Disinvestment is overhyped, won't help an ailing economy

Amitabh Tiwari
·Columnist
·4 min read

The Budget 2021 places special emphasis on disinvestment and privatisation to shore up government revenues and fulfil Narendra Modi’s ambition of minimum government, maximum governance.

Finance Minister Nirmala Sitharaman in her budget speech laid emphasis on the fact that the government will be pursuing the strategic disinvestment of central public sector units (PSUs) more rigorously.

The government has pegged the disinvestment target for FY 2021-22 at Rs 1.75 lakh crore. This will include the shedding of Centre's stake in two state-owned banks and a general insurance company, and largescale asset sales.

The government is committed to complete the strategic disinvestment of many PSUs including BPCL and Air India in the next financial year, the finance minister reiterated.

The government’s record in meeting the disinvestment targets have been dismal so far to say the least. For FY 2020-21, the target was Rs 2.1 lakh crore, of which only 15% is expected to be realised.

The Atal Bihari Vajpayee government during 1999-2004 had privatized four companies Balco and Hindustan Zinc (to Vedanta Group), IPCL (to Reliance) and VSNL (to Tata Group). After that there hasn’t been significant progress on the same.

In a series of structural reforms announced in August last year to combat the economic fallout of the pandemic and the resultant lockdown, the government had identified 18 strategic sectors.

These include banking, insurance, steel, fertiliser, petroleum and defence equipment, where it will retain only a limited presence, a maximum of four PSUs and a minimum of one unit operating. It plans to completely exit non-strategic sectors through privatisation or strategic disinvestment.

India has 348 public sector enterprises and the net worth of the government’s holdings in these firms is around Rs 7 lakh crore, according to government estimates.

Around 80 of these are listed on the stock exchanges with a market capitalisation of Rs 12.2 lakh crore as per current estimates, where its holding ranges from 51% to 75%.

Even if the entire holding of the central government is sold in these PSUs, the maximum it could fetch is Rs 6 lakh to Rs 8 lakh crore.

This is a meagre amount considering that the government intends to spend Rs 34 lakh crore in the next financial year.

This is sufficient to meet just 18%-24% of expenditure of the government in just one year.

Then there are companies which are not listed on any stock exchange. 70 PSUs were in a loss as of March 31, 2019, with their total stress amounting to over Rs 31,000 crore, collectively.

Out of these, state-run carrier Air India, telecom companies BSNL and MTNL were the top three loss-making PSUs in FY 2018-19, as per a written reply in Rajya Sabha.

According to the reply, BSNL lost Rs 14,904 crore; Air India’s losses were at Rs 8,474 crore and MTNL’s losses stood at Rs 3,390 crore.

Now the big question is who will buy these loss making PSUs? They have piled on huge amounts of debt. We have been struggling to sell Air India for more than a year now. The sale process was impacted by COVID.

The carrier does have assets of significant scale and size including airplanes, routes, landing rights, parking spaces etc. However, who would take on its humongous debt?

Many bidders have been hesitant to take over the debt. Without that it practically means selling the airline for free.

Similarly, the BPCL privatisation is also facing hurdles. Valuation remains the sticky point. The opposition by trade unions, legal hurdles and fear of accusations of sell out to private corporates at discounted prices, are other areas of concern for the government.

Critics have argued that disinvestment is like selling family silver to meet your current expenditure. The Finance Minister has countered this by saying that the government’s disinvestment policy is not akin to selling the family silver.

She added that the disinvestment policy has been devised to ensure better spending of taxpayers’ money and scaling up public sector enterprises in strategic areas to their full potential.

As per reports, the government is thinking of bringing down the number of PSUs to about two dozen from over 300 currently.

While privatisation will lead to improvement in efficiencies, investments and creation of jobs, these long term benefits will take many years to fructify.

To sum up, the amounts involved show that disinvestment is not a magic wand which can bail out our economy, ailing from the aftereffects of the pandemic.

The focus has to be on widening our tax base to raise more resources to fund government spending.

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