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Business News/ Opinion / The right approach for disinvestment

The disinvestment story is once again slipping into a set narrative. The government first sets a target to fill the revenue gap and then falls short of it for one reason or the other. As only 12,701.33 crore has been raised so far this fiscal year through stake sales in public sector firms, as against the ambitious goal of 69,500 crore for the full year, the government is now reportedly thinking of more than halving the target to 30,000 crore.

This time, it is worried about valuations, as the public sector companies shortlisted for a stake sale are largely in commodity businesses, where prices are not favourable. So, will the government wait till commodity prices rise to proceed with stake sales? And will the overall market conditions not become unfavourable by then because of higher commodity prices? Naturally, it will, as India is a net importer and sentiment on the street will get adversely affected if commodity prices were to rise rapidly.

The basic issue is that the government lands up in one such situation or the other because of poor planning on the one hand and narrowly approaching disinvestment as a tool to plug the fiscal deficit on the other. This needs to change. Divesting stakes in public sector companies should be seen as an integral part of the larger economic reform canvas.

The National Democratic Alliance government was lauded for setting an aggressive disinvestment target in the beginning of the year, and for its intention to partly attain it through strategic sales. Though some doubts were raised then on whether such a target could ever be achieved, the government had the chance to surprise critics as it managed to raise 24,277.17 crore in 2014-15—the highest ever—in the year it came to office, though it was still short of target.

It is disappointing to see the government giving up midway. Also, there is no visible movement on the strategic sale front. This lack of urgency could also be a consequence of confidence in meeting the fiscal deficit target of 3.9% of the gross domestic product in the current year, compared with actual achievement of 4% last year. But this is no reason for a process so integral to economic reforms to be slowed.

The talking heads of the government have repeatedly argued, and rightly so, that they are not satisfied and want the economy to grow at a faster rate. A higher rate of expansion in economic activity will only come on the back of higher investment and efficient use of existing assets.

At this point, it will be useful for the government to refer to the report of the Fourteenth Finance Commission (FFC) and also look at the opportunity cost of going slow.

In its report, the FFC said: “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."

Differently put, the government should get out of companies where return on equity is less than its cost of borrowing. Also, since the government intends to step up investments in the infrastructure space, it should look at disinvestment as reallocation of resources from one asset to another, which will help push economic growth.

“...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 FFC further noted.

The government would, therefore, do well to not look at disinvestment only as an instrument to bridge the fiscal gap and get trapped with issues such as favourable market conditions and valuations. It is impossible to time the market, all the time. Instead, the government should focus on long-term benefits of seamlessly moving forward with the process of disinvestment.

Should disinvestment be deemed a part of larger economic reforms package? Tell us at

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Updated: 29 Oct 2015, 09:25 PM IST
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