Disinvestment in India

The lofty dream of disinvestment of government stake in public sector units (PSUs) has often remained just that. Successive governments have missed their initial disinvestment targets set during the beginning of the fiscal year. Let’s see what is disinvestment and what’s going on in it.

Disinvestment in India

National monetisation pipeline has narrow outlook

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NMP

Mains level : Paper 3- Issues with National Monetisation Policy

Context

Recently, FM announced the National Monetisation Pipeline (NMP) to lease a slew of “brownfield” (already developed) but underutilised public sector assets to the private sector with the objective of raising Rs 6 lakh crore.

About the NMP

  • The assets identified for lease include roads, railways, ports, power, mining, aviation, oil and gas pipelines, warehouses, hotels and even two sports stadia.
  • The idea is to create “structured public-private partnerships” to unlock value from public sector assets and to recycle the revenues so raised into new infrastructure.
  • But the move raises several concerns.

3 concerns with NMP

1) Government is preferring financial value of assets over public welfare

  • The design of the NMP is out of sync with existential challenges — global warming, pandemics, geopolitical chaos and fundamentalism.
  •  The assets are valued on the basis of conventional financial metrics (enterprise value, book value, net present value, the costs of comparable assets).
  • The model seemingly absolves the government from the responsibility to unlock the intrinsic “social” (to include “smart” and “clean” ) value of these assets.

2) It will lead to concentration of capital

  • NMP is designed to attract deep-pocketed financial institutions (PE firms) and industrial conglomerates.
  • This is because the valuations are so high that few other entities will have the resources or the risk carrying capacity to respond.
  • The result will be a deepening of the concentration of capital and existing inequalities.
  • There will be economic and social implications.

3) Addressing the system problem

  • The government should have asked itself a fundamental question before placing a substantial share of public assets on the block:
  • Why have these assets been so poorly managed?
  • Was it because of bad leadership, inadequate talent within the PSEs, and/or systemic and structural shortcomings?
  • If the reason for low productivity was poor leadership or lack of talent, the transfer of these assets to a different, private sector-led organisational and investment structure would make sense.
  • Structural issues: But if the reason had to do with structural impediments, then such a change may not be warranted, at least not in the first instance.
  •  The example, gas pipelines GAIL are hugely underutilized, but this is not because of the “inefficiency” of GAIL, the PSE operator.
  • It is because of structural factors such as the shortage of domestic gas supplies; the regressive taxation system; the relatively uncompetitive price of gas and the perennial tussle between the Centre and state governments over land access.
  • A similar point can be made about most of the other assets identified for monetisation.
  • Their low productivity is because their PSE operators have faced a combination of systemic hurdles related to weak dispute resolution mechanisms; regulatory miasma; lack of transparency in governance; pricing distortions and intrusive bureaucratic intervention.
  • Way forward: So, until and unless these systemic problems are addressed, the private sector will find it difficult to harness the full value of these assets and the transfer of operatorship to them will offer at best a partial palliative.

Conclusion

Private-public investment structures make sense, but they must be modeled to also generate social value. In today’s world, there are no shortcuts to sustainable development.

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Disinvestment in India

Asset monetisation — execution is the key

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cost of capital

Mains level : Paper 3- Asset monetisation and challenges in it

Context

The government has announced an ambitious programme of asset monetisation. It hopes to earn ₹6 trillion in revenues over a four-year period.

About Asset monetisation

  • Unlike in privatisation, no sale of government assets is involved.
  • The government parts with its assets — such as roads, coal mines — for a specified period of time in exchange for a lump sum payment.
  • Asset monetisation will happen mainly in three sectors: roads, railways and power.
  • Other assets to be monetised include: airports, ports, telecom, stadiums and power transmission.
  • Two important statements have been made about the asset monetisation programme.
  • The focus will be on under-utilised assets.
  • Monetisation will happen through public-private partnerships (PPP) and Investment Trusts.

