Editorials, GS-2, Indian Polity, Public Admin 2, Uncategorized

Divestment: More than just revenue

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Summary:

Divestment in India is a by-product of the economic reforms initiated in 1991. Although the objective of redefining the role of the government versus the market started in 1991 and there was considerable discussion on the role of PSUs, the process of divestment was formalized only after the Divestment Commission was set up in 1996 to examine and suggest withdrawal from non-strategic sectors.

  • The department of divestment was formed in December 1999, which later was made the ministry of disinvestment in September 2001. In May 2004, it was shifted to the ministry of finance as one of the departments under it. Now, the department has been renamed as Department of Investment and Public Asset Management (Dipam).

Why divestment was necessary then?

  • Through divestment the role of the government versus the market was sought to be redefined and market discipline was sought to be injected in PSUs’ decision-making.
  • Through divestment loss-making public enterprises were also sought to be revived and additional resource needs for containing the fiscal deficit and capital expenditure generated.

Current Policy on Disinvestment:

The current Government policy on disinvestment envisages people’s ownership of CPSEs while ensuring that the Government equity does not fall below 51% and Government retains management control. Keeping this objective in view of disinvestment policy, the Government has adopted the following approach to disinvestment:

  • Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ (OFS) by Government or by the CPSEs through issue of fresh shares or a combination of both.
  • Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed.
  • Follow-on public offers (FPO) would be considered in respect of profitable CPSEs having 10% or higher public ownership, taking into consideration the needs for capital investment of CPSE, on a case by case basis and Government could simultaneously or independently offer a portion of its equity shareholding in conjunction.
  • Since each CPSE has different equity structure; financial strength; fund requirement; sector of operation etc., factors that do not permit a uniform pattern of disinvestment, disinvestment will be considered on merits and on a case-by-case basis.
  • CPSEs are permitted to use their surplus cash to buy-back their shares; one CPSE may buy the shares of other CPSEs from the Government.

Why a relook at divestment policy is necessary now?

Over the years, the policy of divestment has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.

Why divestment is good?

  • Reduces financial burden on the Government.
  • Improves public finances.
  • Introduces competition and market discipline.
  • Funds growth.
  • Encourages wider share of ownership.
  • Depoliticizes non-essential services.

Why divestment is not so good?

  • Government’s dividend income will decline and hence fiscal deficit will increase.
  • If government’s role is reduced, the goal of equal distribution of resources for all classes cannot be achieved.
  • In future, this might also lead to private monopolies.

What policy changes are necessary now?

  • Define the priority sectors for the government based on its strategic interests. Considering the limited resources with the government and its diverse role, it is evident that the government has a low capacity to manage PSUs. Use of scarce resources, including land and financial capital, has high opportunity cost and the justification for investment in PSUs has to be in terms of generation of adequate social and strategic returns.
  • Financial return cannot be the sole reason for investment in PSUs. They have to serve social/strategic purposes. The key role of a PSU is to maintain competition in the sector and limit excessive monopoly.
  • Government ownership is required for sectors with strategic relevance such as defence, natural resources, etc. The government should, therefore, exit non-strategic sectors such as hotels, soaps, airlines, travel agencies and the manufacture and sale of alcohol.
  • The outlook towards strategic divestment should move from the current policy of emphasizing on public ownership and retaining majority shareholding to looking at the strategic interest. As per the current divestment policy, government has to retain majority shareholding, i.e., at least 51% and management control of the PSUs. The policy thereby limits the scope to create divestments that would allow easy exit for the government from non-strategic sectors. Allowing ownership of less than 51% will be the first step in the right direction. Eventually, the objective of divestment should be to limit the government ownership to strategic sectors.
  • It is important to realize that ownership is not a substitute for regulation. Therefore, instead of creating PSUs in non-priority sectors, the government should look into strengthening the regulatory framework that ensures efficient market conditions. The regulations should also ensure that the basic necessities of the consumers are met.

Conclusion:

It is time that divestment is not seen as an option to cover for short-term fiscal gains; instead, it should be part of a strategic plan to improve the production of goods and services in India.

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