Why the govt should stop assuming any revenue from disinvestment

The government is sitting on a pile of dross which has a veneer of gold and nobody wants the dross while the govt can't sell the gold

Budget-making time is here. And as for the last two decades this year also the finance ministry will assume some revenue from disinvestment.

With a Rs 2.1 trillion disinvestment target and ballooning expenditure, the government must be looking at every asset it holds with an eye to monetise it.

The finance minister had said in her Atmanirbhar package that there will be not more than four public sector companies in even strategic sectors. Presumably, banking will be deemed strategic, which means most of the current seven large public sector banks and five smaller ones will have to be sold.

So during a discussion on the economy I asked if anyone would buy them and if so, which ones? The answer, unfortunately, was none, except perhaps the State Bank of India (SBI) which is not on sale.

No market

Everyone knows that there are three major reasons for this. Each feeds into the other, making the problem worse.

First, these banks have more liabilities than assets. This means far too much is owed to them, about half or more of which isn’t going to be repaid.

You can see the extent of the problem from the values at which they are trading. It is mostly negative. Even SBI was trading at just about Rs 210, and that before the lockdown, which is way too low for it.

In contrast, the shares of private sector banks are valued much higher. HDFC, for example, was at about Rs 883 just before the lockdown and has even climbed to Rs 1,308 as of last Friday. The market knows the score.

Second, many of the liabilities are hidden even from themselves, not to mention the Reserve Bank of India (RBI) which has been far too lax in its supervision. These banks have been indulging in ‘creative accounting’ for the last 20 years. The birds have come home to roost now.

And third, what these banks regard as assets are, in fact, liabilities. For example, they have too many physical branches, which in these days of technology driven banking, are a millstone round their necks.

The same goes for their employees because as many as 80 per cent of them are not required in an era when artificial intelligence is already doing the job.

Junk has no value

In a word, most of them are junk with no capital and staggering liabilities. It would be difficult to give them away free, let alone sell them.

The RBI has known this for a long time which is why, despite several recommendations by various committees since 1994 to sell them off it has preferred to merge them with each other. There has never been any other alternative.

In fact, even Air India is a better proposition which is why the government has almost decided to sell it off at what is called ‘enterprise value’. In Air India’s case, because it has completely eaten away its capital, this amounts to just the debt owed by it, which is around Rs 23,000 crore.

The question arises: if public sector banks and Air India are close to junk value, how much can the rest of the public sector enterprises fetch if the land on which they are built can’t be sold because no one knows who owns it? Their land was simply allotted by the state governments during 1955-80 when PSUs mushroomed. There is no clarity on the land’s legal status.

There is a story how the Ashok Hotel in the heart of Lutyens Delhi could not be sold by the Vajpayee government because there were no papers for the land. No one would buy it without a proper transfer of the title to the land.

The government is thus sitting on a pile of dross which has a veneer of gold. Nobody wants the dross, and it can’t sell the gold. That’s why it should stop assuming any revenue from disinvestment and take it as a windfall if it happens.

Twitter: @tca_tca