The new Govt is overhauling India's disinvestment policy. It is supporting non-profit enterprises, and maintaining a strong presence of State-run firms in strategic sectors

The new National Democratic Alliance (NDA) government led by Prime Minister Narendra Modi is reviewing the existing disinvestment policy to shift its focus from selling central public sector undertakings (CPSUs) to 'prudent public wealth management (PWM), supporting not-for-profit enterprises, and ensuring strong presence of state-run firms in strategic sectors'.

A CPSU is an undertaking in which the Union government has majority share holding meaning it holds more than 50 percent of its shares. Disinvestment is fancy nomenclature for sale of these shares to private investors. When, disinvestment results in reduction of the government's shareholding in the CPSU to below 50 percent and concomitant transfer of ownership and management control to private entity, this is termed as   'strategic' disinvestment or privatization.

The extant policy on disinvestment was announced by the Union Finance Minister, Nirmala Sitharaman in her Budget speech for FY 2021-22.

Under it, CPSUs were classified 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 viz. industrial and consumer goods, hotel and tourist services, trading, and marketing and so on. The government's intent was to sell all undertakings in the strategic sector with the caveat that at least one (and a maximum of four) will be retained in the public sector. 

As for undertakings in non-strategic sectors, it wanted to reduce its shareholding to below 50 percent in 'all' of them. Put simply, they would all be privatized. All loss-making undertakings in this category would be closed.

Also tagged to this policy was government's intent to use the proceeds from disinvestment for meeting its fiscal deficit (excess of total revenue over total expenditure) or FD target. This part was a continuation from the past when the Modi - government started selling its shares in CPSUs in 2015-16 with particular focus on 'strategic' disinvestment.

In the backdrop of devastation caused by Covid-19 pandemic and debilitating effect on its finances during 2020-21 (in that year, FD had scaled to 9.2 percent of GDP), in the budget for 2021-22, Sitharaman had put even greater reliance on proceeds of disinvestment by setting an ambitious target of Rs 175,000 crore. During that year, the government had planned big ticket disinvestments such as Bharat Petroleum Corporation Limited (BPCL), IDBI Bank, NMDC Steel and Shipping Corporation of India (SCI) and so on.

But, the process has remained stuck in the slow lane even as the targets of proceeds from sales were missed year-after-year. 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 percent 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 percent 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.

The results during 2021-22 and 2022-23 were particularly disconcerting. During 2021-22, against a target of Rs 175,000 crore, the actual proceeds from disinvestment were a meager Rs 15,440 crore. During  2022-23, against a target of Rs 65,000 crore, the actual was nearly half at Rs 31,059 crore. For 2023-24, the FM had lowered the target to Rs 51,000 crore which during the course of the year was further revised downwards to Rs 30,000 crore. Even against this, the actual proceeds were a meager Rs 14,564 crore.

What does the interim Budget for 2024-25 say?

In a briefing following the presentation of the Budget by Sitharaman on February 1, 2024, Finance Secretary TV Somanathan had stated that the "government no longer views disinvestment from the perspective of balancing the budget". Can it be taken to mean that it has shed its age-old stance of using proceeds from share sale for reducing FD. The answer is 'No' as it has set a target of Rs 50,000 crore for 2024-25 under the head "miscellaneous capital receipts" which includes disinvestment proceeds besides receipts from asset monetization.

The very idea of 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 is mooted, the Government faces a bigger challenge as apart from a favorable 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).

In view of above, the government shouldn't put any number to receipts from share sale while preparing the budget as the end of the year, slippage is inevitable.

Even so, the government's tax revenue is buoyant (for three years in a row since 2021-22, these have exceeded the target) and it is getting higher dividends from CPSUs as also higher dividends from the Reserve Bank of India (for its FY 2023-24, the RBI has made a huge dividend transfer of Rs 210,000 crore to the Centre for latter's use during 2024-25) and public sector banks (PSBs). These positive trends should be good enough for managing fiscal deficits; hence, no need to depend on 'miscellaneous capital receipts'.

What happens to strategic sale?

From the emphasis on public wealth management (PWM), strong presence of state-run firms in strategic sectors, one gets sense that the government has completely abandoned the path of privatizing CPSUs in these sectors. As it is, under the 2021-22 policy, it had intended to      retain at least one (and a maximum of four) undertakings in the strategic sector. Now, it seems it won't privatize even one. The government's  decision to drop its plan for sale of BPCL which was on its agenda since 2019-20 is an indication of things to come.

Changing horses midstream won't be in the best interest of the country. Fundamentally, the State shouldn't be in the business of running enterprises. There always remains a risk of political interference and bureaucratic red tape which can seriously hamper the working of CPSUs. The government should continue the process of share sale and focus on de-bureaucratizing it.

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