There is a need for a paradigm shift in the approach to disinvestment; the Government must detach it from budgetary constraints and tackle legacy issues

In a briefing following the presentation of the interim Budget for the financial year (FY) 2024-25 by the Finance Minister, Nirmala Sitharaman on February 1, 2024, Finance Secretary TV Somanathan stated that the "government no longer views disinvestment - fancy nomenclature for sale of Union government shareholding in central public sector undertakings (CPSUs) - from the perspective of balancing the budget". The statement is out of sync with Sitharaman setting a target of Rs 50,000 crore as proceeds from disinvestment for the FY 2024-25 though it wasn't mentioned in her speech.   

If, the government's intent was not to view it as an exercise in balancing the budget - as stated by the finance secretary - then, it made no sense to fix a target. Yet, setting a target for boosting non-tax revenue receipts means that it hasn't shed its age-old stance of linking this exercise with the budget.   

To plan for garnering resources from the sale of government shares in CPSUs is inherently flawed. This is because unlike tax revenue, which can be projected with a degree of certainty based on the existing tax rate and a reasonable assessment of the growth in nominal GDP, the same cannot be said about proceeds from disinvestment. In this case, a lot depends on the market scenario and, in particular, the perception of investors about the company in which share-sale is contemplated.

In cases where the strategic sale (it reduces the government's holding in the CPSU to below 50 per cent or privatization) is mooted, the Government faces a bigger challenge as apart from a favourable market, it needs bidders with deep pockets. The lengthy and cumbersome process of approval and bureaucratic red tape further undermines the chances of its kicking the ball rolling just around the time when the strategic investors are ready to put in their bets.

The Niti Aayog identifies companies for disinvestment which are then considered by the Core Group of Secretaries on Divestment (CGD), a long-drawn process by itself, which takes it to the Alternative Mechanism (AM) - a group of ministers, including finance, road transport & highways, administrative reforms, etc., - for approval. After AM's approval, the Department of Investment and Public Asset Management (DIPAM) moves a proposal for in-principal approval of the Cabinet Committee on Economic Affairs (CCEA).   

It is therefore not surprising that the Modi - government has missed its disinvestment targets ever since it started the process in 2015-16 with a particular focus on 'strategic' sales. Only during two years viz. 2017-18 and 2018-19, it achieved the target. That was primarily because, in those years, it had conducted two big-ticket sales of its shares from one CPSU to another. 

During 2017-18, the government sold 51.11 per cent of its shareholding in Hindustan Petroleum Corporation Limited (HPCL) to the Oil and Natural Gas Corporation (ONGC) yielding Rs 37,000 crore. In the following year, it undertook the sale of its 52.63 per cent stake in the Rural Electrification Corporation (REC) to the Power Finance Corporation (PFC) yielding Rs 13,000 crore. But, those sales can't be termed as strategic as the purchaser being another CPSU namely ONGC/PFC, the Government continues to have effective ownership over the divested entity viz. HPCL/REC.

For the current FY, while presenting the budget on February 1, 2023, Sitharaman had set a target of Rs 51,000 crore for proceeds of disinvestment. This has since been revised downwards to Rs 30,000 crore. Against this, as of February 1, 2024, the government has raised only about Rs 12,500 crore, and it is unlikely that even the revised divestment target will be met. 

At a fundamental level, disinvestment of the government's shareholding in a PSU is in effect sale of its assets. Therefore, receipts arising therefrom can only be treated as 'capital receipts' (CRs). While preparing the budget, it won't be logical to plan for receipts from this source in the same manner as it is done for revenue receipts (RRs) which are receipts generated from the day-to-day business activities e.g. dividends on shares held by the government. The government should change the track. It should unequivocally fall in line with what the finance secretary has indicated. It should pursue share sales 'independent' of the budget exercise.

The government's tax revenue is buoyant (for three years in a row since 2021-22, these have exceeded the BE) and it is getting higher dividends from CPSUs as also higher dividends from the Reserve Bank of India (RBI) and state-run banks. These positive trends should be good enough for managing fiscal deficits. Hence, its budget need not have to depend on proceeds from disinvestment.

The FM has referred to the approach to share sales outlined in her Budget speech for 2021-22. Under it, CPSUs are divided into two broad categories i.e. strategic and non-strategic. The strategic group covers atomic energy, space and defense; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. The non-strategic category includes all other sectors such as industrial and consumer goods, hotel and tourist services, trading, and marketing.

While, the government wants to sell CPSUs in the strategic sector with the caveat that at least one (and a maximum of four) will be retained in the public sector, it will privatize 'all' undertakings in non-strategic sectors. All loss-making undertakings in the latter category will be closed. However, it needs to unshackle the process from a host of legacy issues.  

Foremost, the majority ownership and control by the Government for several decades has ingrained in the bureaucrat a feeling of exercising command over the management of the PSU. Although things have improved under the Modi - dispensation (courtesy of its focus on a 'policy-driven state', and increase in 'transparency'), the basic ingredients remain intact. This mindset has to go.

Second, even after strategic sales, the government wants to remain in the driver's seat. This is amply reflected in a statement in Sitharaman's budget speech for FY 2019-20. She had stated the intent was to change the existing policy from "directly" holding 51 per cent or above in a CPSU, to one whereby its total holding, "direct" plus "indirect", is maintained at 51 per cent. This stance remains intact.  

Third, it remains inclined to use CPSUs for achieving other unrelated objectives. For instance, it uses fertilizer PSUs to ensure adequate availability of this politically sensitive agri-input in every nook and corner of the country. This has come in the way of taking up the strategic sale of nine CPSUs in the fertilizer sector (it falls in the non-strategic category) recommended for sale by the Department of Public Enterprises (DPE) and Niti Aayog

Despite, the deregulation of petrol and diesel prices way back in 2010/2014, the government continues to regulate their prices.

For this purpose, it rides piggyback on oil PSUs which control over 90 percent of the total sales. For this reason, the strategic sale of Bharat Petroleum Corporation Limited (BPCL) hasn't happened nearly four years after it was initially mooted in 2019-20.

Fourth, the government wants to use CPSUs to build infrastructure and invest in green transition to meet climate mitigation goals. While the argument is tenable, this doesn't undermine a case for vigorously pursuing strategic sales to maximize asset value besides involving the private sector in achieving climate goals. Modi should remove all legacy obstacles and de-bureaucratize the process of share sale.

(The writer is a policy analyst; views are personal)