Challenges

1) Investors would prefer property utilised assets over underutilised assets

  • Suppose an asset is not being used adequately because it has not been properly developed or marketed well enough.
  • A private party may judge that it can put the assets to better use.
  • It will pay the government a price equal to the present value of cash flows at the current level of utilisation.
  • This is a win-win situation for the government and the private player.
  • The government gets a ‘fair’ value for its assets.
  • The private player gets its return on investment.
  • Increase in efficiency: The economy benefits from an increase in efficiency.
  • Monetising under-utilised assets thus has much to commend it.
  • However, in case of an asset that is being properly utilised, the private player has little incentive to invest and improve efficiency.
  • It simply needs to operate the assets as they are.
  • The private player may value the cash flows assuming a normal rate of growth.
  •  The cost of capital for a private player is higher than for a public authority.
  • The higher cost of capital for the private player could offset the benefit of any reduction in operating costs.
  • The government earns badly needed revenues but these could be less than what it might earn if it continued to operate the assets itself.
  • There is no improvement in efficiency.
  • The benefits to the economy are likely to be greater where under-utilised assets are monetised.
  • However, private players will prefer well-utilised assets to assets that are under-utilised.
  • That is because, in the former, cash flows and returns are more certain.

2) Valuation challenges

  • It is very difficult to get the valuation right over a long-term horizon, say, 30 years.
  •  For a road or highway, growth in traffic would also depend on factors other than the growth of the economy.
  • . If the rate of growth of traffic turns out to be higher than assessed by the government in valuing the asset, the private operator will reap windfall gains.
  • Alternatively, if the winning bidder pays what turns out to be a steep price for the asset, it will raise the toll price steeply.
  • The consumer ends up bearing the cost.
  • It could be argued that a competitive auction process will address these issues and fetch the government the right price while yielding efficiency gains.
  • But that assumes, among other things, that there will be a large number of bidders for the many assets that will be monetised.

3) Life of the returned asset may not be long

  • There is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation.
  • The life of the asset, when it is returned to the government, may not be long.
  • In that event, asset monetisation virtually amounts to sale.
  • Monetisation through the PPP route is thus fraught with problems.

Way forward: InvIT route

  • Infrastructure Investment Trusts (InvIT) are mutual fund-like vehicles in which investors can subscribe to units that give dividends.
  •  Monetisable assets will be transferred to InvITs.
  • The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued.
  • InvITs offer a portfolio of assets, so investors get the benefit of diversification.
  • In the InvIT route to monetisation, the public authority continues to own the rights to a significant portion of the cash flows and to operate the assets.
  • So, the issues that arise with transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.

Key takeaways

  • Low cost of capital for public authority: In general, due to the low cost of capital for public authority, the economy is best served when public authorities develop infrastructure and monetise these.
  • InvIT route: Monetisation through InvITs is likely to prove less of a problem than the PPP route.
  • Monetise under utilised assets: We are better off monetising under-utilised assets than assets that are well utilised.
  • Monitoring authority should be set up: To ensure proper execution, there is a case for independent monitoring of the process.
  • The government may set up an Asset Monetisation Monitoring Authority staffed by competent professionals.

Consider the question “How asset monetisation is different from privatisation? What are the challenges in asset monetisation? Suggest the ways forward.”

Conclusion

Government must pay attention to the challenges in asset monetisation and use it in the proper way to increase the efficiency in the economy.

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Disinvestment in India

General Insurance Business (Nationalization) Amendment Bill, 2021

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Privatization of insurance sector

The General Insurance Business (Nationalization) Amendment Bill, 2021, was recently passed by both houses of parliament.

What is the amendment?

  • The Bill seeks to amend the General Insurance Business (nationalization) Act, 1972.

What is the GIB Act?

  • The 1972 Act set up the General Insurance Corporation of India (GIC).
  • The businesses of the companies nationalized under the Act were restructured in four subsidiary companies of GIC: (i) National Insurance, (ii) New India Assurance, (iii) Oriental Insurance, and (iv) United India Insurance.
  • The Act was subsequently amended in 2002 to transfer the control of these four subsidiary companies from GIC to the central government, thereby making them independent companies.
  • Since 2000, GIC exclusively undertakes the reinsurance business.

