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Asset Monetization and India’s experience in the past decade (brief)!

India | Stocks | Monetization | 07th November 2021 | Virtual Wire

Picture -New Indian Express


In an asset monetization, the Government parts away with its assets – for a specific period in exchange for a lump-sum payment. This payment is then used for infrastructural development in areas where India lags behind.

Privatization and asset monetization are two sides of a coin; the former means giving up the ownership of pubic goods or properties to private owners while the latter means selling the rights of running the company or using the good to a private party for a specific period after which the assets return to the government. In an asset monetization, the private party is required to pay the government a price equal to the present value of cash flows at the current level of utilization. It can be implemented for mainly 3 sectors: roads, railways, and power. However, there are a number of other assets that can be brought under this umbrella of monetization, these include airports, ports, telecom, stadiums, power transmission, etc.


Two modes of implementation for asset monetization are PPP(Public-private partnership) and InvIT(Infrastructure Investment Trust).In PPP works an arrangement between a government-owned entity on one side and a private party on another side. Asset monetization can be carried for two kinds of assets: under-utilized and well-utilized assets. The under-utilized assets are the ones that are either not used adequately, not fully developed or are not marketed well. These are the assets which if a private party undertakes have the potential to increase the provision of the benefits of the economy as a

whole and of private holders too. This led the government to have a tendency in favour of monetizing these assets as it’ll bring the utilization of assets to the efficiency and welfare of the economy too.

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The other kind of assets which the private owners want the government to monetize is well-utilized assets. These assets tend to bring efficiency as well as inflation in prices if left unregulated, as the private owners only want to maximize their own profits. Therefore a small investment by a private party in case of underutilized assets leads to higher profits for them, the efficiency of monetized assets and an increase in the welfare of all while in case of well-utilized the private party has no incentive to invest thus there is a possibility of little or no increase in efficiency, profits, and welfare. InvITs are like mutual funds in which investors can subscribe to get dividends.


The sponsor, here government, is required to hold a minimum proportion of all the issues total. Investors can get benefits through diversification based on the various portfolios of assets. In this route of monetization, the government holds the rights of a significant proportion of the assets which makes it liable to earn cash flows and to operate the assets. However, the PPP structure proved to be a failure after 2003-2008, economic boom, and many such projects failed to repay bank loans which in turn worsened the situation and saddled the banks with non-performing assets. Moreover, the bulk of the lending has involvements of political connections which resulted in a tangled relation between politics and the banking system. On the other side, InvIT’s performance is closely linked with stock market prices.

Picture -The Second Angle


During the 1991 economic reforms, the bundles of PSUs(public sector enterprises) are sold to the financial institution UTI, and these were further sold in the stock market but the euphoria was short-lived and the Harshad Mehta Scam had handicapped stalling and divestment for almost a decade. Hence, it’s just a gamble to undertake asset monetization in the wake of such bad experiences in the past without paying any attention to the past and its mistakes.


According to RBI, in 2020-21 Indian economy contracted by 8% accompanied by a fall in aggregate savings and investment rates, with the stock market being an exception that is booming due to short-term foreign capital inflows. Moreover, many economists and policymakers are looking for other safety measures that can ensure the government with the required money to undertake infrastructural development on one hand and ensure prevention from another scam and piling of nonperforming assets with banks. One way through which government can have an increase in revenue is increasing the tax rate which is hanging in between 17-18 per cent approx., this is way too low which all other developing countries impose in the current scenario, but undertaking an increase is quite impossible in today’s situation as it’ll land the economy in a political crisis as well as an economic crisis to some extent.

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The novel coronavirus has paralyzed the economy’s savings and an increase in tax at this point when a significant part of the economy has lost their job will be unjust to them. All the methods come up with some trade-off, it’s the responsibility to undertake the method and ensure to minimize its aftereffects to the extent it doesn’t hurt a large proportion of the economy. Thus, carrying out asset monetization in this phase with such a bad experience at hand wants the government to be more vigilant and regulative to prevent the economy to slip into another scam or crisis.