The Hindu Business Line : Disinvestment: Issues and challenges

Budget 2007-08 must send clear signals about the government's intentions to reactivate PSU disinvestment. This is necessary not only to mobilise resources for various critical functions of the government but, more important, to accelerate the growth momentum.

While over the years many countries have implemented successfully the strategy of disinvestment and privatisation of public sector units (PSUs), this tool of public policy still continues to remain elusive and contentious in India. When taken up sensibly, PSU disinvestment and/or privatisation lead to greater productivity and better economic performance. Numerous studies provide evidence about the effectiveness of disinvestment by countries, even those with contrasting political hues.

Unfortunately, in India the process of disinvestment has remained stalled for the past over two years. Most strident opposition to disinvestment is from the Left allies of the United Progressive Alliance Government.

Reviving privatisation policy

But proponents of reform think that such criticism should not deter the Government from reviving its disinvestment policy, and they think the time is ripe to do so.

For, the forthcoming Budget will perhaps be the last opportunity for the UPA Government to prove its credibility with some significant reforms. The next two years may well go in managing the political economy ahead of the next general elections. Second, for the past four years, the economy has turned in a consistently robust performance and this now needs to be leveraged by bold policy initiatives.

Third, the nagging worries over the poor physical and social infrastructure such as power, irrigation, rural connectivity, education, and health. Apart from policy and institutional support, these functional areas call for massive financing support from the government. Indeed, the sustainability of high economic growth will be circumscribed by how effectively the government deals with these challenges.

Economic resurgence

It is essential that the Government sends a powerful message of its ability to push through some challenging reforms such as disinvestment and/or strategic sale of PSUs. At this stage, such efforts make sense for a variety of reasons: First, the Centre has the major responsibility of improving the budgetary health on a sustained basis, not just in response to the Fiscal Responsibility and Budget Management Act targets, but also to keep on a tight leash its internal indebtedness. India's debt-GDP ratio (excluding contingent liabilities) continues to be very high at about 68 per cent, and annual debt servicing at Rs 381,929 croreknocks off over 38 per cent of total revenue receipts of the Central Budget. Withdrawal of budgetary support to sick PSUs will reduce the pressure on budgetary resources immediately, while the subsequent strategic sale will unlock significant resources. A part of this can be used to repay the governments' high-cost debt. Second, a number of PSUs that are partly divested have been seeing unprecedented valuations, thanks to their improved performance. The opportunities afforded by the excellent valuations, based on the performance of many profit-making PSUs, must be leveraged.

Capital raising activity on rise

Capital raising activities of the private corporate sector are on the rise and in the coming yearmajor companies together are expected to raise a whopping Rs 100,000 crorefrom the capital market. Why should profit-making PSUs shy away or be denied the opportunity of raising new equity and in the process also divest a part of the existing equity capital is a moot question.

Expanding equity base

Third, and related to the previous observation, is the issue of expanding the equity base of the economy on a continuous basis, given that now there is a robust capital market infrastructure and the need to make available an increased quantity of quality equity to investors. In fact, a reactivated disinvestment programme will provide a powerful thrust to spread the equity culture and strengthen the capital market.

What is govt business?

Last, after a decade and half of economic reforms, a fundamental issue needs to be decisively resolved: Is it the business of the government to be in business? With the success of the market-driven economic system, it is imperative for the Planning Commission to redefine the role of the state. Equally importantly, the Government must mediate the consultative process (cutting across party lines) to review the policy positions outlined in the National Common Minimum Programme vis-à-vis PSU disinvestment and strive for a more pragmatic consensus on this issue.

Already, the private corporate sector has proved its mettle in managing liberalisation, competition and globalisation over the last decade. Hence, it is an opportune time to prepare a road-map for the eventual exit of the state from the manufacturing, commercial and other business activities, and instead focus on the critical areas of physical and social infrastructure and, more important, governance.

Strategies to be formulated

It is evident that since the beginning of the disinvestment policy in 1991-92 till March 2006, the proceeds from this source amounted to Rs 49,241 crore.

The best year was 2003-04, when as much as Rs 15,547 crore was raised and when many came to believe that this policy strategy had finally arrived.

But it was not to be and the entire process has since been disrupted. Interestingly, the market capitalisation of 41 listed Central PSUs was of the order of Rs 646,645 crore, and has probably scaled up further by at least 35 per cent since then. The valuation of remaining profit-making PSUs cannot be gauged in the absence of any disinvestment and consequential listing of their shares.

Against this backdrop, the following course of action can be followed. First, given the mood of the stock market, the capacity of investors to participate in equity ownership, and the improved performance of the PSUs,in general, the Government can target to raise at least Rs 25,000 crore from disinvestments/strategic sale of PSUs in 2007-08 and aim at reaching higher targets. Second, such proceeds need to be placed in an escrow account and not clubbed with general budgetary receipts.

Third, and most important, the allocation of the proceeds must be one-third each for the specific purposes — building a social safety net and social sector programmes; repaying high-cost debts of the Central government; and funding infrastructure projects that are languishing for financial support. Indeed,, one third of the disinvestment proceeds could be deployed in strengthening the PPP (public private partnership) mechanism through SPVs (special purpose vehicles) and VGF (viability gap funding) for infrastructure projects.

In substance, Budget 2007-08 must send clear signals about the government's intentions to reactivate PSU disinvestment and the privatisation policy. Such initiative is not only necessary to mobilise resources for various critical functions of the government but, more important, accelerate the growth momentum through efficiency gains.

(The author is a Mumbai-based consulting economist.)