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Illustration: Jayachandran / Mint

Illustration: Jayachandran / Mint

Privatization: the road ahead

Privatization: the road ahead

The government would do well to move fast on privatization. The equity markets have rallied, both on global hopes that the world economy is coming out of the woods and optimism about the future of economic reforms in India. It’s a good time to sell.

But that still leaves the question of what is to be done with the money. There is a lot of loose talk right now about how the money that the government will collect by selling shares in public sector units will be used to bridge the widening fiscal gap.

This is a pernicious idea.

Illustration: Jayachandran / Mint

The earlier government had decided that all disinvestment proceeds would go into a special fund. A quarter of the annual income earned by this National Investment Fund (NIF) would be used to meet the capital requirements of profitable PSUs. The other 75% would be used to finance select schemes in education, health and employment. The corpus of the fund would not be touched.

NIF has been functioning since October 2007, after the government collected Rs995 crore from the sale of shares in Power Grid Corp. of India. NIF is managed by three professional fund managers for a fee. In effect, NIF ensures that disinvestment revenues are ring-fenced and kept out of the Consolidated Fund of India—the pool into which government revenues are usually poured.

There is no law mandating NIF—it was set up after a cabinet decision. So it would be tempting for several people in government to try to grab disinvestment money.

We hope the Prime Minister puts his foot down and refuses to play along. He should also insist that revenues from the forthcoming spectrum auction for 3G, or third generation, mobile telephony should be put into NIF.

There are two reasons why this makes sense. First, NIF will ensure that politicians do not hijack disinvestment funds for populist schemes; the money should be used to create new assets or improve the quality of human capital in India—two preconditions for future economic growth.

Second, NIF is a good way to make both disinvestment and full-fledged privatization more acceptable to voters. It would be far easier to tell voters that government companies are being sold to release money for new schools, primary health centres and the like. That would work as a shield against the inevitable claims by the Opposition that the United Progressive Alliance (UPA) government is selling family silver.

How should the proceeds from disinvestment be used? Tell us at views@livemint.com

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