Disinvestment in India

[oped of the day] The not-so bright idea of selling the family silver

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Costs and Benefits of Disinvestment

Context

The proposed stake sale of profit-making public sector undertakings (PSUs) raises a few strategic issues of national importance.

Issues 

    • Ideological – that the Government must get out of business. 
    • Economic – to bring the fiscal deficit down. 
    • Long-term financial one – which option, public- or privately-owned, is better for the Government treasury.
    • National security and self-reliance – can India be under pressure if we do not have full control over petroleum? The United States, China, and other superpowers have control over their petroleum reserves.

Long-term financial issue

    • The Burmah Shell (Acquisition of Undertakings in India) Act 1976 enabled the Government of India to take ownership by paying ₹27.75 crores. 
    • One estimate of that amount in today’s terms is to use the inflation factor, which is about 22.42. This means that the Government would have paid ₹622.06 crores today. 
    • The current market value of BPCL varies between ₹85,000 crores and ₹115,000 crores. The government’s share at present is about 53.3%, which is worth between ₹45,000 crore and ₹61,500 crores. We got the company for a cheap price.
    • Since 2011, the total dividend it has earned is about ₹15,000 crore, which is several times the present value of the investment of ₹622 crores. 
    • If we estimate the present value of all future income that the Government would earn, by using inflation and calculate the value of all future flows, it would forego future income of about ₹78,589 crores. 
    • The effective tax rate on profit before tax for the BPCL is about 34%, whereas for the private sector player it is between 25% and 28%. So there will be a loss in tax revenue for the Government after any privatization.
    • Financially, we as a nation are worse off by selling such a profitable venture. 
    • As the case of BPCL and several other PSU ‘Navratnas’ shows, they have given supernormal returns to the public exchequer. 
    • Instead of selling such high performing PSUs, we should be selling the loss-making ones.

Issue of the fiscal deficit target

    • The fiscal deficit target of 3.4% is now reduced to 3.3%. 
    • As the revenue collections are not enough, the Government is planning the sale of well-running PSUs to meet the fiscal deficit target. 
    • Next year? – If the Government meets its fiscal deficit target by the stake sale of various PSUs including the BPCL this year, how would it meet that target next year? 
    • RBI reserve – In spite of the huge one-time dividend from the Reserve Bank of India, we are far from meeting the deficit target. 
    • Absence of fiscal prudence – Nothing much will change in terms of the expenditure or revenues in the coming years. These strategic sales and dividends cannot be repeated every year.
    • How to reach the targets – The real way of meeting the targets is to cut out wasteful Government expenditure. Most of this is on salaries and pensions, and ensure that the bureaucracy delivers.

On national security

    • Natural resources, especially oil, are a strategic national resource. 
    • The United States maintains such an underground crude oil reserve to mitigate any supply disruptions. 
    • The U.S. over 600 billion barrels, China 400, South Korea 146, Spain 120 and India 39.1. India has a target to substantially increase its reserves. 
    • While China sticks to state-owned national resources, we are moving in the opposite direction. National security also depends on the economic power that a Government has.
    • We do have plans to build the world’s largest refinery in India, with the help of Saudi Arabia, but ownership and control will be in foreign hands. 
    • With the strategic disinvestments, we will lose Government control over both crude and refining. 

Conclusion

    • Through this strategic disinvestment, we are financially worse off, and strategically the nation finds itself in a vulnerable situation.
    • We need to see through the ideological narrative coming from the developed nations. They embraced free trade when it suited them and are now trying to embrace protectionism. 
    • China adopted a market system but does not allow this to cloud its thinking when it comes to strategic national issues; the control remains with the Government. 
    • India too needs to re-think its strategy.
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