Divestment Dilemma

Government will have to understand that   

diluting government control on PSUs by stake sales or getting them to divulge their profits as bonus is not the way to fund fiscal deficit.

With another fiscal year coming to an end in three months, the government is staggering hard to achieve its divestment target in public sector undertakings. Divestment in PSUs is important for maintaining the budgeted level of fiscal deficit but given the unfavorable market conditions at present and general elections looming in, a successful divestment program is highly unlikely. That government has 5,000 crore in its kitty with 40,000 crore to garner before the end of FY 14, is of ample proof how serious it has been to achieve this target.

Ideally the purpose behind divestment is to scale up the efficiency of firms by privatization. As per Anshuman Tiwari, the economic analyst and financial editor of Dainik Jagaran, “There is history of debates in India on purpose of PSU divestment. Divestment is the process to infuse efficiency in PSUs via reduction in government control and making them widely held but lately governments have been employing it to raise funds when they fall short of revenues to meet its fiscal deficit target.”


Government is supposed to maintain fiscal deficit at 4.8% of the GDP in FY 14. But with Petroleum Minister M. Veerappa Moily refusing to divest in nation’s largest oil firm Indian Oil Corporation and trade unions of Coal India Ltd. still adamant on not agreeing to stake sales in coal behemoth, this target now seems implausible to attain. The government had also conducted promotional roadshows back in October 2014 in US, UK, Hong Kong and Singapore to lure overseas investors but to no avail.

Disinvestment in CIL and IOC can fund major chunk of target. That they are refusing to divest is not their adamancy but government’s fault as it awoke at eleventh hour, that too without accommodating favorable market conditions. As long as the ambiguity over environmental clearances of coal blocks wouldn’t resolve, CIL shares wouldn’t attract investors. Also, government will have to try hard to convince CIL trade unions who wouldn’t allow diluting its government holdings. Oil Ministry is not entirely against divestment in IOC but doesn’t want to sell shares at throwaway prices. With the uncertainty over fuel subsidy formula, high under recoveries and crude oil prices going up, the share value of IOC which is languishing at five-year low doesn’t seem to prop up any time soon.

With its effort for stake sales availing no fruit, government is now mulling over asking PSUs to offer special dividends. Special dividends are the portion of company’s profits which it distributes among its shareholders. “Financing fiscal deficit via dipping into reserves of cash rich public behemoths is an old trick. Government is likely to go for it because genuine divestment is just impossible”, said Mr. Tiwari. Ideally special dividends from PSUs should be divulged on company’s volition but the way government is going ahead with it on the name of divestment is wrong on its part.

Recently foreign brokerage Barclays stated that government will have to cut expenditure by up to Rs. 1 lakh crore in the remaining part of the ongoing fiscal year (FY14) if it is to meet the budgeted fiscal deficit target. No brainer that government would not do that with general elections round the corner. It is exhorting for everything but to reduce expenditure. Government will have to understand that diluting government control on PSUs by stake sales or getting them to divulge their profits as bonus is not the way to fund fiscal deficit. Profligacy and populism lasting for entire year has to be replaced by prudence. That is the only way to avert year-end frenzy around meeting divestment target.