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RSTV: THE BIG PICTURE- DISINVESTMENT FOR DEVELOPMENT


RSTV: THE BIG PICTURE- DISINVESTMENT FOR DEVELOPMENT


Introduction:

            The government will reinitiate the process of divesting its stake in national carrier Air India, even as it increased its disinvestment target in the Union Budget 2019-20 presented by Finance Minister Nirmala Sitharaman on Friday. The target for disinvestment receipts has increased to Rs 1.05 trillion for FY20, from Rs 90,000 crore in the interim Budget presented in February. Significantly, the finance minister said that the government’s stake in non-financial public sector units can go below the majority stake of 51 per cent. Instead of holding a direct stake of 51 per cent in PSUs, “government-controlled institutions” can chip in the remaining sum which the government will look to divest. This move will enable the government to retain control over such firms. The Finance Minister reiterated that the government will make sure that its control is not diluted after lowering its stake in public sector undertakings (PSUs) to below 51 per cent. The government will also continue with the strategic divestment of select Central Public Sector Enterprises (CPSEs).

 

Ever since India opened up its economy to the world, the government has been distancing itself from industrial production. Years of monopoly across several industries led to Public Sector Undertakings (PSU) running inefficiently. Thus, the government began the process of disinvesting from loss-making and inefficiently-run PSUs in the 1990s.

 

What is Disinvestment?

Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).

 

The concept of disinvestment follows the dictum: The government has no business to be in business. Thus, the government continues to disinvest in sectors where private companies are already the dominant players.

 

Disinvestment policy in India- salient features of the Policy:

  1. Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs
  2. While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 per cent of the shareholding and management control of the Public Sector Undertakings
  3. Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50 per cent or more, along with transfer of management control.

 

The 1991 New Economic Policy, presented by then finance minister Manmohan Singh pointed out several objectives for disinvestment. These objectives were as follows: Reducing the financial burden on the government, improving public finances, introducing competition and market discipline, funding growth, encouraging wider share of ownership, and depoliticising non-essential services.

Disinvestment got a much-needed boost during the Atal Bihari Vajpayee regime, when Arun Shourie was appointed the minister for disinvestments. Some of the key disinvestments under the Vajpayee administration include the strategic sale of Videsh Sanchar Nigam Limited, Hindustan Zinc, Balco, IPCL, several Indian Tourism Development Corporation hotels and Modern Food Industries. The strategic sales during that period fetched government Rs 6,344 crore. Additionally, the government began disinvesting its stake in Maruti Udyog Ltd in 2002. The government exited the company completely by 2006.

However, disinvestment slowed under the Manmohan Singh government. It seems to have picked pace under the current dispensation. In March, the Modi government claimed that it exceeded its disinvestment target for FY19

 

Disinvestment policy[as per recent budget]:

A major source of additional revenue projected in the Budget is by having an active disinvestment policy. Disinvestment is expected to generate ₹1,05,000 crore, which is almost ₹15,000 crore higher than what was taken in the interim Budget.

The Budget speech also speaks about an active disinvestment policy beginning with Air India.

 

Importance:

  • Improving the structure of incentives and accountability of PSUs in India.
  • Financing the increasing fiscal deficit.
  • Financing large-scale infrastructure development, defense, education, healthcare etc.
  • For investing in the economy to encourage spending.
  • Brings about greater efficiencies for the economy and markets as a whole.
  • Bring relief to consumers by way of more choices and better quality of products and services, e.g. Telecom sector.

 

Concerns:

  • Process of disinvestment is not favoured socially as it is against the interest of socially disadvantageous people.
  • Political pressure from left and opposition.
  • Loss making units don’t attract investment so easily.
  • Over the years, the policy of divestment has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
  • Sometimes the emergence of private monopolies, consumer welfare will be reduced.
  • It is argued that mere change of ownership, from public to private, does not ensure higher efficiency and productivity.
  • It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
  • Private sector, governed as they are by profit motive, has a tendency to use capital-intensive techniques which will worsen unemployment problem in India.
  • Fiscal 2016-17 is the seventh year in a row where the government is not meeting the disinvestment target fixed in the Budget.

 

Way Forward:

  • Define the priority sectors for the government based on its strategic interests.
  • Investment in PSUs has to be in terms of generation of adequate social and strategic returns.
  • The government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
  • The government should look into strengthening the regulatory framework that ensures efficient market conditions.
  • Instead of creating PSUs, the government should create regulations that would ease the entry of new players. The regulations should also ensure that the basic necessities of the consumers are met.
  • Allowing both domestic and foreign buyers to bid freely for stakes.

 

Air India Disinvestment:

  • The Budget speech also speaks about an active disinvestment policy beginning with Air India.
  • Experts welcomed the government’s decision. Every year’s delay has only cost taxpayers and eroded its market value.
  • The healthy growth of private airlines like Indigo has meant that a privatised Air India will operate in a competitive environment.
  • To ensure that commercially unviable airports remain operational, the government can provide subsidy to any airline willing to service such airports, especially those of strategic importance.

 

It is time that divestment is not seen as an option to cover for short-term fiscal gains; instead, it should be part of a strategic plan to improve the production of goods and services in India.  

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