When India launched measures to reform the economy in 1991, one of the items on its agenda was the restructuring of public sector enterprises. What this implied was that the ownership structure of PSEs had to change gradually from public ownership of equity shares to private holding. The process by which ownership change was to be brought about was through disinvestments.
If the public sector was perhaps necessary in the early stages of India’s economic development, disinvestment has become necessary and desirable – in the prevailing regime of liberalization. Firstly, because majority of the PSU firms are loss making which managed to survive only on the state financial support, thus, not only weakening the economy but were diverting badly need funds away from where they were badly needed. Secondly, it is desirable as resources released by disinvestment can make the State perform its basic functions efficiently, reduce the debt and interest burden. Therefore as recently seen the emphasis in the new economic policy changes is on the supply side, by deregulation and delicensing certain sectors,introducing tax reforms, and through disinvestments and privatization of PSEs.
If the public sector was perhaps necessary in the early stages of India’s economic development, disinvestment has become necessary and desirable – in the prevailing regime of liberalization. Firstly, because majority of the PSU firms are loss making which managed to survive only on the state financial support, thus, not only weakening the economy but were diverting badly need funds away from where they were badly needed. Secondly, it is desirable as resources released by disinvestment can make the State perform its basic functions efficiently, reduce the debt and interest burden. Therefore as recently seen the emphasis in the new economic policy changes is on the supply side, by deregulation and delicensing certain sectors,introducing tax reforms, and through disinvestments and privatization of PSEs.
Economic survey 2009 emphasized the unsustainability of fiscal deficit with borrowed funds. Such borrowed funds were being used for current revenue expenditure, and the casualty was infrastructure development.And it is supposed that if the momentum of disinvestments is maintained the government would be able to garner substantial amounts that should help reduce the whopping fiscal deficit which is 6.8 per cent of the GDP.
The recent issue of IPOs of NHPC and OIL alongwith the proposals for a host of companies waiting for the government nod for disinvestment include Bharat Sanchar Nigam Ltd (BSNL), railway consultancy firm RITES, National Aviation Company, and Ircon is all part of the government’s fund raising plans. However, one of the issues on which no clarity has emerged is the manner in which the unlisted PSUs will be allowed to tap the capital market with an initial public offer. One view is that allowing unlisted PSUs to tap the capital market would not necessarily result in any proceeds for the centre and not help meet the government’s fiscal deficit. Hence, such IPOs should be structured in a manner that will enable the government to also divest its stake and mobilise resources to reduce the fiscal deficit.
Another view is that PSU disinvestment should not be used as an instrument to meet the government fiscal deficit. Instead, it should be used to subject the PSUs to market discipline so that its management can measure its performance from its stock valuation in the open market. Such a view also supports more listed PSUs to float new stock to raise resources from a reviving stock market.
What will emerge out as an outcome of the current disinvestment procedure of the government is yet to be seen. But it is an irony indeed that the private companies in the rest of the nations are being rescued by the Government’s bailouts and in India the reverse is happening through disinvestment.
Jaya Roopwani
MBA(IB)2009-11
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