Not by cosmetic changes alone

Disinvestment can get a shot in the arm by ministerial revamp, not by just a nomenclature change

Last week’s Interim Budget made an interesting classification change that many people may not have noticed. Disinvestment, as a receipt item, did not figure as such in the Budget documents. Earlier, disinvestment would be a separate entry under the broad head of miscellaneous capital receipts. However, in the Interim Budget for 2024-25, the practice of showing a separate entry for disinvestment was done away with. The numbers shown against miscellaneous capital receipts were instead presented as what the government hoped to receive from the sale of government equity in public sector undertakings (PSUs).

Thus, instead of a projected disinvestment receipt of Rs 61,000 crore (including Rs 10,000 crore from asset monetisation) in the Budget Estimate for 2023-24, the Revised Estimate for the current year showed that an amount of only Rs 30,000 crore was received under miscellaneous capital receipts. The Budget Estimate for 2024-25 also did not refer to disinvestment but showed Rs 50,000 crore to be collected under the same head of miscellaneous capital receipts.

What could have been the reason for this change? Does this signify any qualitative shift in the Narendra Modi government’s approach to disinvestment? When a senior finance ministry official was asked about this change, his explanation indicated that the government was indeed exploring a fresh approach to disinvestment. The official said: “We have not kept a fixed target for divestment…We need to have a new paradigm in terms of thinking and not just keep on parting with the wealth in one stroke. We can always do it in a gradual, calibrated way.”

India appears to have come a long way as far as disinvestment of government equity in PSUs is concerned. The experiments with disinvestment began over 32 years ago in 1991-92 during Manmohan Singh’s tenure as the finance minister, and the idea of disinvestment was mooted as one of his many reform-oriented steps.

While reforming PSUs through such disinvestment by making their managements a little agile and more responsive to market forces may have been the underlying spirit, an equally compelling reason for such minority sale of government stake in them was to shore up revenue for the government, whose finances were in a poor state.

The Narasimha Rao government needed to mobilise revenue from all possible sources to bring down its fiscal deficit to a sustainable level, not least because international financial institutions, including the International Monetary Fund (IMF), would have released more funds only after they were convinced of the Indian government’s commitment to taking credible steps towards reducing the fiscal deficit, which in 1990-91 had ballooned to 7.6 per cent of gross domestic product (GDP).

Indeed, it was a major victory for Indian finance ministry officials during their negotiations with the IMF when the latter relented and allowed the government to count its disinvestment revenue as capital receipts and use that to bridge the deficit. The IMF had initially argued against using disinvestment receipts to calculate the government’s overall revenue. Although that battle was won then, it gave rise to a problem with the way disinvestment began to be pursued by successive governments over the following three decades.

Governments have periodically used disinvestment more as an instrument to reduce the deficit rather than to do away with government ownership of enterprises, upholding the economic principle that the government should not be in the business of running businesses. This includes gradually imparting management autonomy to PSUs following disinvestment and forcing them to face market forces and fend for themselves.

Not surprisingly, disinvestment began in 1991-92 in a half-hearted way with the sale of government equity being restricted only to state-owned financial institutions, so that its critics could not argue that the so-called family silver was being sold to private entities. Over the years, this hesitation was overcome as government shares in PSUs began to be sold directly to private entities. The United Front government even set up a Disinvestment Commission, based on whose recommendations plans for aggressive disinvestment were mooted.

During the years of the Atal Bihari Vajpayee-led government, disinvestment took a giant leap with many PSUs being privatised. Since then, the pace of disinvestment has slowed, and in the last two decades only one PSU has been privatised. Inter-PSU sale of shares often contributed to the government’s disinvestment receipts. Indeed, in the last 32 years, the government of the day has managed to achieve its disinvestment target only in eight years. The highest disinvestment receipt in all these years was achieved at 0.8 per cent of GDP in 2007-08, and in only five years were such receipts higher than 0.5 per cent of GDP.

So, what kind of a new approach to disinvestment will help improve its performance? Surely, merely changing the nomenclature in the Budget documents will not be enough. Instead, the new government that presents the full Budget for 2024-25 in July this year should be ready to restructure the way disinvestment is managed and implemented. Here are two approaches that the government could adopt.

One, the NITI Aayog document on public sector policy should be taken seriously by the new government, and barring the few strategic PSUs, as recommended there, all other PSUs should be placed under a five-year time-table for disinvestment or privatisation depending on the market opportunity and suitability of the entities involved. A five-year plan would allow the government to plan the sale of shares in a way that fluctuations in market prices do not become a hindrance.

Two, all PSUs from which the government believes it should exit should be brought under the administrative control of a new ministry. The department of disinvestment was created in December 1999 and less than two years later it was converted into an independent ministry. Indeed, that was also the period when several PSUs were privatised. In May 2004, the disinvestment ministry was downgraded to a department and made part of the finance ministry. Subsequently, the disinvestment department was renamed. However, the pace of disinvestment or privatisation has remained slow.

It is time to set up a disinvestment ministry once again and delink it from the finance ministry. More importantly, the administrative control of all PSUs, whether to be privatised or have their shares sold, should be transferred to the new disinvestment ministry. Disinvestment and privatisation should not be undertaken by the finance ministry, but entrusted to a different ministry that has no obligation to raise more revenue to bridge the deficit. That will be the surest way to delink disinvestment from the government’s revenue-raising obligations.