Answer this PYQ:

Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/ services rendered under micro-finance is/are: (CSP 2011)

  1. Credit facilities
  2. Savings facilities
  3. Insurance facilities
  4. Fund Transfer facilities

Select the correct answer using the codes given below the lists:

(a) 1 only

(b) 1 and 4 only

(c) 2 and 3 only

(d) 1, 2, 3 and 4

 

Post your answers here:
1
Please leave a feedback on thisx

Key highlights of the Amendment Bill

  • Government shareholding threshold: The Act requires that shareholding of the central government in the specified insurers (the above five companies) must be at least 51%.  The Bill removes this provision.
  • Change in definition of general insurance business: The Act defines general insurance business as fire, marine or miscellaneous insurance business.
  • Transfer of control from the government: The Bill provides that the Act will not apply to the specified insurers from the date on which the central government relinquishes control of the insurer.
  • Notifying terms and conditions: The Bill provides that schemes formulated by the central government in this regard will be deemed to have been adopted by the insurer.
  • Liabilities of directors: The Bill specifies that a director of a specified insurer, who is not a whole-time director, will be held liable only for certain acts.

Significance of the bill

  • De-regulation: The move is part of the government’s strategy to open up more sectors to private participation and improve efficiency.
  • Capital infusion: Privatization will bring in more private capital in the general insurance business and improve its reach to make more products available to customers.
  • Insurance coverage: This will enhance insurance penetration and social protection to better secure the interests of policyholders and contribute to faster growth of the economy

Concerns of the opposition

  • The Opposition is of the view that privatization will be detrimental to the interests of the public.
  • They wanted a proper discussion on the pros and cons of the Bill rather than passing it in a hurry.
  • They wanted an expert committee of the Cabinet to study the impact before passing the legislation.
  • They are worried about large-scale employee layoffs and short-term investors entering and exiting these entities once the Act comes into force.

Also read:

[Burning Issue] Divestment of LIC

Disinvestment in India

Privatisation of public sector enterprises in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Privatisation of PSUs

The article suggests the privatisation of public sector enterprises by analysing their performance and devising strategy for privatisation accordingingly.

Three categories of public sector enterprises

1) Sick for long time and beyond redemption

  • There is the category of enterprises which have been sick for a long time.
  • Their technology, plants and machinery are obsolete. 
  • They should be closed, and assets sold.
  • The labour in these enterprises have had a political constituency which has prevented closure.

What should be done with these enterprises?

  • The Government should close these in a time-bound manner with a generous handshake for labour.
  • After selling machinery as scrap, there would be valuable land left.
  • Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
  • All this would need the creation of dedicated efficient capacity as the task is huge and challenging.
  • These enterprises may be taken away from their parent line Ministries and brought under one holding company.
  • This holding company should have the sole mandate of speedy liquidation and asset sale.

2) Financially troubled but can be turned around

  • Private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
  • Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.

What should be done with these enterprises?

  • Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
  • As valuation rises, the Government could reduce its stake further and get more money.
  • If well handled, significant revenues would flow to the Government.

3) Profitable enterprises

  • Pragmatism instead of ideology should guide thinking about them.
  • The Chinese chose to nurture their good state-owned enterprises as well as their private ones to succeed in the domestic and global markets by increasing their competitiveness in cost, quality, and technology.
  • The Chinese chose to promote both their public as well as their private sector enterprises to rise.
  • Both have made China the economic superpower that it is today.

What should be done with profitable enterprises?

  • The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
  • Calibrated divestment to get maximum value should be the goal instead of being target driven to get a lower fiscal deficit number to please rating agencies.
  • In parallel, managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.

