Disinvestment and Mobilization of Resources

In this article, we review the current government policy and various issues around disinvestment. Disinvestment and privatization are two related but different terms. They are related because both involve sale of government shares in PSUs. However, when 51% or more equity is sold to private players, its privatization. In disinvestment, only a part of government equity (less than 51%) is sold to private players and thus ownership and management still remains with the government.

Rationale

There are several reasons as to why government sells its stake. Firstly, it is believed that private ownership would result in better use of resources and more efficient allocation of resources. Secondly,  it mobilizes resources for the government without losing ownership and management. Thirdly, it allows quick restructuring of the Public Sector Undertakings. Thus, the main objectives of disinvestment are as follows:

• To reduce the financial burden of sick, loss making PSU’s on the Government
• To improve public finances
• To introduce competition and market discipline
• To fund growth, social sector welfare
• To encourage wider share of ownership
• To depoliticize non-essential services

The basic philosophy of disinvestment in contrast with privatisation is that as long has majority stake is with government, the public sector character of the companies is not affected; and so, the disinvestment can be used as an economic tool.

Government Policy on Disinvestment

The story of disinvestment in PSUs begins in India from 1991 when the government withdrew the budgetary support of more than half of the loss making public sector enterprises. The money coming from such disinvestment was to be used to meet budgetary needs, reduce fiscal deficit, enhance efficiency of the PSUs and raise funds for the upgradation of other / loss making units. The  Narsimharao government had also set up the Rangrajan committee to make suggestions on disinvestment. This committee recommended that the government should identify and disinvest in all companies to whatever level the government finds suitable but only leaving atomic energy and defense sector. It also recommended to set up a commission to look into smooth functioning of the disinvestment programme of the government. On the basis of this recommendation, a Disinvestment Commission was established in 1996 as an advisory body. This body suggested four modes of disinvestment viz. Trade sale, strategic sale, offer of shares and closer or sale of assets. Post 2000, the disinvestment pace has been slow and tardy mainly because of political opposition to such move. So far, disinvestment in several companies has taken place, most notably in VSNL, ONGC, SAIL, GAIL, MTNL, NALCO, Power Grid Corporation and numerous others. The problem was seen in the way sale of the shares was carried out. A lot of corruption was reported while selling the shares of these PSUs to the private sector. The issue reached to such an extent that the Supreme Court had in 2003 stopped the process of disinvestment of Hindustan Zinc Ltd. on the grounds of irregularities in the process.

National Investment Fund (NIF)

Another important aspect of disinvestment policy was that during Atal Bihari Vajpayee government, the disinvestment of profit making PSUs was preferred. Later the UPA government reversed this policy and declared that no PSU which is making profits will be disinvested.

In 2005, the UPA government set up National Investment Fund (NIF) to put the money received from disinvestment. It was decided that 75% of the annual revenue of the fund will be used to finance social sector welfare schemes while 25% would be used to meet the capital investment needs of those PSUs which were making profits and those which were not making profits but revivable. But then, this plan was changed in 2009-10 when world had just seen a financial crisis, elections were upcoming, and P Chidambaram had announced a Rs. 60,000 crore loan waiver as election bait. So, the government decided that instead of routing the money through the fund, the government will “directly” use the money to finance the welfare schemes. Later one more change was done by UPA and NIF was shifted to public account from which money could be used as  and when needed for some purposes such as investment in shares of profit making CPSEs, recapitalization of banks, equity infusion in metro projects etc.

Current Government Policy and Issues

The current government, like the previous ones, is keen on disinvestment in several companies including both profit and loss making enterprises. Further, it is betting big on disinvestment of Air India, about which we shall study in our Civil Aviation Module later. There are three main modes adopted by current government in disinvestment viz. Sale of Minority Shares, Strategic Disinvestment and listing of General Insurance Companies.

In Strategic sale, the disinvestment / privatization take place by auctioning a state-owned enterprise to the highest bidder. It is in contrast with the minority sale where shares in an enterprise are sold as public offers.

Of these, the sale of minority shares is largest source of money as shown in below table:

This apart, the government has also taken keen interest in CPSE exchange traded funds for better mobilization of resources.  Current government is banking on the highest-ever receipts of Rs 72,500 crore from disinvestment in public sector units (PSUs) to finance social and infrastructure spending and rein in the fiscal deficit at 3.2 per cent of GDP in 2017-18.

However, there are several key challenges. First, the process of disinvestment is not favored socially as it is against the interest of socially disadvantageous people. Second, these adventures always face political pressure from left and opposition. Third, loss making units don’t attract investment so easily. Fourth, whichever is the government, things are done as per whims of the ruling dispensation. Fifth, the government has constantly failed to meet the budget targets for disinvestment. The UPA government had failed to meet all targets. In last two years, the NDA led government could raise only two-third targets but has also doubled the disinvestment targets.