PSU disinvestment ? while it is a measure to squeeze the widening fiscal gap, it can also be work for the business.

In a strategic move to meet the highest-ever disinvestment target of Rs 1.05 lakh crores for the fiscal year 2019-20, the NDA government is not only looking at selling assets of Central Public Sector Enterprises (CPSEs) but also strategic disinvestment in profitable state-run behemoths.

In 2001-02 the Vajpayee government ceded ownership of a handful of PSUs to private players, but had to face scathing criticism for its pricing and choice of buyers. Since last twenty years Govt?s disinvestment programme has largely been centred around dribbling minority stakes in PSUs into the market without the Government really ceding control, insignificant stake sales through the ETF route or changing pockets between PSUs that serve little purpose outside of numerically meeting disinvestment targets.

It is therefore quite reformist of the NDA regime in its second term, to revive the idea of genuine disinvestment through strategic sales of its majority stakes in profitable PSUs to private buyers. Recently it kicked off a blockbuster disinvestment plan, lining up the sale of five PSUs, including majority stakes in country’s second-largest state refiner Bharat Petroleum Corp Ltd (BPCL) and India’s largest shipping company Shipping Corporation of India (SCI). Also on sale will be a 31% stake in Container Corporation of India (Concor) along with management control.

How the disinvestment narrows the fiscal deficit?

Based on current market prices, the sale of stakes in these three firms will fetch the Government around ?70,800 crore, taking it close to the disinvestment target for the fiscal year. The government’s 53.29 per cent stake in BPCL is valued at around ?58,800 crore, while 30.8 per cent stake in Concor is worth about ?10,400 crore, and stake sale in SCI will fetch just over ?1,500 crore based on Friday?s closing price. 

But, Oil Minister Dharmendra Pradhan in a recent statement hinted that public sector firms such as Indian Oil Corporation (IOC) may not be allowed to bid for buying government stake in Bharat Petroleum Corporation Ltd (BPCL), for which a buyer may have to shell out as much as ?90,000 crore.

Tehri Hydro Development Corporation and North Eastern Electric Power Corporation are proposed to be sold to NTPC. The government holds 74.23 per cent in THDCIL and 100 per cent NEEPCO.

Parallelly, the Cabinet had also approved reducing government stake in select PSUs such as IOC to below 51 per cent while continuing to retain management control. The government, currently, holds 51.5 per cent in IOC and another 25.9 per cent through state-owned Life Insurance Corp of India (LIC), and explorers ONGC and Oil India Ltd (OIL), and the government can potentially sell 26.4 per cent for about ?33,000 crore.

A similar formula can also apply to ONGC and gas utility GAIL India Ltd.

It is estimated that the government can raise about more than one lakh crore by selling its direct holding above 51% in listed non-financial PSUs or about three lakh crore by selling its direct and indirect holding including stakes of LIC and other PSUs above 51% in listed nonfinancial PSUs. The amounts can enough to cover 1-2 years of divestment targets. Thus, the government may have to consider outright privatisation of PSUs in the nottoo-distant future.

These strategic sale will help the government in this financial year for partly bridging the fiscal gap arising out of the Rs 1.45 lakh crore tax stimulus offered to the corporates. It is, however, learnt that the Centre has taken the move to line up the CPSEs for strategic sale in five tranches over the next few years. Faced with a massive shortfall in revenue and capital receipts ? as of September 30, net tax revenue had only reached 36.8% of the budget estimate of ?16.5 lakh crore for the full year, while non-debt capital receipts were at 17.2% of the fiscal?s target of about ?1.2 lakh crore according to the Controller General of Accounts ? the share sale is aimed at helping the government narrow the yawning fiscal gap. The Union budget has estimated the fiscal deficit for 2019-20 to be Rs 7.03 lakh crore, or 3.3% of GDP.

The other PSUs, which have been approved by the government for disinvestment, include Bharat Immunologicals & Biologicals Corporation Ltd, Bharat Earth Movers, National Aluminium Company, Natinal Mineral Development Corporation, Scooters India, Certification Engineers International Ltd, Projects & Development India, Bridge & Roof Co (India), Engineering Projects (India), Hindustan Newsprint Ltd, Cement Corporation of  India, Hospital Services Consultancy Corporation (India), Pawan Hans, National Projects Construction Corporation, ITDC Hotels (for long-term lease of 50 years).

With just a little over four months left in the financial year, how the government intends to actually complete the transaction ? from appointment of advisers, to deciding on the pricing mechanism and initiating a transparent bidding process before finalising a buyer ? this fiscal is another big question. With just ?15,483 crore of the ?1.05 lakh crore disinvestment target realised so far, the Centre has little choice but to expedite these strategic sale proposals in double-quick time.

Can it be beneficial for the PSUs and economy as a whole?

Since 2014, the Government has a clear vision that the government has no business to be in business.  Oil Minister Dharmendra Pradhan said ?We have examples of 2-3 sectors such as telecom and aviation where ushering in private participation has led to customers benefiting from price cuts, efficiency, and better service?

BPCL will give buyers ready access to 14 per cent of India’s oil refining capacity and about one-fourth of the fuel marketing infrastructure in the world’s fastest-growing energy market. Pradhan said the privatisation of BPCL was following the policy of ushering in greater competition in sectors that can sustain on their own.

Greater private participation, like in the telecom and aviation sector, will bring about efficiencies and better service to consumers, he said.

While government presence may be a necessary in strategic sectors such a defence or oil exploration, there?s really no call for it to be running fuel retailing outlets, building ships or running container freight operations. Government presence in such non-strategic sectors not only distorts competitive dynamics for private players, it also results in consumers and taxpayers bearing the brunt of inefficient PSU operations. While strategic sale deals in the past have seen a few mis-steps, they?ve also yielded convincing success stories like Hindustan Zinc?s, which has seen a hundred-fold increase in its profits on the back of a six-fold expansion in capacities, since its takeover by Vedanta in 2002.

PSUs contribute towards a major economic output but, but they are not managed optimally, especially not on purely capitalistic principles. There is a lot of possibility of unlocking value over there and it has got a lot of implications and positives down the line for many other sectors and has a productive effect on the economy as a whole. But the real economic growth depends upon how the sums raised from such strategic sales will be utilized. Government has to ensure that the proceeds aren?t frittered away in interest or salary payouts but are reinvested prudently in long-term infrastructure assets that can yield enduring returns to the economy.

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