Challenges

  • First, the number of Indian private firms which can buy out public sector firms are very few.
  • Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
  • Then, these successful large corporates need to be encouraged to invest and grow both in brownfield and greenfield modes in the domestic as well as international markets.
  • Sale at fair or lower than fair valuations to foreign entities, firms as well as funds, has adverse implications from the perspective of being ‘Atma Nirbhar’.
  • Again, greenfield foreign investment is what India needs and not takeovers.
  • Public sector enterprises provide for reservations in recruitment.
  • With privatisation, this would end and unnecessarily generate social unrest.

Conclusion

Would it be in India’s interest to lose the strategic capacity that its ownership of public enterprises including financial ones provide it? It would be better to think carefully now.

Disinvestment in India

Why privatising public assets is poor economics

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- How fiscal deficit financed government spending leads to wealth inequality

The article highlights the issues with government expenditure driven by the selling of public sector assets.

How public asset selling could affects private investment decisions

  • Public sector assets are not bought by reducing consumption or investment.
  • Current investment expenditure depends on decisions taken in the past and is more or less pre-determined.
  • Investment decisions that are taken today for fructification tomorrow that may be scaled down by such a purchase.
  • However, if investment decisions taken today are scaled-down, then it results in crowding out and such a strategy should be avoided anyway.
  • This implies that selling public sector assets therefore does not release any resources from private use for government spending.

How selling public asset has same macroeconomic effect as fiscal deficit

  • In case of fiscal deficit, the government puts its bonds in private hands; in sale of a public asset, the government puts its equity held in public sector assets in private hands.
  • The macroeconomic consequences of a fiscal deficit on the economy are no different from those of selling public assets.
  • However, finance capital, and institutions like the IMF treat the sale of public assets on a different footing from a fiscal deficit, for ideological — not economic — reasons, because they ideologically favour a dismantling of the public sector.

How fiscal deficit leads to wealth inequality

  • In a situation of demand-constraints, where unutilised capacity and unemployed workers exist aplenty, if an appropriate monetary policy is pursued, it can have no adverse effects whatsoever, except one: It increases wealth inequality.
  • The government expenditure financed by the fiscal deficit creates additional aggregate demand that increases output and incomes until the additional savings generated out of such incomes exactly match the fiscal deficit.
  • These additional savings accrue to the savers without their having to reduce their consumption, compared to the initial situation (that is, prior to government expenditure increase).
  • Since savings represent additions to wealth, this amounts to putting extra wealth into the hands of the rich.
  • Selling public assets puts into private hands public assets, and that too at prices well below the capitalised value of earnings.
  • This increases wealth inequality for two reasons:
  • First, it does so exactly as a fiscal deficit does.
  • Second, the public asset it puts in private hands is under-priced.

Why tax financed government spending should be preferred

  • If the same government expenditure is financed by taxation, no matter who was taxed, then there would be no addition to private wealth and hence no increase in wealth inequality.
  • Which is why tax-financed government expenditure should always be preferred to fiscal-deficit-financed government expenditure.

What alternative government have

  • The obvious one is wealth taxation.
  • Taxing away the private wealth created by a fiscal deficit leaves private wealth inequality unchanged at its initial level; it does not exacerbate it.
  • If the government is unwilling to impose higher wealth or profit taxes, it can raise GST rates on several luxury goods.

Consider the question “How fiscal deficit financed government spending differs in its impact on weath inequality from the tax-financed government spending?”

Conclusion

Thus, selling public assets to finance government spending is both undesirable and unnecessary.

Disinvestment in India

Initial Public Offer (IPO) of LIC

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IPO

Mains level : LIC disinviestment

The government has started the process to launch the initial public offer (IPO) of Life Insurance Corporation (LIC) within this year.

Read the complete thread here at:

[Burning Issue] Divestment of LIC

Try this question from CSP 2019:

Q.In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

  1. Ad Hoc Committees set up by the Parliament
  2. Parliamentary Department Related Standing Committees
  3. Finance Commission
  4. Financial Sector Legislative Reforms Commission
  5. NITI Aayog

Select the correct answer using the code given below:

(a) 1 and 2

(b) 1, 3 and 4

(c) 3, 4 and 5

(d) 2 and 5

About LIC

  • LIC is an state-owned insurance group and investment corporation owned by the Government of India.
  • It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
  • Over 245 insurance companies and provident societies were merged to create the state-owned LIC.

