DISINVESTMENT Arguments For and Against

Definition: Process through which Privatization could take place. (Disinvestment = Privatization) It is process by which ownership of a Public Sector Enterprise (PSE) is transferred to private sector. I have divided the article in to 4 sections: Section 1: Disinvestment Policy since independence Section 2: Present Disinvestment Policy Section 3: Arguments against and in favour of Disinvestment Section 4: Conclusion

Section 1: Disinvestment Policy since independence

Let me begin with the background of our disinvestment policy in India since independence: The policy of disinvestment is largely evolved through policy statement of Finance Minister in their budget speech. At the time of independence socialistic pattern was adopted where industries were under govt. control. The disinvestment process came into force mainly in the year of liberalization. The industrial policy statement of 1991 set a comprehensive policy on public sector. Chronology of events: Year 1991-92 1992-93 1993 Events In interim budget govt announced disinvestment up to 20% in selected PSEs in favour of Mutual Funds and Financial Institutions. In budget Speech investor base was enlarged to include FII, employees and other Commercial Banks. Rangarajan Commitee recommended disinvestment up to 49% of PSE which were explicitly reserved for public sector and 74% disinvestment in other industries. (But govt. did not take any action on its recommendation). Budget Speech setting up of Disinvestment Commission for 3 years (chaired by G V Ramakrishna). Govt classified PSEs in to two categories (a) Strategic CPSE and (b) Non-Strategic CPSEs. Strategic CPSEs are those which are in areas like Arms & Ammunition; Defence Equipment; Railways; Atomic Energy. All other PSEs were considered as Non-Strategic.

1996-97 1998-99

1999-2000

2002 2004

2005

2004-05 to 2008-09

2009-10 onwards

Budget Speech Disinvestment of Non Strategic PSEs and Rehabilitation strategy for weak PSEs. Dept. of Disinvestment was set up in Dec, 1999 and was later renamed as Ministry of Disinvestment in 2001. From 2004, Deptt of Disinvestment is under Ministry of Finance. Specific aim was given to disinvestment modernization and up gradation of PSEs, creation of new assets and retiring public debt. Due to change in govt., there was a change in Disinvestment policy. Govt. adopted National Common Minimum Programme (CMP). Govt. decided to maintain management control, commercial autonomy of PSEs; No privatization of profit making PSEs and restructuring of sick companies. Formation of National Investment Fund (NIF) where the amount received from disinvestment is to be kept. 75% of the amount of NIF to be used for social sector and rest 25% in capitalization of PSEs. Disinvestment remained stagnant (thanks to the political pressure the Left parties succeeded in exerting on the Congress, their alliance partner) Improvement in stock market condition led to revival of disinvestment policy. However, from 2011 onwards disinvestment process has slowed down. The target of disinvestment in 2011-12 was Rs. 40,000 cr. but govt was able to raise only Rs. 14,000 cr. The situation was similar in the year 2012-13 also.

Section 2: Present Disinvestment Policy

Govt. recent Disinvestment Policy: 1. Right of the Citizens: Citizens have every right to own part of share of PSUs. (This is followed only on papers and in reality it is the big corporate houses mainly enjoy this right this has been explained in following sections) 2. PSUs are the wealth of our nation and this wealth should rest in the hands of people. (This wealth rest in the hands of few rich people and politicians rather than the common man) 3. While pursuing disinvestment, Govt. should retain majority shareholding i.e. at least 51% and Management holding of PSUs.

Action Plan/Approach for Disinvestment: 1. Listed PSEs to be made compliant of SEBIs 10% listing norms. (That means public should own at least 10% of equity shares of PSE who are already listed on stock exchange) 2. Unlisted PSEs who are earning Net Profit in the last 3 consecutive years are to be listed on stock exchange. 3. IPO or FPO of PSEs will be on done case to case basis ( it suggests that govt. is cautious and going slow on disinvestment and taking one PSE at a time for disinvestment) 4. In all cases govt. will be the owner i.e. Govt. to retain minimum 51% ownership and management control. 5. Deptt. of Disinvestment will identify PSEs for disinvestment.

Section 3: Arguments against and in favour of disinvestment policy of Govt.

In this section I will mention arguments against disinvestment and some points in the favour and some reality checks (in italics font)

Arguements
1. There will be a loss of revenue (i.e. dividend earning) for government by disinvesting profit making PSEs. (At present, the expenditure of govt. is more than its revenue (i.e. Fiscal Deficit is there) and selling the stake of profit making PSEs will squeeze the revenue sources for the govt (thus will lead to higher Fiscal Deficit).

