On November 20, the government announced that it would sell stakes in several public sector undertakings (PSUs) and even give up management control in some. The Central government will cede full management control to buyers in the case of oil marketing company Bharat Petroleum Corporation Ltd. (BPCL), Shipping Corporation of India (SCI) and Container Corporation of India Ltd (CONCOR). The government will transfer its 74.2% stake in THDC India Limited (formerly Tehri Hydro Development Corporation of India) and its 100% stake in North Eastern Electric Power Corporation Limited (NEEPCO) to another public sector unit and power distribution major, NTPC Ltd.
Why do governments divest stake in public sector undertakings?
Some political parties that come to power believe that “the government has no business being in business”. That is, the government’s role is to facilitate a healthy business environment but the core competence of a government does not lie in selling fuel or steel at a profit. That is one reason that divestment is often a priority item in the election manifesto of such parties.
Two, with governments always having to spend more than they earn through taxes and other means, additional income from the proceeds of a stake sale is always welcome. This is especially so in the case of India now, where it has fallen to the government to spend higher amounts on infrastructure to boost economic growth, along with its commitments on health and education.
It is true that this is like selling the family silver and that at some point there would be nothing left to sell and cushion the fiscal deficit with, but the argument is, the government should not have been funding these companies in the first place.
What is a strategic sale?
A strategic sale by a government is one where the management control is ceded to the buyer. A divestment could be stake sale to a buyer, via an initial public offering or a direct deal, but in which the government still retains majority and management control.
A strategic sale is also different from cases where the government transfers majority stake but only to another PSU over which it has control, as happened recently with HPCL (bought by Oil and Natural Gas Corporation) and with Tehri Hydro and NEEPCO in the latest round.
What is the history of disinvestment in India?
Since liberalisation began in India in 1991 under then Prime Minister P.V. Narasimha Rao, the country saw a steady flow of disinvestment decisions. However, privatisation, where buyers took over management control, began later under the National Democratic Alliance governments. Arun Shourie, the country’s first Disinvestment Minister, gave an impetus to the exercise. He is credited with the privatisation of Maruti, Bharat Aluminium Company Ltd., Videsh Sanchar Nigam Limited and Hindustan Zinc through the strategic sale process.
Why sell a profitable public sector unit?
One counter to this question would be: why would a buyer pay a premium, or even be interested in a loss-making unit? Air India is a case in point. The government has been unsuccessfully trying to sell the debt-laden and loss-ridden airline for a while now. Bharat Sanchar Nigam Limited, which made a loss of Rs. 7,500 crores for the first half of this fiscal, may not find a buyer easily, even if it were on the block.
What does the government get out of divestment?
In the latest round, the government stands to get a sum in the region of Rs. 80,000 crores from a stake sale in the five aforementioned units, which would take the total disinvestment value for the fiscal close to the Rs. 1.05 lakh crore amount it had planned.
India is currently facing an economic slowdown in which indirect tax collections are below par. The government has cut corporate tax rates hoping that companies will use these savings for price cuts or dividend payouts, or for investments that create jobs. As consumption is highly muted, the Central government may look to place more disposable cash in the hands of the taxpayer through lowering personal income tax rates. As a result of cut and to-be-cut tax rates, the government would have less and less cash for its own expenditure in infrastructure and the social sector.
Further, if the fiscal deficit goes out of hand, the sword of Damocles — of global rating agencies lowering the country’s investment grade — could fall on India’s neck. This would make any future foreign currency loans costlier, both for the country and for large Indian conglomerates whose fortunes rise and fall with the local economy.
Here is where proceeds from strategic sales give the government extra spending cushion.
This fiscal has been a year without precedent for the government on the fiscal front. The Reserve Bank of India gave the Central government a record dividend payout of about Rs. 1.76 lakh crore. The joy over this would have been short-lived as the government has had to execute a corporate tax cut — to mitigate the effects of a slowdown — and will suffer an annual loss of Rs. 1.45 lakh crore.
So at least meeting the year’s disinvestment target, if not exceeding it, would give the government some respite from the string of bad fiscal news that has been flowing its way.
Source: The Hindu
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