Why LIC IPO?

  • LIC is the largest investor in government securities and stock markets every year.
  • On an average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
  • LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects according to its Annual Report for 2017-18.

Biggest IPO in Indian markets

  • The finance ministry has invited bids from transaction advisors, including consulting firms, investment bankers, and financial institutions, for assisting the government in the preparatory processes leading to the IPO.
  • The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC, the country’s oldest and largest life insurer.

What is the size and position of LIC in the insurance market?

  • Even if the government decides to sell 5-10 per cent of its equity in LIC through an IPO, the share sale of LIC, which was set up in 1956, is expected to be the largest.
  • The insurer’s total assets had touched an all-time high of Rs 31.11 lakh crore in 2018-19, an increase of 9.4 per cent.
  • The Corporation realized a profit of Rs 23,621 crore from its equity investment during 2018-19, down 7.89 per cent from Rs 25,646 crore in the previous year.
  • LIC would have at least one transaction of IPO of a size of at least Rs 5,000 crore, or a capital market transaction of at least Rs 15,000 crore.

How does LIC fit into the overall disinvestment roadmap?

  • In the Budget 2020-21, the finance ministry had announced plans for IPO of LIC and a proposal to sell the government’s equity in the stressed IDBI Bank.
  • The government expects to raise Rs 90,000 crore through stake sale in LIC and IDBI Bank, and another Rs 1.2 lakh crore through other disinvestments.
  • LIC is also a majority shareholder in IDBI Bank.
  • The government had earlier listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago.

What benefits can be expected through the IPO?

  • An IPO will certainly bring in transparency into affairs of LIC since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges.
  • Investors can benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments.
  • LIC’s investment in various equity and bond instruments will come under greater scrutiny after its lists on the exchanges.

Back2Basics: IPO

  • IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
  • Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
  • A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares.
  • Through the IPO, the company gets its name listed on the stock exchange.

Also read:

Disinvestment Policy in India.

Disinvestment in India

[op-ed of the day] Strategic disinvestment does not deserve the criticism it gets

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Pros and cons of strategic disinvestment.

Context

Air India is on the block.

Why disinvestment is not such a bad idea?

  • Wisdom lies in the use of resources to meet the emergent needs: True wisdom lies in the use of resources, including the so-called “family silver”.
    • To meet emergent needs.
    • As also for better returns.
    • Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.
  • The weakening of Indian economy
    • This fiscal year’s second quarter growth in the gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent.
    • Private sector investment is sagging. Gross capital formation has dipped.
    • Aggregate demand has contracted.
    • Public sector expenditure is the single engine that’s driving economic growth.
  • Clamour for the government to open its purse and limited fiscal room.
    • Shrunk revenue growth: There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk.
    • Low direct tax collection: Direct tax collections registered a growth of only a little more than 6%.
    • The cautious approach by the RBI: The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc.
    • Commitment to low inflation: The political executive seems determined to honour its commitment to low inflation and macroeconomic stability.
    • India facing Hobson’s Choice: India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.
  • The liberalized markets and optimizing wealth.
    • Perception in the capital market: Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same.
    • Why should India suffer suboptimal wealth creation?: The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation?
    • Need to make policies aimed at value creation: Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created.
    • Stake sales can achieve value creation: For validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.
  • Not all private sector companies perform well: In those cases, the losses are not funded by innocent taxpayers.

Twin angles to welcome strategic disinvestment

  • One: The need for India to invest in fresh asset creation.
  • The fresh asset can be created by way of roads, ports and airports that would result in a cascade effect for the economy’s growth.
  • Two: The optimization of wealth generation from the country’s assets.
    • This, incidentally, will benefit individual shareholders, including employees with shares, who have invested in the equity of listed public-sector companies such as Bharat Petroleum.
    • Energy security of the country not harmed: As there are other state-owned petroleum companies undertaking exactly the same activities, such as refining and marketing crude oil, the sale of one company does not tamper with the energy security of the country.

