Diversify Disinvestment: Financial Express: 12th June 2009

It is not surprising that at a time when fiscal constraints are dominanting government thinking, the scanner will turn to disinvestment. Let’s briefly revisit the ideology behind disinvestment. In 1991 when this idea was propagated, the objective was to broadbase equity, improve management and raise resources for the enterprise which would help strengthen the organisation. The 1991-92 Budget focused on raising resources, encouraging wider participation and increasing accountability. The limits for the so-called privatisation went through iterations with the Rangarajan Committee settling for 49% in certain non-critical sectors, which later increased. By 1999 we were talking of disinvestment in the context of helping in restructuring and reviving the PSUs. It was only after 2001-02 that this programme began to be viewed with the purpose of covering budgetary support for social infrastructure and to generate funds to reduce public debt.
Now, the question is two-fold: should we be going in for disinvestment, and if so, how should the proceeds be deployed? Disinvestment makes economic sense when we restrict our thought process to the initial motivations outlined earlier where the idea is to make the units stronger through better management practices, wider dispersal of interest and probably the introduction of the private sector ethic. However, in the face of the failure of private enterprise, particularly in banking, across the world, the undisputed superiority of a private sector model needs to be qualified. This means that we are basically discussing disinvestment in either a non-profit-making enterprise which needs better management or a profit making enterprise where the government should probably not exist, as the industry can be in the private sector. Clearly loss-making companies would not generally garner interest (Modern Foods and ITDC could be some glaring exceptions), though ideally they would be the natural choices.
The second question is about the deployment of the disinvestment proceeds. It does not appear to be prudent to use these proceeds to finance the budget. This is because it sets a precedent of moral hazard and leads to slackness in maintaining fiscal balances.
Second, divestible amounts are not infinite and hence cannot be government policy in the long run. Since the time we embarked on this programme, we have raised just over Rs 53,000 crore and this is not really substantial to make a lasting impact. Third, disinvestment should ideally be focused on the unit rather than the government. The rationale is that the moneywhich is picked up must be used by the company to grow. When an owner divests, the money belongs to him and he may not be bound to reinvest the money. However, when the entity is the government, it should ideally be used to strengthen the enterprise. In fact, disinvestment must be treated more like an IPO where the share capital remains intact and the money goes as premium to the ‘reserves account’. By diverting the funds, we would be weakening the financial position of the company as the value does not increase. In the private sector, any dilution of equity provides funds for growth and ultimately enhances the shareholders’ value. But, here, the exercise does not contribute to the company at all.
This will hold for both profit and non-profit making companies. Today, there are 160 profit-making central PSUs which can command a premium in the market. These proceeds could instead be channelled to reviving the 53 non-profit making units. Therefore, when funds are scarce for all companies in general, raising resources through alternative debt routes is expensive and disinvestment provides an effective solution.
Fourth, it is often argued that disinvestment proceeds should be used for repaying debt. While prima facie this appears to be a viable option, it has to be a concerted action to really have an impact. It has to be done at a time when these funds are not being used to support the budget, as is being done today. Lastly, there is an argument for using these funds for ‘inclusive development’ which certainly deserves deeper thought.