New Delhi: The 13th Finance Commission makes a strong case for disinvestment in all public sector units (PSUs), saying that the government could raise resources up to 0.88% of gross domestic product (GDP) in the next five years.

Graphic: Yogesh Kumar/Mint

“A re-ordering of the government’s public investment priorities is...both necessary and desirable," the report said. Disinvestment “allows the government to increase its capital expenditure without impacting the fiscal deficit".

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“It enables the government to meet its overriding fiscal priority (reducing the debt-to-GDP ratio) and simultaneously increase the volume of public investment in key strategic areas," it added.

India’s fiscal deficit is estimated at 6.8% of GDP for 2009-10. The government is trying to reduce the debt-to-GDP ratio, which hovers around 80%, while at the same time increasing spending on infrastructure and the social sector, which will help boost economic growth.

The panel has recommended the government list all PSUs that yield lower returns on assets than a standard rate, which will be decided by an expert committee. It also said that state governments should sell off or list state PSUs since this “not only engages the productive assets of the government, but also promotes inefficiency due to lack of proper monitoring".

It recommended that these be made available for public projects or else be sold.

Using valuation measures such as average price to earnings and average price to book of listed PSUs, the panel estimates that the market value of unlisted PSUs is Rs3.5 trillion. It assumes a 10% disinvestment in these firms, and the government whittling its stake in listed state-owned banks and PSUs to 51%. This will enable the government to raise Rs3.8 trillion, which spread over the next five years amounts to 0.88% of GDP.

This money, it says, should go to the Consolidated Fund.

Currently, divestment money is routed to the so-called public account, from where it goes to the National Investment Fund, which is earmarked for social sector programmes.

It also remarked that disinvestment in PSUs will allow more space to private firms.