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Ministries divided over use of income from disinvestment

Ministries divided over use of income from disinvestment

India’s ruling United Progressive Alliance may have officially put disinvestment or sale of state-owned assets on hold last July, but various arms of the government are still bickering on how best the proceeds from previous disinvestments can be used.

The Planning Commission, the ministry of power and the ministry of mines favour using divestment proceeds to fund expansion of public sector firms, not development programmes.

They have opposed the move to park the funds in a National Investment Fund (NIF) that will bankroll development programmes.

A white paper on disinvestment will be tabled in Parliament during the monsoon session beginning next week.

This comes six years after a parliamentary committee first asked the government for an update on the “factual position" of disinvestment.

The white paper was prepared by the department of disinvestment in May and circulated for comments to all ministries and government departments in June.

In response, the power and mines ministries, that administer several key public sector firms, disagreed with the government’s policy of using 75% of the proceeds of disinvestment to finance education, employment and health care.

“The experience of the government and its agencies in managing funds has not been encouraging. This is borne out by the present condition of pension and Provident Funds," the power ministry said in its comments.

The Planning Commission said “there is no particular merit in using the proceeds to set up the fund and then use the income for particular purposes" because the amounts generated are “so small".

“Setting up of the NIF is a conscious decision of the government," the department of disinvestment (DoD) said in response to the Planning Commission’s views.

“There is also no need to alter the objectives of the fund," it added.

The white paper estimates total receipts from disinvestment, a programme started in 1991 at Rs6,344 crore.

According to it, since 1991-92, around Rs3,354 crore has been generated from the sale of a minority shareholding in 42 public sector units.

The government’s current policy is to plough back 25% of the proceeds of disinvestment into profitable public sector firms or those that are loss-making but have the ability to become profitable. The remaining 75% is meant for welfare projects.

But the ministry of power has said that it would like disinvestment proceeds arising from the sale of the government’s stake in power companies to be put into a sector-specific fund such as an “India power fund" that can be managed by the Power Finance Corporation and be used to finance new power projects. “Similar models can be created for other sectors too," it has suggested.

The ministry said that the 25:75 approach can be adopted later, but at present “entire proceeds of disinvestment of power companies should be totally used for improving capacity in the power sector itself. "

In response, the department of disinvestment has said that while a public sector firm would be allowed to retain proceeds from an initial public offering of fresh equity, money arising from a stake sale would have to go to the NIF.

The cabinet committee on economic affairs decides whether a public sector firm’s IPO is to be a sale of fresh equity, a stake sale, or both.

A Mumbai-based economist, who spoke on the condition of anonymity said that using divestment income to finance social schemes could merely be a political strategy.

“When divestment was first debated in the 1990s, I favoured using disinvestment proceeds to tackle public debt. The debt situation has improved today but at 80% of GDP it is still an issue.

Also with the government’s track record in managing funds still being an issue, the proceeds may best go down to pay debt," she added.

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