there, it doesn’t really move the needle.

We keep discussing 3.2 or 3.5 as a percentage of GDP which is a real misnomer. It should be discussed as a loss of 3.5 on a revenue base of 10. So, it is a 30-35 percent loss which you are running every year and that loss has to be plugged and you cannot run it by borrowing money to pay interest.

I keep coming back to the same thing. The government has no business sitting on all these assets which are decaying with time. If they don’t monetise today, they will be in a sorry situation of how we are now selling loss-making companies as the strategic disinvestment list put out, or indeed Air India which can be the test case. We should sell assets when they are well priced. They haven’t managed to sell the residual stake of Hindustan Zinc for the last 13-14 years. It is the best time to monetise that asset.

Government sitting on ITC through SUUTI stake. There are a lot of low hanging fruits. It is a question of application of mind and some dedicated effort. The way they got GST done was brilliant. The way we have got the NCLT and insolvency code done is brilliant. The way we have got Aadhar and DBT to work is brilliant. So, there is a lot of good work which was done. But the big miss of $500 to a trillion dollar of assets sitting and not producing a return... the Prime Minister needs to focus on that and go after it. Because this will get him the headroom and create capacity in the villages and tier 2 towns of India. We are not getting ready otherwise to manage the growth.

Where do you see markets 12 months from now after the budget?

The world is in recovery mode. Equity markets and commodity markets are in exuberance zone. Money is still relatively cheap. Though it is going to get tighter and tighter. The scenario has been of a melt-up in global markets. We have just followed suit with other emerging markets. Nothing unique has happened in India in that context. Global mid-caps, small caps and EMs have had a fantastic rally.

We like to believe that we are at the beginning of a bull run in India, but the reality is that you are close to that kind of easy money, bull run globally. There will be challenges if interest rates go up more than what markets are currently discounting. If growth in the world and commodity prices rise the way they are, U.S. seems to be full employment as well, it is possible that you will start seeing inflation and the market have not priced that in. You could be in a spot of bother. And the markets are by no means cheap. We are currently in a Goldilocks period where there is growth and liquidity. No one wants to get off the bus as there is nowhere else to go. From that perspective, if you make a 10 percent higher number this year, people would be happy. Now of course, you would have given it away by way of capital gains tax. But I don’t think 2017 which was a 45 percent return year, will repeat in a hurry.