Falling PSU disinvestment receipts as stark as higher govt capex for them

The Narendra Modi government’s engagement with public sector undertakings (PSU) has undergone a major change in the last 10 years. There are some obvious trends, and there are some that are not so obvious.

 

The rise and fall in receipts from disinvestment of government equity in central PSUs is one such obvious trend. It rose from 0.2 per cent of gross domestic product (GDP) in 2014-15 to a high of 0.6 per cent of GDP in 2017-18. But over the next few years, it fell steadily to just about 0.03 per cent of GDP in 2024-25. Importantly, the fall in disinvestment receipt since 2017-18 was sharper than the rise in the previous three years.

 

Disinvestment as a policy was launched in the early 1990s to bolster revenue and use the reduced government stake in PSUs to help enhance their autonomy. The central idea behind disinvestment was that the government should not be in the business of running businesses. Disinvestment was seen as part of a process towards the eventual privatisation of PSUs. 

 

Understandably, therefore, disinvestment became a politically sensitive idea. Barring a few years of the Atal Bihari Vajpayee government in the late 1990s and early noughties, when over a dozen PSUs were sold to the private sector, privatisation as an idea did not take off. Even disinvestment made only a slow and halting progress in the last three decades.

 

The formation of the Modi government in May 2014 gave rise to hopes of a faster implementation of a disinvestment plan leading to privatisation. There was a good beginning, with higher disinvestment in the early years of the Modi government’s first term, but in retrospect, it has proved to be a false start. 

 

In the last 10 years, only three PSUs have been privatised — Air India, Neelachal Ispat and Ferro Scrap Nigam. In 2021, the Modi government had decided to privatise half a dozen PSUs, but hardly any action followed. Instead, the government began infusing fresh equity into some of the PSUs like the Rashtriya Ispat Nigam, an enterprise it had earlier proposed to privatise.

 

The government, however, has been defending its policy shift, evident in a slowing pace of disinvestment. Its argument has been that it believes PSUs to be a source of value creation. The numbers, though, tell a slightly different and nuanced story.

 

The government’s total receipts from disinvestment and dividend from PSUs over this period of 10 years fell from 0.45 per cent to 0.25 per cent of GDP. This is the not-so-obvious trend in the Modi government’s engagement with PSUs. In contrast, the government has been increasing its capital allocations for PSUs through equity and loans in the last 10 years, from about 0.54 per cent in 2014-15 to about 1.66 per cent of GDP in 2024-25. This is an unprecedented increase. Ten years of the Manmohan Singh government saw PSU equity and loans rise at a much lower pace, going up from 0.53 per cent in 2004-05 to 0.61 per cent of GDP in 2013-14. 

 

The large increase in the Modi government’s contribution to PSUs by way of higher equity and loans to them is not unconnected with the massive increase in its capital expenditure plan over the last 10 years. From 1.6 per cent of GDP in 2014-15, the government’s capex rose to 3.1 per cent of GDP in 2024-25.

 

The fact is the government’s capex plan has managed to be as ambitious as it has been because it relied on its modified public sector strategy. Remember that the government’s infusion of equity and loans to PSUs is counted as part of its total capex plan. In 2014-15, total equity and loans to PSUs were estimated at ₹67,512 crore, accounting for just about 34 per cent of the Modi government’s total capex of ₹1.96 trillion. By the end of 2024-25, that share rose to 54 per cent, as PSU equity and loans were estimated at ₹5.48 trillion, out of a total capex of ₹10.2 trillion.

 

In sum, the government’s stated policy of treating PSUs as a source of value creation has given it very little additional revenue over the last decade. As a percentage of GDP, disinvestment and dividends from PSUs have declined. Instead, the government has been pumping in more resources into PSUs, which has in effect helped it sustain a steady rise in its overall capex plan. In retrospect, it appears that sustaining its support to PSUs through higher equity and loans was a critical ingredient of its overall plan to boost capital expenditure to revive growth, particularly after the Covid pandemic. As important as the shift away from disinvestment of government equity in PSUs has been the policy of using the public sector to revive the economy through higher capex.

 

Going forward, sustaining the government’s overall capex plan will continue to depend on strengthening the capital base of central PSUs. This route may have its own limitations, unless the government decides to explore new avenues for boosting its capex plan. 

 

  A clarification: Personal income-tax collections, according to provisional accounts of 2024-25, were 1.7 per cent lower than those presented in the revised estimate (RE), and not 6 per cent as mentioned in Perils of overestimates published on this page on June 11. The inadvertent error is regretted. A finance ministry note also points out that one of the major reasons for the 2.3 per cent shortfall in net tax revenue collections is “negative” receipts from integrated goods and services tax or IGST, which were estimated at zero in RE 2024-25. Against this, the actual collection was (-) ₹32,995.3 crore, mainly on account of excess settlement with the states.  

However, the Union government decided not to adjust this amount from the states in March to enable them to invest in projects that would spur growth, without concurrently reducing devolution to states on account of the non-recovery. Its decision not to recover the IGST dues provided the much-needed fiscal space to states at a time of stress on growth, without undermining the Union government’s fiscal performance. Even the increase in the Centre’s capital expenditure helped the states, as a large part of the rise was on account of higher zero-interest loans to them. 

 

The finance ministry note also points out that no last-minute brakes were applied on revenue expenditure, which was lower than the RE because of savings of ₹25,000 crore on account of conditional Finance Commission grants to states (which did not submit their claims or failed to meet the conditions), ₹20,000 crore of savings in interest payment demand, ₹18,000 crore of savings on account of various centrally sponsored schemes for which states did not need extra resources, and ₹8,000 crore of savings due to non-utilisation of funds meant for micro, small and medium enterprises, as loans given to them during the Covid years did not turn non-performing assets and those funds were not needed.