One of the key prerequisites for any country aspiring for sustainable economic development—government’s firm willingness to cede control in public sector undertakings (PSUs) and bring in more private participation—is finally taking place in growth-starved Indian economy. In a late night announcement on Wednesday, the Union Cabinet approved the sale of government's stake in blue-chip oil firm BPCL, shipping firm SCI and onland cargo mover Concor, besides promising to reduce shareholding in select public sector firms below 51 percent.
At the current market price, the government can realise close to Rs 80,000 crore from the sale of stake in just these three firms. Bharat Petroleum Corporation Ltd's (BPCL) 53.3 percent stake will fetch about Rs 63,000 crore, sale of 63.7 percent in Shipping Corporation of India (SCI) will get Rs 2,000 crore while Rs 13,400 crore can be raised from Concor’s 30.8 percent stake. The government will also sell its entire stake in Tehri Hydro Development Corp of India and North Eastern Electric Power Corporation (Neepco) to NTPC.
The stake will be brought down in select PSUs to 51 percent while retaining the management control on a case-to-case basis, the government said. According to reports, a number of oil companies in the Middle East have already approached the government expressing interest in purchasing BPCL stake including the likes of Saudi Aramco, Rosneft and Kuwait Petroleum.
One thing is sure. The government’s messed up fiscal math just got a face-saver. The government was struggling to meet the slated fiscal deficit target of 3.3 percent in the current fiscal on account of lower-than-expected revenues and expenditure pressure. Especially after the massive cut in corporate tax rates in September, economists were quite sure that the government will miss the fiscal deficit target.
On the disinvestment-front, the government was lagging far behind the target. Against a target of Rs 1.05 lakh crore, the government has so far managed only Rs 12,359 crore by way of disinvestments. If the mega plan goes as scheduled, that will offer big relief to the government adding close to Rs 80,000 crore to its coffers if not more. That will help move closer to the fiscal deficit target. If the government follows up this approach in other PSUs as well, such as LIC and public sector banks, it can unlock a huge value and bring in more private participation.
No doubt, the mega disinvestment push is positive for the economy and will bolster investor sentiments. The move will be seen as the government’s willingness to embrace a major privatisation drive and free up the economy from government control. In fact when Narendra Modi first came to power at the Centre in 2014, one of his key promises was to usher in privatisation in the economy.
“Government has no business to be in business,” the prime minister had said. But what has happened so far was not up to that promise.
The government’s consolidation drive seemed to end with merging weak banks and pushing one PSU to acquire another. Recently, Union Finance Minister Nirmala Sitharaman had announced a mega bank merger. In one shot, the government decided to merge ten public sector banks (PSBs) into four to gain size. This took the total number of PSBs to 12 from 27 banks in 2017.
Besides these mergers, the finance minister also announced governance reforms for the PSBs. This was no solution to the problem faced by PSUs. As Nobel laureate Abhijit Banerjee said, "The government should have tried to sell off loss-making PSUs instead of merging them."
Nevertheless, Wednesday's announcement of strategic sale in five PSUs including BPCL, gives hope that Modi’s old promise will be kept this time. That’s indeed good news for the economy.
What does this major disinvestment drive mean for a slowing economy? It is unlikely that the privatisation drive will help the economy on a decline in a big way. The current phase of the economic slowdown is mainly on account of consumption slowdown. To address this, there need to be more structural reforms mainly, land and labor reforms. The government needs to spur individual consumption by putting money in the household kitty to spend more. The general sense among economists is that the Indian economy, slated to grow below 5 percent in the second quarter, is unlikely to have a quick recovery.
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Updated Date: Nov 21, 2019 12:47:25 IST