In Favour
It is assumed that the loss of revenue from disinvestment would be compensated by gains in capital appreciation. (It means equity shares are sold at higher prices in the market thus generating higher revenue for the government.) Though there is dividend earning from the PSEs but there were also expenditure associated with the PSEs which nullifies the effect of dividend earnings. The return on investment (ROI) is very low, thus it is more logical to use the funds in higher profit avenues than blocking them in PSEs.

2. A nationwide survey by NCAER in 2007-08 revealed that only 0.5% retail participation (i.e. Aam Admi investment) in equity market. This means the benefit of disinvestment are mainly large corporate housed and institutional investors

The current retail participation is low but these PSU IPOs themselves present an opportunity of widening the retail base. (but the real fact is that disinvestment is done to benefit those corporate who in return funds political parties for their election campaign. Thats why it seem difficult that political parties will come under the purview of RTI and publically display their sources of election funding) The current return on these investments is very low. So it is better to use these funds in social sector scheme than locking capital in asset. (It is important to note that to reduce fiscal deficit, govt. has to reduce its expenditure. But the govt is doing so by stopping spending on increasing the production capacity in the economy. Govt has not reduced its wasteful revenue expenditure like expenditure on their salaries and foreign visit. Govt is making our economy weaker and Aam admi is fooled by the number game)

3. The funds received from disinvestment are used to finance fiscal deficit which is an unhealthy practise. (It is like selling family gold to meet short term expenditure on whiskey and beer). Since disinvestment income is one time income so it should be used to create production capacity in the economy (instead of using it to pay for foreign trips of ministers and on the renovation of bathroom in the office of Planning Commission)

4. The tax rate applicable on PSEs is higher than that applicable on Pvt Sector companies. (This again shows that govt favours big corporate houses and ignore the needs of Aam admi). The Pvt. Companies are enjoying tax concession and PSEs are paying higher taxes.

There is requirement to change the tax laws to bring Pvt. Sector at par (But we would be fooling us if we expect govt to change the tax laws against the pvt comp. Even GST and DTC are not implemented till date)

5. Profit making PSEs should not be There are various examples where post disinvested as they are doing well. disinvestment returns are higher than pre disinvestment dividends. For e.g. in case of BALCO, CMC, Maruti Udyog Ltd., IPC etc.

6. After disinvestment employees of PSUs Companies offer VRS to employees on a will lost their job scale higher than govt VRS. But there was no retrenchment and also packages have increased after privatisation. (in reality, employees do loss their job)

7. Disinvestment would lead to private But government claims it will ensure better monopolies competition (e.g. of Pvt Monopoly after disinvestment is VSNL, which was also the first PSE to be divested by way of public offer in 1999-00)

8. It is alleged that PSEs are sold cheap to There is need to bring transparency in the preferred parties (There is some truth in this disinvestment policy. allegation)

9. To complete the target of disinvestment, A well run PSE can ensure proper running of govt sold stake of a PSE to other PSE, which disinvested PSE. means ownership remains with the govt only. This is not disinvestment (for e.g. in every disinvestment process, LIC is asked to invest in the shareholding.)

Section 4: Conclusion
It will be worth mentioning that disinvestment process will benefit our economy in the sense that it will divert blocked capital to fund social sector schemes for the welfare of Aam Admi (like NRHM, MGNREGS and all other Gnadhi-Nehru Schemes). If the funds are invested in capacity building, it can create production capacity for the future which will ensure supply of goods on a regular basis and help in checking inflation from supply side ( which is the real cause for price rise). But the problem lies in the fact that the govt is misusing the fund from disinvestments to finance their bad policy decisions. Also the process of disinvestment in not transparent and favours big corporate houses. The question is often asked Should India adopt rapid pace of disinvestment/privatization or move with a slow pace? Taking example of disinvestment process of other countries: Rapid approach: Countries like Russia, Czech Republic adopted rapid disinvestment. For e.g. in 1993 Czech Republic privatized nearly 1000 state owned enterprises. Similar thing happened in Russia. Results were disappointing in both the cases. Slow approach: Chine represent other extreme approach to disinvestment even though it adopted of Open Door Policy in 1978. But still there are more than 3 lakh State owned enterprises in China Middle approach: India represents between Chinese approach and Russian & Czech Republic approach. India is doing on a case to case approach which is the right way to go with disinvestment process.

-x-x-x* The source of above information is the notes prepared by me taking reference from different websites and newspapers. This write up is prepared by:Akshay Dhadda