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Insights into Editorial: Belated, but bold: On Nirmala’s disinvestment policy

 

disinvest

 

Context:

The government’s spending plans for 2021-22 hinge on better compliance lifting tax collections, and an ambitious plan to raise non-tax revenue.

Finance Minister has announced large-scale monetisation of government sector assets, including vast tracts of land, and is banking on disinvestment receipts of ₹1.75-lakh crore.

This includes likely inflows from the strategic sale of entities such as Air India and BPCL, carried forward from this year’s plans.

The listing of LIC could be completed as well, with necessary amendments in the Finance Bill, and that alone could bolster the revenue kitty.

What is meant by Disinvestment?

Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.

The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.

Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity).

Unlike the simple disinvestment, strategic sale implies a kind of privatization.

The disinvestment commission defines strategic sale as the sale of a substantial portion of the Government shareholding of a central public sector enterprises (CPSE) of up to 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.

Policy of Strategic Disinvestment announced in this year’s Budget:

  1. The government aims at making use of disinvestment proceeds to finance various social sector and developmental programmes and also to infuse private capital, technology and best management practices in Central Government Public Sector Enterprises.
  2. Union Minister for Finance and Corporate Affairs, while presenting the Union Budget FY 2021-22 in Parliament announced that government has approved a policy of strategic disinvestment of public sector enterprises that will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors.
  3. Fulfilling the governments’ commitment under the AtmaNirbhar Package of coming up with a policy of strategic disinvestment of public sector enterprises, the Minister highlighted the following as it’s main features:
  4. Existing CPSEs, Public Sector Banks and Public Sector Insurance Companies to be covered under it.
  5. Most significant, however, is the new strategic disinvestment policy for public sector enterprises and the promise to privatise two public sector banks and a general insurance company in the year.
  1. The policy, promised as part of the Atma Nirbhar Bharat package, states the government will exit all businesses in non-strategic sectors, with only a ‘bare minimum’ presence in four broad sectors.

India’s Disinvestment started in 1990’s:

  1. In India’s brief but tortuous history of disinvestment since it began listing PSUs on the stock markets through minority stake sales in the 1990s, this is undoubtedly the boldest stance yet.
  2. Apart from raising precious revenues, the sale or closure of such firms will help the exchequer stop throwing good money after bad, and funnel it into more productive endeavours.
  3. It is not clear why it took the present government administration so long to articulate this plan or make headway on this front even without such a blueprint, as the PM had declared, back in 2014, that the government had no business being in business.
  4. Now that the policy is in place, tactful execution will be as critical as dealing with the usual pockets of resistance that would crop up.
  5. While stock markets are on a high, the financial capacity of potential bidders may not be optimal, thanks to the pandemic.

The Department of Disinvestment was set up as a separate department in December, 1999.

From 27th May, 2004, the Department of Disinvestment was brought under the Ministry of Finance.

The Department of Disinvestment has been renamed as Department of Investment and Public Asset Management (DIPAM) from 14th April, 2016 which has been made the nodal department for the strategic stake sale in the Public Sector Undertakings (PSUs).

Two-fold classification of Sectors to be disinvested:

Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiarized with other CPSEs or closed.

Following 4 sectors to come under it:

  1. Atomic energy, Space and Defence
  2. Transport and Telecommunications
  3. Power, Petroleum, Coal and other minerals
  4. Banking, Insurance and financial services

Non- Strategic Sector: In this sector, CPSEs will be privatised, otherwise shall be closed.

Benefits for Government side: Higher target:

With the government having a tough time collecting taxes, especially direct taxes, disinvestment can mobilise resources for various schemes.

Also, the government can use the proceeds for infrastructure spending. There is strong possibility that the divestment target will be raised to ₹3-lakh crore or even more in the Budget.

For the current fiscal, the government hopes to rake in ₹2.10-lakh crore from disinvestment.

This includes ₹1.20-lakh crore from stake sale in CPSEs and ₹90,000 crore from stake sale in LIC and IDBI Bank. But, so far in the current fiscal, the government has managed to realise only ₹17,957.7 crore .

Conclusion:

Strategic disinvestment in India has been guided by the basic economic principle that the government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age.

Among its multiple challenges, the government will need to create confidence in the sale processes, ensure a semblance of fair valuations, give officers some cover from potential post-transaction witch-hunts by auditors and investigating agencies, sequence the sales so that the economy does not face shocks or create monopolies, and most of all, manage electoral pressures in jurisdictions where these units would be located.

A single controversial transaction could scuttle the momentum behind such a plan and India can ill afford it.

It should be ensured that the proceeds of such strategic sales aren’t frittered away in interest or salary payouts but are reinvested prudently in long-term infrastructure assets that can yield enduring returns to the economy.