Way forward

  • Caution against undervaluation: The government, however, must ensure that it is not taken for a ride. It must make a good judgment of the value of the company it decides to disinvest from and if the market conditions are not favourable for the move it must wait for the opportune moment.
  • Asset creation from the proceeds: Instead of using the proceeds from the disinvestment to fund revenue deficit the proceeds must be utilized strictly for new asset creation.

 

 

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.

Disinvestment in India

[op-ed snap] Making Air India’s disinvestment work

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Disinvestment in India

Mains level : Air India disinvestement

Context

Air India has witnessed a calamitous fall in the last four decades. 

Fall of Air India

    • It operated in a near-monopoly environment, but the pace of descent intensified when it faced competition. 
    • In the late 1990s, the airline’s service standards declined, and it was referred to as the Disinvestment Commission of India. 
    • It recommended dilution of government ownership to 40%. The effort did not succeed. 
    • After 2004, the descent was quick due to a series of reckless decisions, like the acquisition of aircraft in numbers far more than what it could afford or gainfully deploy; and the merger with Indian Airlines.
    • The airline was also weak due to doling out of seats by the administration to foreign airlines.

Lack of strategic direction

    • Air India’s precarious financial situation was first made public in June 2009 by the then-Chairman Arvind Jadhav. 
    • The government, instead of tackling the core problem, decided to focus on a financial package. 
    • The bailout package of over ₹30,000 crores, infused over an eight-year span ending 2021, has not helped Air India evolve into a robust carrier.
    • The airline’s survival depends on several factors: the induction of professional management with effective leadership, a sound financial package that does not come with political interference in its day-to-day operations, and unions allowing changes in work conditions and pays packages. 
    • In 2017, Niti Aayog recommended disinvestment. The government decided to not only retain 24% equity, it also wanted the acquirer to absorb a major chunk of the non-aircraft related debt. 
    • A proposal for sale has to suit the acquirer as much as the seller was thus overlooked. The offer found no takers.

Present situation

    • The government has put Air India for disinvestment. 
    • It is driven by the Centre’s anxiety to get rid of the airline. Thus, it can spare itself of the responsibility of further infusion of funds.

Way ahead

    • The government ought to ensure that it exits totally, giving freedom to the potential acquirer to transform it into a successful player. 
    • The cost of further infusion of funds if the exercise fails mustn’t be overlooked. 
    • As the product still commands a sizeable market share and has an extensive global network that no other Indian carrier can match, the government needs marketing skills.
    • All major stakeholders should be convinced that disinvestment is the best way forward. 
    • Only 1 in 9 passengers are currently patronising Air India. It will be only one in 12 in the next three years as capacity augmentation is undertaken by private airlines.
    • This competition cannot simply be matched by funds-starved Air India.
    • The government has to make a plan to address the medical-related concerns of serving and retired employees.

Conclusion

The disinvestment exercise this time should be thought of wisely and pursued with determination.  Only with it is linked to the prospect of transforming Air India into a robust carrier.


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Disinvestment

Disinvestment Policy in India.

Disinvestment in India

[op-ed snap] Push for the better

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Disinvestment

Mains level : Current disinvestment India - challenges

Context

The Cabinet Committee on Economic Affairs (CCEA) approved the strategic disinvestment of five public sector enterprises – Bharat Petroleum Corporation Ltd (BPCL), Container Corporation of India Ltd, Shipping Corporation of India, Tehri Hydro Power Development Corporation (THDC) and the North Eastern Electric Power Corporation (NEEPCO).

Disinvestment target

    • 1.05 lakh cr – The proceeds from the stake sales will help the Centre move closer to achieving its disinvestment target of Rs 1.05 lakh crore for this year.
    • Disinvestment so far – only Rs 17,364 crore or 16.5% of its budgeted disinvestment target is met, as per data from the Department of Investment and Public Asset Management(DIPAM).
    • Revenue shortfall – Centre is facing huge shortfalls in both direct and indirect tax revenues. Its gross tax revenues have grown by 1.5% in the first half (April to September) of the current financial year.

