Disinvestment in a recessionary economy

Amit Saha

(The author is an Assistant Professor of Commerce in Assam Don Bosco University and can be contacted at amitsahaghy@gmail.com)

Indian economy travelled across multiple phases since independence due to polarized economic policies of different administrators and leaders. Political ideologies have always impacted business policies and have sometimes hindered the smooth pace of development. In 1947 when India attained Independence, the economy was in shambles. Various revival policies were introduced over the years which mainly targeted at protecting the domestic industry and strengthening the public sector. But down the years it had only been found that a large number of public sector units were either underperforming or were making huge losses. 1991 saw a radical change in the economic scenario as the economy was opened up to the private sector for investment. The number of industries reserved for the public sector was reduced from 17 to 8 and new disinvestment policy was introduced which permitted selling up to 20% share in profit making public sector units. However, a major set aboutIndian economy travelled across multiple phases since independence due to polarized economic policies of different administrators and leaders. Political ideologies have always impacted business policies and have sometimes hindered the smooth pace of development. In 1947 when India attained Independence, the economy was in shambles. Various revival policies were introduced over the years which mainly targeted at protecting the domestic industry and strengthening the public sector. Bubegan only in 1999 when a separate ministry of disinvestment was set up which was further remodelled in 2016 and named as Department of Investment and Public Asset Management (DIPAM).

In 1951, there were five public sector enterprises in India which increased to 348 in March 2019 with a total investment of around Rs. 16, 40, 628 crore. During the year 2018-19, the net profit from all Central Public Sector Undertakings was Rs. 1,42,951 crore. Enterprises in coal, power, petroleum and natural gas made a substantial amount of profit while enterprises in Civil Aviation and Telecommunication suffered huge losses. The Department of Telecommunications reported a loss of Rs. 18,159 crore with BSNL alone making a loss of Rs. 14,904 crore. The loss reported under the Ministry of Civil Aviation was Rs. 6,504 crore with Air India at Rs. 8,474 crore while Airport Authority of India reported a profit of Rs. 2,271 crore.

Over the past few years there is a dedicated effort towards disinvestment of several PSUs. The government has raised around Rs. 2,79,622 crore from the disinvestment of public sector undertakings (PSUs) during 2014-19. It is expected to meet the fiscal deficit and also improve the efficiency of PSUs. The resources at the disposal of the government is limited and these funds can be directed towards social security schemes like health, education etc., and also towards development of infrastructure. However, it has been seen that in 2017-18, the amount raised through disinvestment was Rs. 1,00,056 crore which fell down to Rs. 84,972 crore and Rs. 50,298 crore in 2018-19 and 2019-20 respectively. Although, the government has set a disinvestment target of Rs. 2,10,000 crore during 2020-21, the global recession and the pandemic have affected the process of disinvestment as it can be visibly seen to miss the targets. There are a lot of infrastructure projects in hand and the disinvestment process is expected to fund those development as well as social projects. The pandemic has brought in high instability in businesses all across the globe and disinvestment is further expected to contract.

Another aspect has often raised eyebrows regarding the disinvestment of profit making PSUs. The strategic disinvestment approach which included selling stakes in public companies to raise revenue but retaining management control has seen significant changes with three profitable companies namely Bharat Petroleum Corporation Ltd. (BPCL), Container Corporation of India and Shipping Corporation has been put for 100 per cent disinvestment. This is expected to give a major boost to fulfil the disinvestment targets but it will still be short of target. The concern, however, doesn't end there as the pandemic has caused major damage to the private sector and thus even if the offer for sale is made there is a doubt if these shares would be subscribed. The proposed 100 per cent disinvestment of Air India is yet to happen with the Government further extending the last date for expression of interest by another month. The disinvestment of LICI by 5% is expected to gather around Rs. 50,000 crore but considering the market scenario it is again feared that the shares might go unsubscribed. Quite contrary to its planned disinvestment, the government has also decided to withdraw the exemption allowed on insurance premium under Section 80 of the Income Tax Act which might affect the business of LICI as people opting for insurance policies for tax savings would start looking up for other options. LIC is one of the most reliant and dominant profit-making entities owned by the state which channelizes investible funds to different productive sectors and the government is trying to capitalize out of its brand value. But it is feared that the situation would lower the valuation of the shares in order to proceed with the sale. The market rates are subject to the forces of demand and with the economy lurking on recession there is a constant fear whether the demand would rise or it would fall further. Disinvestment under such unfavourable circumstances would tend to lower the prices and stakes might be sold off at an unfair consideration. Another significant aspect is the stability of the private sector in such tough circumstances and positioning India ahead of China as an investment destination and manufacturing hub. It could be the time for the public sector to get into strategic alliances banking on its stability and efficiency in order to ensure unaffected supply chain as an alternative to our neighbouring country.

It is undeniable that disinvestment has its strong pros especially with regard to operating efficiency and profitability and it is often argued that it ensures sustainability in profit making PSUs as well yet it cannot be denied that the Government would under such circumstances lose its chances to fit under unfavourable conditions for the greater interest of the people. The sudden rush to fulfil its disinvestment target even at the time of such an economic crisis may backfire and put the economy in a poor light. Strategic disinvestment must be stressed further with increased public private partnership with the government holding the majority share and playing a regulatory role while the operations are handled by private management. The economic disparity in our country is still too high for the people to adjust with the free forces of demand and supply. The need of the hour is to strengthen the economic condition with active but limited private participation and strict government control. Although, it is understandable that the economy needs a good amount of resources for various infrastructure and social welfare projects in light of the increasing fiscal deficits yet it is questionable whether it is necessary to push sell both profit-making and loss-making PSUs in this recessionary phase.