Disinvestment in Indian context

Disinvestment is a milder word for Privatization of public sector enterprises in India. For some, this word has become synonymous with reforms. When the FM Mr. Pranab Mukherjee will raise to present the Indian budget for 2010-11, Disinvestment will figure in it for sure – But does this mean will it be a dosage of reforms? May be or may be not. I have thought about this many times and the eve before budget is the best time to pen down my thoughts!

When India went the reforms way in 1991, the reason was pressure from IMF and not to actually encourage/promote private sector participation, though that was a beneficial (IMO) side-effect. Economic Reforms took some sort of a shape under the 2nd NDA Govt. The following is a quote from Wiki: (Source):

Vajpayee’s administration earned the ire of many unionized workers groups and government workers for their aggressive campaign to privatize government owned corporations. Vajpayee promoted pro-business, free market reforms to reinvigorate India’s economic transformation and expansion that were started by former PM Narasimha Rao but stalled after 1996 due to unstable governments and the 1997 Asian financial crisis. Increased competitiveness, extra funding and support for the information technology and high-tech industries, improvements in infrastructure, deregulation of trade, investments and corporate laws – all increased foreign capital investment and set in motion an economic expansion. These couple of years of reform however were accompanied by infighting in the administration and confusion regarding the direction of government.

So, a lack of direction on Disinvestment has been a major issue ever since then and it is sad that we are not any bit wiser today after about 6 years of UPA rule. The Govt. remembers disinvestment when there’s a huge deficit which is deterring growth – so the easy way out is to sell “Family silver” as our Commie friends say. Consider the recent privatization of NTPC and other Govt. companies which yielded about 3.5b$. The FPO had lukewarm response from Retail investors. Arun Shourie summarized it superbly in an interview with MoneyControl (Source):

I sincerely hope that the programme will succeed because the government’s finances over the last few years were managed in such a way that deficits have reached proportions which cannot but lead to great problems for the country. We are seeing inflation, we are seeing the pressure on interest rates. So I sincerely hope that the programme will succeed. I am as disappointed as you are about the retail response. NTPC is one of our strongest companies.

I personally believe that power will be the next telecom sector in the country in leading growth and the reason why this probably has happened though we should hope that in this or in subsequent issues retail investors will get confidence and buy these, the reason why this disappointing response has happened is probably that this has been seen not as part of a reform programme of the government but as a measure of government offloading its equity only to raise resources to plug-in the deficit. That is always a reason why the retail investors do not get confidence.

What we need here, as Shourie had pointed out, is a statement of intent from Govt. that it is genuinely interested to improve the quality of public sector operations by actively involving the private sector. Not only would this give a fillip to the private sector by providing it with new opportunities, it would also serve to improve the the operational efficiency of these public enterprises. Above all the proceeds from this exercise would be credited to the National Investment Fund which could be used for better purposes than funding the black hole of fiscal deficit. This may sound very idealistic, but this is the need of the hour and with the kind of mandate UPA has for this term, it would be fantastic if the Govt. pushes through with Disinvestment for the right purposes.

P.S.: But, how will the fiscal deficit be brought down to the 3% levels as indicated in the FRBM act. I don’t think the FM will be addressing it concretely tomorrow. But most commentators and analysts have aired their views on taming the deficit and I’ll write about them in the next post.