Current disinvestment

    • BPCL – Of the five companies, the stake sale in BPCL is likely to be the biggest. The sale will be of interest to both domestic firms and major international players. 
    • The government could fetch around Rs 63,000 crore from its stake sale in the company.
    • Adding proceeds from the sale in the Container Corporation and the Shipping Corporation, Centre may earn more than Rs 70,000 crore through these three firms alone. 

Challenges

    • Less time – With only four months to go, the stake sales may not be wrapped up by the end of the financial year. 
    • Other PSU buying – It should not be another case of public sector firms stepping in to buy these entities to bail out the government. 
    • Transfer of assets – The sale of THDCIL and NEEPCO to NTPC, is essentially a transfer of assets between various arms of the public sector.

Way ahead

    • Plan – The government should draw a more ambitious, better laid out, medium-term plan for disinvestment.
    • Not for revenues – It should not be approached as merely an arrangement for plugging its revenue gaps. 
    • Calendar – It should draw up a list of potential candidates and release an advance calendar, indicating the period of disinvestment. This would help draw in more buyers.
    • Use of proceeds – should be only for the creation of new assets, not to meet its revenue expenditure.

Back2Basics

Disinvestment Policy in India.

Disinvestment in India

[op-ed snap] How to set the sell-off ball rolling once again

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Disinvestment - various types

Mains level : Disinvestment challenges and Way ahead

Context

The government is drawing up plans to sell its stake in several state-run companies as part of its disinvestment programme for this financial year. 

Disinvestment

  • Several companies have been identified for the sale of minority stakes.
  • Some companies for strategic disinvestment—where the government reduces its ownership to a minority holding. 

Need for disinvestment

  • Half of this financial year is almost over. Of the ₹1.05 trillion disinvestment target set for 2019-20, only ₹12,357 crores, or 12%, has been raised so far. 
  • The government could anyways engineer one state-run company to buy the stake of another—like the ONGC-HPCL deal last year—or by having Life Insurance Corporation subscribe to share offerings.
  • Buch a strategy could erode the agenda’s credibility. 
  • It’s best if disinvestment is done to achieve efficiency aims. 
  • Firms that would perform better in private hands than the public should be allowed to change owners.

Making Disinvestments work

  • For better price realizations on shares, the government may be tempted to wait for market conditions to improve. 
  • But markets are subject to various vagaries, and there is no appropriate time for disinvestment. 
  • If a more efficient economy is the objective, then government equity should be offloaded regardless of market index levels. 
  • The government should resist imposing conditions that make stake sales unattractive. A strategic buyer of a firm would need a free hand to reorganize operations as it deems fit. 
  • In the case of Air India, the Centre had stiff riders on matters such as the retention of employees, mergers of ancillary businesses, and so on; it also insisted on retaining a 24% stake in the airline. 
  • With a heavy debt burden, Air India failed to attract even a single bid despite two attempts.
  • Disinvestment process demands clarity on its main goal.
  • It needs to be made investor-friendly.
  • Some state-owned companies need to be privatized outright, with no strings attached. 
  • The assurance that the government would cease to exert control may be necessary for prospective buyers to see value in taking over. 
  • Private turnaround plans often include staff downsizing; this should not pose a political problem. 
  • Profitable public sector units
    • sell-offs tend to meet even more resistance, mostly from employees who fear for their jobs
    • Many of these are likely to do better under private management. 
    • Investor appetite for such companies is likely to be higher. 
    • The successful sale of a high-profile profit maker could even generate enthusiasm for the entire programme. 

Way ahead

  • “The government has no business being in business”. Along with this, the state should focus on governance and not on activities that private parties are better equipped to handle. 
  • Companies that are vital to the state’s strategic interests cannot be sold off. But most businesses owned by the government surely can.

 


Back2Basics

Disinvestment Policy in India.

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