Disinvestment: Revival of a Discredited Agenda

The President’s address on 4th June 2009 has unveiled the agenda of the Congress led Government at the Centre. Among its major themes was the issue of disinvestment of public sector companies, a bone of contention between the UPA Government and the Left parties during the past five years. In keeping with the election manifesto of the Congress party, the President’s address mentioned: “Our people have every right to own part of the shares of public sector companies while the government retains majority shareholding and control. My Government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that government equity does not fall below 51%.” While the policy of diluting government’s equity in PSUs upto 51% is not new, what is novel in the current approach is to shroud the move towards creeping privatisation of PSUs as “people-ownership” and posit the disinvestment question in terms of the right of the people to own PSU shares. This is indeed trying to be too clever by half.

“People-Ownership”

A public sector undertaking, by definition, is owned by the people. The state owns and manages the company on behalf of the entire people of the country. In contrast, a nationwide survey conducted by the NCAER in 2007-08 revealed that only 0.5% of Indian households invest in equities. A recent article in The Economist (21st May 2009) estimates this section to be 0.7% of Indian households. Thus, the Congress’ concept of “people-ownership” implies transferring the common ownership of the PSUs by all Indians into the private ownership of 0.5-0.7% of Indians. 

Moreover, the latest RBI Annual Report shows that Mutual Funds account for only 7.7% of India’s gross household financial savings in 2007-08, and shares and debentures of private corporates, another 2.7%. Bank deposits, which account for 55.3% of all financial savings and Life Insurance, which account for 16.9%, are much preferred savings instruments for Indians than direct or indirect ownership of company shares and debentures, which account for only around 10.5% of all financial savings. Thus, even the better off sections of the Indian people who hold financial assets, are not particularly keen on holding equities. This aversion towards the speculative risks inherent in the equity market would have only increased following the global financial meltdown witnessed since September 2008.

The dominant players in the equity markets are not the small retail investors but the big financiers like the FIIs and Mutual Funds. A large proportion of investors in the FIIs and Mutual Funds are also the big corporates themselves, who park their savings with them in order to make a quick buck. Invoking “people-ownership” in order to justify the sale of government’s equity in PSUs is therefore, nothing but a subterfuge. The express purpose for announcing the intent to disinvest was to whet the appetite of the global and domestic financiers in times when the global financial markets are in doldrums. That the message was not lost can be seen in the recent bull run in the Indian stock markets.

Resource Mobilisation

A case for disinvestment is often made as an avenue for resource mobilisation. The previous UPA Government had constituted a “National Investment Fund”, to channelise the proceeds of disinvestment to finance social welfare programmes. But this process did not gain much momentum because of the stiff resistance of the Left and some other parties to the disinvestment process. With the Congress not requiring the support of the Left parties this time, concerted attempts at prodding the Government down the disinvestment route have gathered momentum.

The Financial Times (20th May 2009) quotes a report brought out by the French securities firm CLSA to state: “A reduction in shareholding to hypothetically 51% across all the state-owned entities could bring in USD 62 bn (Rs. 2.9 lakh crore approximately) at current market prices…We believe the government will, however, test the waters with small stake sales. A 10% stake sale in the ten large public state undertakings that are likely disinvestment candidates can bring in USD 17 bn (Rs. 80000 crore approximately).” Another such estimate by Delhi based investment bank SMC Capitals suggest that if the Government follows up on its promise of bringing down its equity stake in all the 45 listed PSUs to 51%, it can mobilise upto Rs. 4.46 lakh crore going by the current market valuations. This, according to them, “signifies that the present government, with the clear and aggressive disinvestment policy, has lot of cushion and headroom in its fiscal policy making. With the aggressive disinvestment policy, the fiscal deficit may not be such a serious threat to Indian economy, as generally perceived”.

Such arguments, however, are based upon completely fallacious logic. While being obsessed with maintaining a low budget deficit is itself irrational, especially during a recession, divesting stakes in profit making PSUs to bridge that deficit is even more bizarre.  Selling off government equity in a profitable PSU is actually a mirror image of running a budget deficit. While in the case of running a deficit, the government has to make interest payments in the future against a one-time borrowing from the market, in the case of disinvestment, future streams of income from dividends are forgone against a one-time receipt from the sale of stakes. In fact disinvestment is worse since it involves transferring state-owned assets to private hands, which is not the case when the government borrows from the market. According to the Public Enterprises Survey 2007-08, the Central PSUs taken together contributed Rs. 19423 crore to the central exchequer in 2007-08 as dividends, witnessing an increase of over Rs. 4000 crore from 2005-06. Considerable divestment of government’s stakes in CPSUs would squeeze this important source of revenue for the Government.

The Central PSUs also have huge cash surpluses piled up over the years, which are not being put into productive use. The Public Enterprises Survey states that the reserves and surplus of all CPSUs taken together stood at Rs. 4.85 lakh crore in 2007-08. While aggregate real investment in CPSUs in 2007-08 increased by 10.16% over 2006-07, reserves and surplus grew by 16.56%. In the absence of managerial autonomy, the CPSUs are unable to utilize these reserves for their own expansion or diversification. If the resources of the CPSUs are to be tapped at all, an eminently better way would be to seek special dividends from them rather than selling off their equity. This way the Government would be able to mobilise resources without transferring a single percentage in equity ownership or sacrificing future dividends.

It also needs to be underlined that while the effective tax rate for the CPSUs taken together in 2006-07 was 30.78%, the average effective tax rate for private sector companies in the same year was 19.5% only (as per the Statement on Revenue Forgone, Receipts Budget, 2008-09). When the private sector’s effective tax rate is way below the scheduled tax rate (33.66%) owing to myriad tax concessions, why can’t more taxes be raised from the private corporate sector by doing away with some of the tax exemptions? Current public spending on social welfare programmes should be financed by raising more tax revenue from the private corporates and the affluent sections, whose earnings and assets have grown manifold over the past decade, through better administration of corporate tax and wealth tax and introduction of long-term capital gains tax and inheritance tax. This would be both socially desirable and economically sustainable, compared to the irrational course of selling government’s capital assets like equities in profit making PSUs.

 Conclusion

The arguments in favour of disinvestment, either in terms of resource mobilisation or in terms of “people-ownership”, are devoid of sound economic rationale. Rather, the disinvestment agenda is driven by powerful interests; like the big players in the stock market whose fortunes depend on “good news” and the private corporate sector, which wants to escape the responsibility of paying taxes for financing the government’s welfare programmes. It is unfortunate that at a time when even the American President is working out ways of insulating the economy from the undue dominance of such vested interests, which precipitated the global economic crisis in the first place, the newly elected Government in India is succumbing to them.