Government’s plan for Disinvestment and its impact:

In this article, we will see about What is disinvestment and whether it is good or bad for the economy. Disinvestment means sale of public assets to the private entities or retail buyers.

One has to understand the difference between part of stake sale and privatization. If the government is having 100% holding in a company and even if it sells 30% of its stake still the majority stakeholder will be the government. This is known as stake sale or disinvestment. 

In the same scenario if the government sells 51% of its holding then some other private entity will have major stake holding and that private entity will run the company. This is known as privatisation. Now the government wants to do both according to the specific sector or company. 

Background of disinvestment:

Fiscal deficit is targeted at 6.8% of GDP in 2021-22, down from the revised estimate of 9.5% in 2020-21 (4.6% in 2019-20).  The government aims to steadily reduce fiscal deficit to 4.5% of GDP by 2025-26. Government will have  both income and expenditure to run the country. Income can be through income tax collected,gst received or selling any asset etc and the expense can be through paying the government employees salary, building the airports,roads etc. The fiscal deficit occurs when the expense is more than the income. Now the government needs extra money to fund its expense. It can either print money or raise money by selling the assets owned by the government. Now the government cannot keep on printing money because that will increase inflation. Therefore it is trying to sell the stake in the public sector. The sale can be either done by selling more than 51% stake in a company or by selling the whole company. 

In the recent budget, the government proposed that it is not the government’s business to be in business and following are the budget estimates it has planned to disinvest in the fiscal year 2021-22

Budget Estimates:

  • The government has planned to receive receipts of Rs. 1.75 Lakh crore 
  • Rs. 1 lakh crore from selling stake in PSB and financial institutions
  • Rs. 75,000 crore from CPSE (Central Public sector enterprise)
  • 2 PSU banks and 1 general insurance firm will be disinvested this year. Names are not disclosed yet
  • There are in total 4 PSU general insurance firms out of which 1 will be disinvested. 
  • Also planning to issue the LIC IPO which has Rs. 32 Lakh crore assets under management. The percentage of liquidation is not yet disclosed. Issuing a small percentage of it’s 32 lakh crore assets as IPO will be huge. Government is planning to wipe off a sizeable amount from here

The privatisation policy, in its final form, has divided sectors into strategic and non-strategic. While the government will keep “bare minimum presence” in strategic sectors, all companies in the non-strategic sectors will be considered for privatisation, merger, or closure

Government will keep presence through public sector companies such as 

  • telecommunications, transport
  • atomic energy, defence, space
  • Power, petroleum, coal and other minerals
  • Public sector banks and financial institutions. 

And apart from the above, the government is planning to sell the following companies completely. 

  • BPCL
  • Air India
  • Shipping Corporation of India
  • Container Corporation of India
  • Bharat Earth Movers Limited and other companies

There are two points of view in selling the above companies. For example Air India is not performing well and the government wants to get rid of this loss making company. However the companies like BPCL are profit making companies and yet the government wants to sell those companies to fund the fiscal deficit.  

A good example against this criticism would be BALCO which was a profit making company that earned the Government an average dividend (over eight years) of Rs. 5.69 cr every year on the equity sold. The Government post-disinvestment, however started getting Rs. 82.65 crore every year.

By privatizing the company, the efficiency increases. In public sector enterprises, the manager or officers does not share the profit but it is not the case in the private sector so the focus will be to reduce the cost and increase profit. Therefore the company profitability and efficiency increases. 

One more argument against disinvestment is fear of loss of jobs. There are companies where they give voluntary retirement programs and it has been availed by many employees. However there is no history of people getting fired due to privatization. Rather it is expected that the salary will become better due to better profitability and higher efficiency. 

We can also think that disinvesting might be short term and unhealthy and it’s like selling a family’s gold during emergency. Usually the government borrows money to fund the fiscal deficit. The government has to pay interest for the borrowed money. This can be avoided in disinvesting by foregoing the future streams of income. Letting go of these assets can be best for the long term. The government has to make sure it invests in better assets by foregoing low yield assets and invests in education system, better health care etc. 

Finance Minister Nirmala Sitharaman recently said the money raised through disinvestment will be used to develop infrastructure, which will have a multiplier effect on the economy and not bridging revenue deficit.

There are other countries too which have done disinvestment. During 1980’s, the UK went on an aggressive disinvestment for 11 years. After privatisation of telephones, electricity and gas supply, the cost of services fell, and quality of performance also did improve. However it was found later that the water price and new water pipe connection was raised six times higher. The public monopoly became private monopoly and it was not a healthy competition in all cases. When there is only one company to provide a product or a service then there is a monopoly in the business. They can raise the price to any level. Therefore there should be regulations to monitor the industry which is a monopoly. 

Likewise Germany sold 13,500 companies in a span of two years. Other countries like Taiwan, Hungary, Thailand, Korea and even China marched towards disinvestment programs. 

The ideology behind this is not only to raise money but also to improve efficiency and profitability and benefit the economy as a whole.

We have to wait and see How far Ms.Nirmala sitharaman (FM) successfull  in achieving the aggressive target of disinvestment sale during the FY 21_22, when second wave of COVID has slowly emerged in all parts of the country.Will the market condition support her ? 

Until then …

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