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Business News/ Opinion / Lower government stake for higher gains

Finance minister Arun Jaitley argued at the bankers’ conclave late last week that India needs strong banks instead of a large number of them. Public sector banks (PSBs) are facing serious issues of asset quality and are now being widely recognized as a potential impediment to economic recovery. Bankers at the conclave were in favour of constituting an expert committee to explore possibilities of consolidation among PSBs—something that the recently constituted Banks Board Bureau under former comptroller and auditor general of India Vinod Rai will also look into. There are valid questions as to how weak banks will be consolidated to strengthen the overall banking universe, but the positive part is that the government is willing to consider ideas and move forward. And that brings up perhaps the most important question: Why should the banking sector remain dominated by government-owned banks, which at the macro level also affects efficient allocation of capital, among other things?

Jaitley announced in the Union budget that the government will consider lowering its stake in IDBI Bank to below 50%. A similar solution should be considered for other PSBs, which will give them the necessary operational freedom, induce competition in the true sense of the term and reduce administrative and fiscal pressure on the government. After all, at a broader level, incoming statements and a number of announcements in the budget suggest that the government is keen to utilize its investments in public sector companies more effectively.

For instance, the finance minister announced that in order to promote the objective of transparency, state-owned general insurance companies will be listed on stock exchanges. It is reasonable to expect that stock market listing will not be restricted to general insurance firms and will be followed by other companies, such as Life Insurance Corporation of India, which will also help the government unlock value. Further, the government will encourage companies to sell assets such as land to be able to generate resources for investment in new projects. The government will have to be a little careful in pursuing this idea so that it doesn’t end up interfering in the functioning of these companies, which can compromise the interest of minority shareholders and could be counterproductive in the long run.

Also, after the government failed to make any meaningful progress in the area of strategic sale in the current year, it has put in place a procedure and has asked NITI Aayog to identify companies. This should help attain the objective in the next fiscal; it has been reported that NITI Aayog has already started the process so that the government can spread the stake sale through the financial year. The government is aiming to raise 20,500 crore from strategic stake sale in the next financial year. This will restart the all- important process of privatization, which has virtually fallen off the government agenda for over a decade.

As highlighted in this space before, it is important that the government moves forward on this front, which is an integral part of overall economic reforms. In its attempt to consolidate the fiscal position, the government’s reliance on non-tax sources has increased and disinvestment is an important part. The government is aiming to raise 56,500 crore in the next financial year under this head. The flows from stake sale will not only help the government push capital expenditure at a time when it is chasing a stiff fiscal target, but will also allow it to move out of sectors where there is a vibrant presence of the private sector.

Clearly, there is a visible shift in the government’s outlook towards public sector companies as it intends to effectively use its investments. But success on this front will depend on how the entire process—be it strategic sale or consolidation or lowering stake in banks— is taken forward.

The government should be prepared to deal with political opposition and pressure from interest groups.

Should the government use its investment in the public sector more effectively? Tell us at

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Updated: 08 Mar 2016, 11:23 PM IST
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