Story Of The Week

Disinvestment: A New Way to Achieve Budgetary Targets

I have 100 candies. I realize that I no longer require 100 candies and I’m happy to trade some of my candies for money that I will use for some other purpose. This is called disinvestment. It is the sale of stake held by the government in its entities to public or private entities by the route of IPOs (Initial Public Offers) or strategic sale of assets.

The Modi government 2.0 increased the disinvestment targets for FY 19-20 from Rs. 90,000 crores to Rs. 1,05,000 crores, giving it a 16.67% hike from the interim budget presented in February 2019. With a target of Rs. 43,425 crores in FY 2014-15 to Rs. 1,05,000 crores in FY 19-20, a new debate has risen “Whether disinvestment is just a tool to meet the fiscal deficit targets”.

What is a fiscal deficit?

Every year, the Government of India tries to estimate its revenue and expenditures that will take place for the upcoming financial year. The fiscal deficit is the shortfall in the revenues over expenditure. When a government says its fiscal deficit is 3.4%, it is a representation of fiscal deficit as a percentage of GDP.

It takes one no time to realize that higher the fiscal deficit, higher are the chances of a country falling into debt trap*. The Fiscal Responsibility and Budget Management Act, 2003 enacted by the then Finance Minister, Mr. Yashwant Sinha was passed to ensure that Government of India works towards long term macro-economic sustainability by the way of monetary policies and prudent debt management.

*Debt trap – A company accrues so much debt that it becomes impossible to pay the principal amount

 

Disguised mismanagement!

The question regarding aggressive targets for disinvestments raises the concern that whether it is a cover for fiscal mismanagement for the past term.

  • There has been a significant rise in debt by 49% (Rs. 82 lakh crores) in the year 2018 when compared to the year 2014.
  • For the first quarter of the current year, we have witnessed a 5-year low GDP growth at 5.8%.
  • The pro-agri reforms of the Government of India haven’t been able to deliver desired results for the rural economy with growth rate still being a mere 2%.
  • Although the bad loan situation with the banking sector in India has improved a little after the introduction of Insolvency and Bankruptcy Code 2016, we still face a situation of about Rs. 9.34 lakh crores.

Disinvestment Targets proposed in Annual Budget

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Source-Department of Investment and Public Asset Management

Disinvestment: Base for economic boom

What looks like a blanket cover by the Government of India to hide macro-economic issues in India might just be a boon for the future of India. The Central Public Sector Enterprises (CPSEs) in India has miserably failed in reforming the industrial sector in India. Various reasons support the need for disinvestment of CPSEs in India.

  • Companies like BSNL have employees approximately six times more than its private competitors like Airtel, Jio.
  • The banking sector has accumulated non-performing assets (NPAs) of above Rs. 17 lakh crores.
  • Air India has been reporting financial losses since its merger with Indian airlines. It is expected to report further losses of Rs. 7600 crores for the FY 18-19. Even after trying to sell its assets for the second time in a row, the government is unable to sell its stake.
  • IDBI bank had to be merged with LIC to meet the operating requirements of the bank. IDBI had accumulated NPAs at 32% before its merger.
  • IL&FS group has a total accumulated debt averaging to Rs. 1 lakh crore with NPAs averaging to 90%. Though the IL&FS group had certain debt securities with AAA ratings, poor management by top managers resulted in such economic havoc that it becomes a nightmare for the whole NBFC (Non-Banking Financial Company) sector in India.

These are just a few famous examples of Government of India pouring a huge amount of public money into the inefficiently run organizations.

  • By conducting disinvestments, Government of India will be able to reduce its burden on meeting financial necessities of these organizations.
  • Strategic disinvestment in non-core assets of CPSEs will help in the effective utilization of resources. Such strategic sale will again increase the availability of funds with CPSEs.

Along with fundraising, cost-cutting will be another factor in mind while improving the status of public sector units.

  • This can be seen in the case of mergers in the insurance sector, with the Government of India aiming to merge the three insurance companies into one. The recent announcement made by MoS for Finance, Mr. Anurag Thakur confirmed the intentions of the government to give way for a merger in the insurance sector. This will help the current insurance companies to pool their assets and cut cost by bringing all the functions of non-life general insurance under one name. One must realize that these companies (Oriental Insurance, United India Insurance, National Insurance) will be listed on the stock market after the merger, which completes the process of disinvestment.
  • The same can be said about the banking space where already two major mergers have taken place*, and few more are on the way. This will help the Government of India create megabanks that will be able to self-sustain, rather than requiring regular inflow of money.
* State Bank of India absorbed five of its associates and the Bharatiya Mahila Bank. The merger of Vijaya Bank and Dena Bank with Bank of Baroda (BoB)

Actual disinvestment made in respective financial years

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Source-Department of Investment and Public Asset Management

Final take?

The take on disinvestments is divided within the nation. For some, disinvestments might just be a tool to sugarcoat the nation’s economic status, while for others it might be an efficient use of underutilized government resources, which can facilitate economic growth. It may have been done for any of the above reasons, but in the long run, it will pace up economic growth and prove itself to be fruitful.

References

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