A renewed approach to disinvestment
3 min read 28 May 2015, 04:01 PM ISTFreeing assets from government control should be the aim of disinvestment policy
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The lofty dream of disinvestment of government stake in public sector units (PSUs) has often remained just that. Successive governments have missed their initial disinvestment targets set during the beginning of the fiscal year. This has been commonly attributed to many reasons ranging from pressure exerted by interest groups on the government not to divest its stake to the unfavourable market valuation of PSU stocks due to careless planning of the disinvestment process.
The last fiscal was no different with the government’s disinvestment proceeds falling well short of the initially targeted amount of ₹ 63,425 crore. The privatization of public sector behemoths such as Coal India Ltd and Air India Ltd—initially expected under a new government oriented towards radical economic reforms—did not come through. The government instead settled for partial divestment of its stakes in some PSUs to fund the most urgent expenditure of the day.
While radical privatization may not be in store this fiscal year either, there could be reason to believe that things may turn out to be a little different this time around. Earlier this month, the cabinet committee on economic affairs (CCEA) headed by the prime minister approved the sale of public stakes in a number of PSUs. Some of the companies include heavyweights such as Oil and Natural Gas Corp. Ltd and Indian Oil Corp. Ltd that could bring in huge proceeds for the government, and others such as Bharat Heavy Electricals Ltd, NMDC Ltd and MOIL Ltd.
In his budget speech earlier this year, finance minister Arun Jaitley set an ambitious disinvestment target of ₹ 69,500 crore for the fiscal year 2015-16. The amount was estimated to come from ₹ 41,000 crore worth of minority stake sales and the rest (amounting to ₹ 28,500 crore) from the strategic sale of stakes in loss-making PSUs. To be sure, given the bitter past experience of meeting disinvestment targets, these ambitious estimates must be taken with a pinch of salt.
Yet, it is welcome that the government has woken up from slumber and expedited the disinvestment process for the current fiscal year. It is also encouraging that the government is looking at allowing retail investment in PSUs through the means of exchange traded funds. This will allow a greater amount of investment capital to reach the market and aid in the proper valuation of PSU stocks. The government will do well not to shelve its disinvestment plans owing to market pressures—in the form of unfavourable valuation of PSU stocks in the stock market—as in the past.
Moreover, it is crucial that the favourable momentum built up now in expediting disinvestment is used to institutionalize the whole process. Rather than being motivated mainly by the expenditure needs of the government, disinvestment must be carried out as a reform required for greater economic efficiency. The inefficient use of capital has remained a major problem affecting India’s productivity, and PSUs that consume significant amounts of capital must assume part of the blame. This is more reason for the government’s target of strategic sale of its stakes to move beyond merely loss-making PSUs.
The national investment corpus proposed by the government earlier this year to manage the revenue collected from resource auctions could offer a clue in this regard. The proceeds from disinvestment must be directed towards capital spending in the form of infrastructure and other assets, rather than in sectors already dominated by the private sector, to fund the next phase of high growth.
In the coming years, it is important that the government pushes ahead with the pace of its disinvestment programme. But more importantly, the philosophy of disinvestment must be driven by the goal of releasing assets under government control to market forces. Such steps promise greater efficiency in the use of resources.
Unfortunately, and in direct contrast, the disinvestment approach of successive governments has emphasized using disinvestment proceeds for funding fiscal profligacy. This must change soon if disinvestment is to be about anything more than simple public finance management.
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