Finally, a pragmatic sell off: Financial Express: November 10, 2009

Disinvestment has been a glowing controversy ever since we first spoke about it several years ago. It came in the form of privatisation to begin with, which raised the hackles of the left parties as anything ‘private’ was looked upon with suspicion. Coincidently, anything ‘private’ was looked at by the policymakers as being progressive.
Privatisation through disinvestment did not quite make the capitalist ideal, as the question raised was that the same outcomes could have been effected by changing the work ethics rather than the ownership. Further, the fact that only profit-making enterprises were targeted made the concept opportunistic, as it suited both the parties. The government was happy because it would get money, which the loss-making firms—which probably required private ownership more—would not achieve. Private sector would not have touched a loss-making unit anyway and profit-making firms were attractive propositions for them. It was a win-win situation, but the critics slammed it, saying that we were selling the family silver. Some big companies were partly divested, then the pace slowed down and, amidst controversy, went into a recess.
The issue of disinvestment to take care of the budgetary requirements came up as a compelling economic argument for the same. Protagonists said that such proceeds should not be used for financing the revenue deficit, but for lowering public debt. It was argued that public debt could be repaid through these proceeds, which, in turn, would lower interest payments and hence the fiscal deficit would come down in course of time. While this argument looked okay, there was a counter-argument here. If these funds were not used for financing the fiscal deficit but used to lower public debt, then fiscal deficit would increase proportionately, as borrowings were needed to finance the budget and the size of the debt would not really change. Therefore, this argument, too, was not strong enough, as it would simply be an exercise in financial accounting. The budget then stopped putting these numbers in the final accounts.
Now, there is a new look being taken by the government. It wants to have the unlisted ones listed and get the listed ones to have at least 10% of their shares held by the public. The funds so mobilised—something of the order of Rs 50,000 crore or above—would go into the National Investment Fund (NIF). The initial thoughts on the NIF were that the interest on the fund would be .used for social purposes, but now it appears that the capital amount will directly be deployed for social capital, and hence, will be of much larger amount. Is this thought process okay?
In a way it is, because we are at least clear that we want to use this money for investment projects in the social sector, which if deployed judiciously, cannot be argued against. We are not bringing in the private ethic, which has failed in the West, or the fiscal deficit or public debt argument, which is somewhat contradictory as argued earlier. Therefore, the result can be only positive. The policy appears to be pragmatic in this context by choosing only profit-making firms, as the loss-making ones would not command similar valuation in the market.
But, can this be a policy? This is the broader issue because if the government keeps on doing this, there will be a point when a critical decision will have to be taken as to whether or not the unit will remain in the private sector. And a logical corollary is that this will not be a bottomless moneybag from where funds can be drawn. But, nevertheless this money can be used for investment in social infrastructure.
A curious issue will be that in case these funds are earmarked for capital projects, then will there be less pressure on the government to incur such expenditures within the confines of the traditional budget? Therefore,
if we exclude these disinvestments, it should not be the case that the government concentrates only on the revenue side and not the capital side. The other possibility is that the disinvestment finances incremental capital formation, in which case the fiscal deficit is not affected and remains at the usual level, which will then be beneficial.
What about the capital market? This move is good news as there will be more equity issues in the pipeline and the market is looking for such issues. Investors can cheer, as they will have more options and there will be a lot of money to be made with the overall market capitalisation of Indian firms increasing substantially.
Therefore, we can on the whole feel good about this move at disinvestment if we keep in mind the fact that we are not particular about selling our silver. As we reach the 49% mark, a hard decision will have to be taken. Till then it may just be rightto say, hallelujah. ... ..