Some sense at least

Why did it take so long, is the question that comes to mind immediately when discussing the Rs 14,500 crore UTI bailout-cum-reforms package announced by the government. After all, the government knew it was really responsible for all the commitments made by UTI to its investors, so there was little point wasting several months in announcing it would guarantee all UTI8217;s promises. All that the delays resulted in, really, was to depress the stock markets further. Since market participants knew UTI was short by over Rs 14,500 crore, in the US-64 as well as various MIP schemes, and since everyone expected UTI to make distress sales of its equity holdings, the sensex was kept low. And keeping the sensex low further increased the hole in UTI8217;s coffers. None of this is rocket science or complicated financial modelling 8212; UTI8217;s chief has been shouting this from the rooftops for several months now.

That apart, the move to split UTI, and to privatise one part of it, is a good move 8212; based on the current asset-split, over 40 per cent of UTI8217;s various investment schemes fall under what8217;s called UTI-II, the part which will be sold. UTI-II essentially comprises those investment schemes run by UTI in which there are no guarantees on returns. The balance, or UTI-I, will comprise of US-64 and various assured-return schemes for which the bailout has been announced, and this will be retained by the government. Purists will criticise the move as half-hearted, and argue that the government should have sold UTI entirely, as the Malegam committee had proposed. But that was an unimplementable suggestion, as there would be few takers for a scheme with such huge liabilities. Not bailing out UTI was never an option 8212; the government refusing to honour its financial commitment, and that too on such a large scheme, would have hit confidence in the entire financial system, and this would have been too big a risk to take. Why do you think the US government spent over 200 bn bailing out various Savings 038; Loan institutions in the late nineties?

There is, also, a related issue that is beginning to look quite serious now 8212; the issue of government debt. Today, the total debt adds up to around 58 per cent of GDP, and the UTI bailout package itself will contribute another 0.5 per cent of GDP to this. Add to this the expected costs of the bailout packages for IDBI and IFCI 8212; to be announced later this week 8212; and the total could add up to another one per cent of GDP. With interest payments on this mounting debt now accounting for half the government8217;s total revenue expenses every year, India could well be moving towards a debt-trap. That, after UTI, is the next crisis to watch out for.