Arun Jaitley's disinvestment act is looking better than Pranab's or Chidu's

Finance Minister Arun Jaitley needs to be complimented for correcting 20 years of a stop-go approach to disinvestment, where the Centre wakes up to the need to sell public sector shares only after half the year is over. Not surprisingly, disinvestment targets have been missed in most years, including last year, Jaitley’s first as FM.

The disinvestment department under Jaitley has now put in place an early-approvals process for year-round disinvestment, and, as things stand now, nearly 20 companies have been cleared for share sales of 5-15 percent each this year and the next.

This is needed because this year’s target is huge: Rs 69,500 crore from disinvestment and strategic sales (of which Rs 41,000 crore is from the former). It can’t be done by dusting up sales brochures plans in October.

Apart from the usual suspects – ONGC, Indian Oil and NTPC, which yield large chunks of cash at one go due to high valuations – this time we also have Bhel, NMDC, NHPC, Managalore Refinery, Rural Electrification Corporation, Power Finance Corporation, Nalco, MMTC, National Fertilizers, Rashtriya Chemicals and Fertilizers, Hindustan Copper, State Trading Corporation, India Tourism Development Corp, Engineers India, MOIL, and SJVN, according to a report in Business Standard.

Two reasons have held back finance ministers for milking the public sector cow for what it is worth in the past.

First, there was the need to maximise revenues – which meant waiting for market buoyancy before selling. This was the logic of waiting till September-October, which is the time when the markets normally start rebounding around Diwali, holding up till the budget in February.

Second, the fiscal process in the first six months tends to be slow, and revenue departments tend to start looking at trends in tax receipts and departmental expenditures only around the time when the process for the next budget starts kicking in.

This que sera sera attitude has ensured two negative outcomes: one, share sales never meet budget targets, and two, the fiscal targets for the year then focus on cutting plan and capital expenses, thus hurting the very growth that will drive future growth and tax revenues. From Pranab Mukherjee to P Chidambaram to even Jaitley in his first year, fiscal targets have been achieved by eating the seedcorn of future growth.

The early moves on disinvestment, and the Modi government’s instructions to ministries to bring forward spending to the first half of the fiscal year will hopefully reverse this foolish approach to fiscal targeting.

By keeping the disinvestment pipeline primed for year-round sales, revenues should start trickling in by the second quarter of the year, improving the ability of government to spend early and boost growth.

However, Jaitley would do well to create a more permanent vehicle for all-year share sales, for this revenue opportunity is going to be crucial in the next two years to boost government spending for reviving growth.

He should create a special purpose vehicle (SPV) owned 100 percent by government (the LIC could also be roped in to provide some of the share capital). This SPV can then buy the shares to be offloaded for future sale to investors and institutions. If market conditions are bad, this SPV can raise debt funds from the markets and LIC and buy public sector shares to help reduce the fiscal deficit. These shares can then be sold later, when market prices are better, with the resultant profits being shared between the government and LIC (or any other entity) equitably. This way Jaitley will also avoid opposition political bullets – which will surely come – to the effect that crown jewels were sold for a song to brokers and private interests.

On the assumption that public sector share sales will continue to be crucial to the fiscal arithmetic, Jaitley should also do two other things.

#1: Move the cabinet for granting near complete managerial autonomy, with taxpayer interests being protected by agreed medium-term performance goals. Managers can also be given Esops as part of their compensation for performance.

#2: Corporatise parts of non-corporatised public sector entities (like the production units under the Indian Railways, the excess land owned by public sector units, including ports, etc) and clean up the balance-sheets of the subsidiaries of entities like Coal India or ONGC so that these can also be put on the disinvestment block in future years.

Disinvestment is going to remain a cash cow for the government over the next few years. Jaitley should get the pipeline ready not just for this year and the next, but for the next five to 10 years.