Disinvestments – What’s a realistic target?

Disinvestments is a process through which the Government promotes people’s ownership in Central Public Sector Enterprises (CPSEs) thereby ensuring better governance and efficiency in the state run organizations. The receipts from disinvestments also act as an important revenue for the Government to gap its fiscal deficit. While there is no specific stated policy on disinvestments, it has largely evolved through the policy statements of Finance Ministers in budget speeches over the years.

In the past 5 years, the Government fell short of the initial budgeted receipts under disinvestments. This year the Government set itself a disinvestment target of Rs 69,500 crore for the year. This is the highest budgeted receipts ever in a single financial year. So far in the fiscal, the Government has sold minority stake in PFC, REC, Dredging Corporation and Indian Oil Corporation. A total of about 12,500 crore has been realized under these with strategic disinvestment yet to kick off. The current Government took credit for highest ever disinvestment receipts for a single financial year during 2014-15. While the Government is likely to miss the targets this year, it would be an achievement if they can have a framework in place the rest of their term.

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Stake Sales

The number of CPSEs has increased from just 5 at the beginning of the First Five Year Plan (1950) to 290 by 2014. The investment of the Government in these enterprises, about Rs. 9,92,971 crore, shows the potential revenue which can be realized by exiting from all non-strategic sectors. The 2013-14 performance Public Enterprises Survey points out that in the last 7 years, the turnover of CPSEs has been stagnant and the profit came down by 4% at constant prices. Already huge costs have been incurred to revive sick PSUs most notably in the cases of BSNL, MTNL and Air India. Ironically, these are considered “low-hanging fruits” in disinvestment / privatization by many experts.

As per the current disinvestment policy, only minority stake is to be disinvested (≤49% equity) in profitable Central Public Sector Enterprises (CPSEs). Minority stake sale is the largest contributor (with 90% of receipts since 1991) in the Disinvestments process. 41,000 crore of the budgeted 69,500 crores is expected from stake sales. There is no dearth of companies with the disinvestment proposals already cleared by the Cabinet Committee on Economic Affairs (CCEA) estimated to be about Rs. 50,000 crores. However, the current policy is to have all disinvestments decided on a case-to-case basis. The Government should focus on encouraging private players rather than using these enterprises as cash cows to plug in the fiscal deficit.

Strategic Sales

It was during the first NDA government that, receipts worth Rs. 6,344 crores were realized in strategic sales. In the strategic sale of a company, there are two elements to the transaction: a) Transfer of a block of shares to a Strategic Partner and b) Transfer of management control to the Strategic Partner . The strategic sale was the preferred option by the Rangarajan Committee (1993) and was also recommended by the erstwhile Disinvestment Commission. While there is a target receipts of Rs. 28,500 crores through this route, no amount has been realized till date and more importantly, there is no communication from the Government on how it intends to. Earlier this year it was first reported in sections of the media that line ministries were asked to come up with proposals for such sales . The Medium Term Fiscal Policy Statement mentions that it would be coming from sale of holdings in non-government entities like SUUTI, BALCO, HZL etc.

Taking a look back

After the economic liberalization in 1991, for the first five years, the targets and realization was not substantial. In 1996, then United Front Government constituted a Public Sector Disinvestment commission for an initial period of three years. The later NDA Government not only continued the commission, but also created a separate Department of Disinvestment in 1999 and later converted into a Ministry in 2001. Subsequently in 2004, the ministry was converted as a department under the ministry of finance and the Divestment Commission was wrapped up. A Board for Reconstruction of Public Sector Enterprises (BRPSE) was set up in the same year to prepare revival plans for sick state-owned companies. The current NDA Government is going ahead with replacing BRPSE with a holding company to enable the Government to exit unviable ventures. The proposed body should also handle the task of identifying sectors where the Government should go ahead with the stake sales.

With the disinvestment season set to take off, the Department is gearing up to achieve the budget targets. While the LIC allegedly picked up substantial stake in Indian Oil Corporation, there were reports that the Government has decided to not go ahead with Oil India. With a volatile stock market, concerns of Chinese economy coupled with falling oil prices the Government might just postpone major chunk of disinvestments for the year. Despite the steps taken by the Government, we are yet to see any concrete plan towards institutionalizing the disinvestment process to fit in the “Minimum Government, Maximum Governance” framework.