Using disinvestment for growth
4 min read 15 Jul 2015, 07:11 PM ISTIt is important to keep the disinvestment clock ticking so that additional resources can be generated to push investment and economic activity
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The government has mobilized 1,610 crore through disinvestment so far this financial year. It appears that the stake sales will once again be back ended, though the Cabinet Committee on Economic Affairs has given approval for disinvestment in several large public sector companies. For the current year, the government has set an ambitious target of raising 69,500 crore through disinvestment. Out of the total targeted revenue mobilization through disinvestments, it is expecting to raise 28,500 crore by way of strategic sale, while the rest (41,000 crore) will come through minority stake sale. However, in recent years, the government has fallen short of the target for a variety of reasons and the same story was repeated last fiscal, though the mobilization was the highest ever. But markets will be hoping that this year will be different for various reasons.
For one, attainment of such a big target itself will send a positive signal to the market. Also, meeting the target would mean that the government may not have to compress capital expenditure towards the end of the year in order to meet the fiscal deficit target in case there is a shortfall in revenue as has been happening for past several years. Such a situation should be avoided as the economy is still in the early phase of revival in investment and economic activity. “The need of the hour is to nurture this investment revival by formulating and executing policies conducive for investments. The central government front loaded plan expenditure in the first two months of this fiscal; plan expenditure of four key ministries—human resource development, roads, rural development and railways—proportioned 73% of the total plan expenditure of the central government," said a recent research note by India Ratings and Research, a rating firm. Since investment from the private sector is weak, the government has taken the lead and this is where higher disinvestment proceeds can be helpful. However, to be able to take full advantage, the approach towards owning commercial assets and disinvestment, perhaps, needs to be reassessed.
The report of the 14th Finance Commission (FFC) could be a good starting point. “The fiscal costs of public ownership in public enterprises, for analytical purposes, may be reckoned as the opportunity costs of retaining the current level of investments in public enterprises," noted the FFC. (See: page 219 of volume I of the report.) It goes on to say that if the return on equity of a public sector enterprise is less than the borrowing cost of the government, it is prima facie a candidate for disinvestment. The other approach could be to factor in the risk premium of holding equity as well. Differently put, companies with less than 16% return on equity (as illustrated by FFC) can be divested, unless they are in a business that only a public sector company can do. Another approach highlighted by the FFC is to consider an alternative use of proceeds obtained from disinvestment. On this point, the government has a strong case for aggressively divesting its holding as it needs to increase investment in other areas such as infrastructure, which will have a multiplier effect on the economy.
Further, the FFC argued that if the private sector is in a position of providing goods and services in a particular area, the government can consider exiting such a business. “…approach could be to consider the benefits of the ‘crowding-in’ effects of public investment in infrastructure through a shift in investments away from those in public enterprises producing tradable goods and into building economic infrastructure in the interest of growth," the report added. As highlighted earlier in this space, FFC has identified 88 companies that have less than 1% market share in their respective businesses and which can be sold. So, there is scope for accelerating the pace of disinvestment and the government can look beyond the names that come up regularly for stake sale.
Encouragingly, this year, the government is also looking at strategic sale, which will not only lead to revenue generation, but will also serve the larger purpose of disinvestment, i.e., bringing in more efficiency. While it is important that the government achieves the target set for the current year, what is needed at this stage is a medium-term roadmap for disinvestment which will give a steady flow of cash that can be invested in physical and social infrastructure.
In recent years, often, the government has failed to attain the target because of adverse market conditions. Ideally, the government should not worry about market conditions as it is always difficult to time the market. The other problem in selling stake in listed companies is that prices get depressed at the time of the issue. To avoid such an outcome, the government can decide a floor price and sell shares to institutional investors through bidding. There is a chance that the government will get a better price as institutional investors may be willing to pay more for a large number of shares which they cannot acquire in the market without influencing the price. Later, the government can do a smaller issue for retail investors. Therefore, there are ways by which market-related issues can be addressed.
What is important is to keep the disinvestment clock ticking so that additional resources can be generated to push investment and economic activity.
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