Not real disinvestment

Buybacks are hardly the way to exceed targets

The government has beaten its disinvestment target. This is so unusual an occurrence that it deserves a closer look. After all, successive Union Budgets have tended to set ambitious targets for revenue from the sale of state assets and have then under-performed. If that has now changed, then it reflects considerably to the credit of the central government. However, a closer look throws up one or two questions. For one, this is not the original disinvestment target from the 2016-17 Union Budget that is being met or surpassed; this is a “revised” target that was introduced when the Union Budget for 2017-18 was presented in February. At that time, Finance Minister Arun Jaitley had lowered the disinvestment target from Rs 56,500 crore to Rs 45,500 crore. It is this lower target that will be achieved by disinvestment receipts in 2016-17.

There are other, more worrying questions that should be asked. Their answers will reveal the government’s actual attitude to disinvestment and privatisation. For one, what has happened to the outright sale of public sector units, actual privatisation, in which the government gives up control? Even in the revised disinvestment target, “strategic stake sales”, as they are called, were supposed to account for Rs 5,500 crore. This was down from Rs 20,500 crore in the original target given in the Budget for 2016-17. But even the scaled-down target has not been met. It is not clear whether the Cabinet’s decision in October 2016 to permit some privatisation has been followed through at all. The choices and timelines for privatisation of public sector units continue to be very unclear.

Even the nature of the disinvestment actually carried out poses questions. Buybacks of shares by state-controlled public listed companies accounted for more than half the revised disinvestment target. The companies that conducted the buybacks include NMDC and Coal India Limited. But buybacks are hardly the same thing as disinvestment. A buyback essentially means the government is selling its shares to an entity that it continues to control, rather than to the wider public — juggling from one hand to the other. It seems like just another way to transfer resources from cash-rich public sector units, particularly in the commodities space, to the government so that it can spend on its priorities. In the past, the government has used other methods to achieve the same aim, such as special dividends. Arbitrarily using the cash reserves of public sector units to bridge gaps between current spending and revenue in the government’s budget is not advisable. It is poor corporate practice as well. The managements of well-run and independent companies should have the option to hold on to cash until they find profitable and attractive investment opportunities. The government has also issued guidelines that restrict public sector companies’ ability to decide on exactly how they should pay dividends; now, state-owned companies have to consider net worth when paying dividends and not just profits. They must pay whichever is higher of 30 per cent of net profit or 5 per cent of net worth. This runs counter to the real logic of disinvestment to reduce government control over the economy, and to increase the independence and market discipline of the public sector. Whether or not diminished targets are met hardly matters in this context.