The Government’s route to Disinvestment

The relevance of disinvestment is not simply the Government’s inclination towards selling off minority stakes of Public Sector Undertakings (PSU’s) as there is strong economics behind the whole agenda. At a time when successive stimulus packages, announced by the Indian Government to stem the impact of worldwide economic crisis, has put tremendous pressure on the central exchequer and shrinking revenue doing little to beef up Government’s treasury disinvestment in PSUs the Government is planning Disinvestment on a large scale.

Rationale behind disinvestment in PSU does remain placing three booster doses for the Indian economy. The Government has incurred a fiscal deficit of Rs 3, 30,000 crore, amounting to 6.2 per cent of Gross Domestic Product (GDP) of the country in 2008-09.


According to estimates, flow of cash to Government exchequer could be huge over the next few years, even if the Government plans to dilute its stake in so-far listed PSUs to 51 per cent. Government’s holding in listed state-owned enterprises are estimated to be over Rs 8.8 lakh crore, and if stakes are diluted to 51 per cent in these PSUs at current market prices, it would yield an inflow of around Rs 3 lakh crore. A dilution of about 10 per cent in top 10 PSUs can fetch a staggering Rs 85,000 crore in terms of market valuation. The Government would obviously look to explore disinvestment options, if not in profit-making PSUs, then in loss-making ones at least to tighten its fiscal belt.


Often people crib about the necessity of initiating PSU reform. Disinvestment can provide a much-needed boost as it is likely to act as an effective instrument to enforce market discipline in PSUs. Once listed, public enterprises will be open to public glare and will have to abide by the norms of market regulator, SEBI as well as the stock exchanges, including quarterly release of their income statements and on-time dissemination of market-sensitive information which is crucial for the secondary market.

A definitive roadmap is being prepared for the process of disinvestment. The Government is also mulling winding up of the National Investment Fund (NIF), into which disinvestment proceeds have been flowing in the last five years. The NIF has been kept outside the consolidated fund of India and according to the constitution of NIF, 75 per cent of its annual income has to be used to finance selected social sector schemes. Hope exists that by channelling disinvestment proceeds away from NIF the Government will be able to use the disinvestment money to bridge the widening fiscal deficit.

The Government has prepared a list of nearly 40 PSUs in which it is looking to divest part of its shareholding through the stock market. The block includes 15 listed companies, in which the government’s stake is over 90 per cent. The Government has also drafted a list of around 25 unlisted enterprises for selective disinvestment. These companies are estimated to have a net worth of Rs 200 crore with each of the enterprises earning a net profit in each of the past three years. Some of these include, Rashtriya Ispat Nigam, Bharat Sanchar Nigam Ltd, Coal India and Hudco.
Political obstacles also have to be given due consideration. There are already some opposition emanating from the chief ally, Trinamool Congress and southern alley DMK. TMC has said it will oppose any move to disinvest PSUs or strategic sales of profitable PSUs. DMK too has a track record for opposing sale of shares of PSUs, such as Neyveli Lignite Corporation. Hence, the Finance Ministry, which is now in-charge of disinvestment, must create a consensus on the issue of disinvestment by engaging key administrative ministries, coalition partners in Government, including Congress as well as stakeholders of the PSUs, including employees.

Why do we love Gold?

"The desire for gold is not for gold. It is for the means of freedom and benefit"- Ralph Waldo Emerson

Today, gold touched an all time high of Rs 18000 for 10 grams or Rs 1800 per gram The sudden increase in the rate has been triggered by rumours suggesting that India is planning to purchase more gold from International Monetary Fund. It was only a few days ago that India procured about 200 tonnes of gold from the International Monetary Fund (IMF) at a collossal rate of 6.7 billion Dollars.

What is that influential factor that draws Indians towards gold? Can it be treated as a retribution on the world when India stood feeble at the foyer of IMF during the early 1990’s? Or is it the consequence of that exceptional value gold held prior to the Gulf war?

