Disinvestment needs a different approach

News: The overall performance on the disinvestment front in 2021 is particularly disappointing. The government has raised only about Rs 9,300 crore compared to the target of Rs 1.75 trillion.

This needs to be changed because, India’s post-pandemic medium-term growth, to a large extent, will depend on how government finances are managed, and the disinvestment programme will be critical in this context.

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Why a better disinvestment performance was needed?

This is because of the following two reasons:

Firstly, despite higher tax collection, higher receipts from disinvestment would have helped push up capital expenditure, enabling faster and more durable economic recovery.

Secondly, market conditions were extremely favourable. The private sector has raised record sums, and the momentum is likely to continue in the near term.

What are the issues wrt disinvestment policy of the Government?

Despite being on the agenda for decades, disinvestment has not been approached more systematically over the years.

For instance: The government has made one public sector enterprise (PSE) buy another to meet disinvestment targets in the past. In a recent report, the Comptroller and Auditor General (CAG) objected to such an exercise and noted that it defeats the spirit of disinvestment.

Further, the gains from disinvestment have been used to lower the fiscal deficit.

Why Govt should not run a large number of enterprises?

Many of the enterprises are a burden on government finances and impose high costs.

Only few contribute to the overall profits: As per a 2019 CAG report, which reviewed over 600 central government PSEs for the financial year ending 2018, over 70% of profits earned by state-owned firms were contributed by 52 companies in sectors such as petroleum, coal and lignite.

Accumulation of losses: PSEs tend to do well in areas where competition is limited, as adapting to a rapidly changing business environment and handling competition is inherently difficult in the public sector with all its constraints.

This is one of the main reasons why public sector firms lost in sectors such as telecom and aviation despite massive financial and other support from the government. For instance: In the CAG’s sample, 184 companies had accumulated losses of over Rs 1.42 trillion.

What is the way forward?

First, Govt should announce a medium-term target for attaining the stated policy objective of reducing its presence, except in a select few firms in strategic areas. This selected list should also be made public to provide more certainty.

Second, the government should have a rolling list of PSEs to be disinvested/privatised, at least over the next three years. Finding firms/shares to sell depending on budgetary needs will not help. Every company/sector has its own set of issues that will need to be addressed—and the process will take time.

Third, the government should declare the yearly fiscal deficit number, both with and without accounting for disinvestment proceeds. This will be important because proceeds in some years could be much higher. Thus, the focus of should be on managing the deficit without disinvestment receipts.

The government should identify large projects that can be financed with disinvestment funds. It can clearly show in the budget documents where the proceeds are going. This would send a signal that Govt is not only selling assets but also building new ones while improving the growth potential of the economy.

Source: This post is based on the article “Disinvestment needs a different approach” published in Business Standard on 30th Dec 2021.

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