Home >Budget 2019 >Economic Survey >2019-20 budget guide pitches for an aggressive disinvestment playbook
The survey says that the recent strategic disinvestment in Bharat Petroleum Corp. Ltd has led to an increase in value of shareholders’ equity of the company by  ₹33,000 crore. (Ramesh Pathania/Mint)
The survey says that the recent strategic disinvestment in Bharat Petroleum Corp. Ltd has led to an increase in value of shareholders’ equity of the company by 33,000 crore. (Ramesh Pathania/Mint)

2019-20 budget guide pitches for an aggressive disinvestment playbook

  • Disinvestment proceeds will help the Centre invest 100 trillion over the next five years to boost infrastructure
  • This articulation of position also signals a turnaround from the earlier perceived return of the public sector as the commanding heights of the economy

The Economic Survey presented on Friday pitched for an aggressive disinvestment of central public sector enterprises (CPSEs).

While building a case for such a move, the economic report card for 2019-20 said post-privatization CPSEs performed better. The survey argued that privatization results in higher profitability, efficiency, competitiveness and professionalism.

“Key financial indicators, such as net worth, net profit and return on assets, of the privatized CPSEs, on an average, have increased significantly in the post-privatization period compared to peer firms. This improved performance holds true for each CPSE taken individually as well," said the survey.

This articulation of position also signals a turnaround from the earlier perceived return of the public sector as the commanding heights of the economy.

Union finance minister Nirmala Sitharaman had in her maiden budget increased the divestment target from 90,000 crore to 1.05 trillion for FY20, focusing on consolidation of public sector units (PSUs) and strategic disinvestment. The disinvestment proceeds will help the Centre invest 100 trillion over the next five years to boost India’s infrastructure.

“The recent approval of strategic disinvestment in Bharat Petroleum Corp. Ltd (BPCL) led to an increase in value of shareholders’ equity of BPCL by 33,000 crore when compared to its peer Hindustan Petroleum Corp. Ltd (HPCL). This reflects an increase in the overall value from anticipated gains from consequent improvements in the efficiency of BPCL when compared to HPCL, which will continue to be under government control," said the survey.

Also, PSUs have inefficiencies built into their functioning, which at times, prevent them from being as cost-competitive as the private sector.

The National Democratic Alliance government has set an ambitious task of turning India into a $5-trillion economy by 2024-25. Given that the government’s persistent wooing of India Inc. to invest hasn’t borne results, perhaps this is the way forward for a slowing domestic economy.

Mint had reported on 17 September about the plans of state-run NHPC Ltd, India’s largest hydropower producer, to leverage infrastructure investment trusts (InvITs) to monetize 10 of its 22 projects. The move is in line with the stepped up efforts of state-run PSUs to generate resources for the country’s ambitious infrastructure plans, which include tapping the InvIT route.

InvITs are trusts that manage income-generating infrastructure assets, typically offering investors regular yield and a liquid method of investing in infrastructure projects.

The survey examined the “realized efficiency gains from privatization in the Indian context". It analyses the before-after performance of 11 CPSEs that had undergone strategic disinvestment from 1999-2000 to 2003-04. To enable a careful comparison using a difference-in-difference methodology, these CPSEs are compared with their peers in the same industry group. The analysis shows that the privatized CPSEs, on an average, perform better post-privatization than their peers in terms of their net worth, net profit, return on assets (ROA), return on equity, gross revenue, net profit margin, sales growth and gross profit per employee.

This comes at a time when the government has decided to privatize Air India and shut down state-owned trading companies, in a signal that it should not be running firms in non-strategic sectors.

“More importantly, the RoA and net profit margin turned around from negative to positive, surpassing that of the peer firms, which indicates that privatized CPSEs have been able to generate more wealth from the same resources," said the survey. “The analysis clearly affirms that privatization unlocks the potential of CPSEs to create wealth. The chapter, therefore, bolsters the case for aggressive disinvestment of CPSEs."

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