For centuries, before the logical progression to a paper currencey was made, gold was used as a metal that helped make transactions easier. When the value of a currency – typically, coins - was determined by the value of the metal that constituted it, precious metals like Gold made all the difference. Gold was always treated exclusive as compared to other metals like silver, copper and bronze. Epochs before World War I believed in the gold standard as the medium of currency. With the outbreak of World War I most of the nations that engaged in war required excessive funding. This financial support was provided by United States of America; In exchange for the endowment, USA acquired large amounts of gold from the warring countries. The value of gold kept escalating as the supply kept waning. The United States grew richer and stronger. After World war II a gold standard was established following the 1944 Bretten Woods conference, fixing the price of gold at US$35 per troy ounce, or, in effect, pricing the U.S. dollar as 1/35th of a troy ounce of gold. The dollar came to be seen as a currency in which transactions could happen in the future.

Though this system was scrapped in the early 1970s, such was the power of gold that within a span of few years, United States of America became a superpower. With all the gold that they held, and the dollar developing into the International currency for trade, there was a shift in economic power worldwide in favour of the United States. But is this the reason India decided to buy out a large chunk of the gold sold by the international Monetary Fund? Well, the answer is a simple yes. More gold would help the bullish bullion market and this can help increase Consumer spending habits. Gold on the other hand also acts as a safeguard against Inflation and other Economic downturns.

Becoming the sixth largest holder of gold across the world essentially indicates to the world that “We might have been poor at one stage, but dont look at us the same way anymore.” Infact, USA recently acknowledged the fact that India is a “superpower”. Indian currency is not convertible on capital account.This means that the tendencey to hold wealth in the form of foreign currency is not viable as holding money in the foreign currency is an option of safeguard. But in India Gold resolves this concern as Gold can be a sensible mean to hold wealth. Gold has its other uses as well. Considering that Indians use gold for everyday purposes such as marriages, temple functions, demand is always soaring.

But does it really matter if we buy gold in large quantities?, Yes, it does really matter in a world where one is judged by colour and the region one belongs to. Becoming an dconomic superpower is very important for a country like India, which in a short span of time has shown the world that it can no longer be ignored. With constant threats from countries across the globe , the initiative to purchase gold from IMF seems to be a strong message.

With the New Economic Policy coming into force in the early 90s, the Government’s disinvestment policy was given fresh impetus. The idea of disinvestment had been widely discussed earlier but had hardly won public acceptance. In simple terms, disinvestment is the sale of shares held by the government in a public sector enterprise. This would then result in decreasing the extent of government control in that public sector enterprise. But the wider question is: is disinvestment a smart move?

Many claim that by reducing the Government’s hold on a Public Sector Undertaking (PSU), an increase in efficiency can be achieved. Though it has not been proved yet, one of the main reasons touted in favour of disinvestment is the significant rise in government revenues from sale of shares. Mostly in sectors where the Government has reason to believe that selling its shares would be yield better returns than retaining its stake, the Government has made efforts to disinvest its holding. Highly profitable PSUs such as GAIL, SAIL, and ONGC were also not spared in the drive towards disinvestment.

What really prompts the government to take such a drastic measure? Well, the foremost reason is the increase in the government’s revenue by means of disinvestment, which can used to offset the fiscal deficit in its annual budget. Some feel that in another 10 years, most of the companies currently under government control would in all likelihood disappear. As long as deficits are being managed and the economy is being served, disinvestment can be a short term solution. But in the long run? In the long run, we would not have as many public sector units as we have today.

Every instance of disinvestment is marked by a lot of political machinations behind the scenes. Corruption remains one of the crucial factors. Everyone wants a piece of a well run and well managed public sector unit. Politicians are in a position to corner most of what is being disinvested because disinvestment often happens through auctions and other methods which make it easier for shrewd and corrupt politicians to achieve their aims through manipulation of the official procedures.

What else would explain Sharad Pawar, Union Minister and a senior politician, holding a large chunk of shares in Swan Telecom as well as holding a large number of shares in the name of benamis in many PSUs? Sharad Pawar is only one among many such politicians who have benami holdings in several large PSUs. They definitely would not have bought these shares if disinvestment were not in the offing. Then a move for disinvestment is initiated and it’s a win-win situation for all concerned. Government gets the revenue and the others, mostly politicians, get their part of the pie.

But in the long run, a lot of questions need to be answered. Whether the “failure” of Indian public enterprises is true or exaggerated? Can public enterprises be reformed from within or are they intrinsically inefficient? Is a change in ownership the only solution? Impact of ownership and competition on the efficiency of Indian enterprises is another question that needs to be answered. Methods of privatization and the experience of other countries with regard to disinvestment need to be studied. All these aspects need to be analyzed before taking an initiative as big as a disinvestment.