In several areas, Modi – government has continued with the policies and programs of the erstwhile UPA – dispensation and has unquestionably bettered upon in implementation and deliverable; for instance, Mahatma Gandhi National Rural Employment Generation Program [MGNREGP] and disbursement of LPG [liquefied petroleum gas] subsidy. Yet, there is one area where the former continues with latter’s legacy with no better outcomes. This has to do with “strategic” disinvestment of Union government’s shares in public sector undertakings [PSUs].
It may be recalled that in its previous incarnation under Vajpayee, the BJP-led NDA dispensation [1998-2004] had vigorously pursued strategic disinvestment, some of high profile cases being Modern Food Limited [MFL], Hindustan Zinc Limited [HZL], Bharat Aluminium Company [BALCO] etc. The UPA – government which took charge in 2004 abandoned this route and during its decade stint, had used proceeds from share sale to plug the fiscal deficit.
Initially, Modi – government gave an indication that it was serious about strategic sale. Thus, in the union budget for 2015-16, finance minister, Arun Jaitely provided for Rs 28,500 crores from this route out of total divestment proceeds of Rs 69,500 crores. Likewise, in his budget speech for 2016-17, he projected Rs 20,500 crores as proceeds from strategic sale out of a total of Rs 56,500 crores. But, there was little to show in terms of actual performance.
During 2015-16, not even a single case of divestment through strategic route was pursued even as the overall proceeds by itself was less than half of the target. As regards 2016-17, Jaitely has taken recourse to quite a bit of financial engineering [reminiscent of what Chidambaram used to do under UPA – dispensation] to put up a seemingly impressive performance even though results are disappointing.
While, presenting budget for 2017-18, he lowered overall divestment target for 2016-17 from Rs 56,500 crores to Rs 45,500 crores – a dip of Rs 11,000 crores. The target for strategic sale was reduced even more sharply from Rs 20,500 crores to a meager Rs 5500 crores. This meant a corresponding hike in target for proceeds from non-strategic route from Rs 36,000 crores to Rs 40,000 crores.
The government may now feel elated having achieved Rs 45,500 crores, but this does not instill confidence. To revise a target when 10 months of the financial year have already elapsed and then, to measure the performance against this revised figure makes a mockery of the entire exercise. In respect of strategic sale, even the revised measly number of Rs 5500 crores has not been achieved.
What makes the scenario even more pathetic is that more than half of divestment proceeds have come from ‘buyback’ of shares by select PSUs viz. Coal India Limited [CIL], National Mineral Development Corporation [NMDC]. Buyback of shares by the company is not divestment which would happen only when the government sells shares to the public leading to reduction in its ownership. Instead, it has done some jugglery to garner resources for itself even while retaining majority control in the PSU.
Last year, Jaitely had asked NITI Aayog to come up with options for divestment of government’s equity in PSUs. The Aayog submitted two reports viz., (i) one dealing with loss making PSUs; (ii) for undertakings where strategic sale can be made. Under (i), it mooted sale of assets especially land and buildings. For category (ii), it opined that the government can enhance value by bringing in a strategic partner [this may also include some loss making PSUs].
Under this concept, the intent is to transfer a sizeable portion of ownership and management control to an investor [call him ‘strategic’ investor] by selling commensurate shares. Apart from much needed capital, he/she can bring in technology, management skills, intellectual property and other resources that can help transform the way a PSU is run, make it grow faster and enhance its competitiveness in an increasingly challenging world.
In a trans-formative sense, the government could also relinquish majority ownership and control by reducing its holding to below 50% or privatization in plain words. Clearly, the think tank did not rule out this possibility. But, it would appear that the finance minister has given a slip shod to the very idea of strategic divestment. There could be two plausible explanations for this.
First, having initiated reforms with emphasis on ‘minimum government and maximum governance’ and the philosophy being extended to its agencies including PSUs [that includes granting full autonomy to their managements] as well, Team Modi feels confident that they can maintain their competitiveness even with majority ownership and control remaining with government. Hence, there is no need for even inducting a strategic partner to run the show, forget outright privatization.
This is also corroborated by a decision of the union cabinet last year. It approved revival of sick plants of Fertilizer Corporation of India Limited [FCIL] at Sindri [Jharkhand] and Gorakhpur [Uttar Pradesh] besides Barauni [Bihar] unit of Hindustan Fertilizer Corporation Limited [HFCL], despite these being good candidates for strategic sale according to Niti Aayog prescription. These plants have been sick for more than 2 decades even as attempts to revive them under government jurisdiction in the past failed. Yet, powers that be are in no mood to relent.
The second reason could be the obsession of Modi – dispensation too [very much like UPA – regime] with using PSUs to garner resources for plugging its budget deficit. This is also reinforced by its taking recourse to other means [besides buyback] such as special dividend. Its dividend policy is guided by a terse order that requires a PSU to give dividend @ 30% of profits or 5% of net-worth whichever is higher. Clearly, the government is out there to extract resources from PSUs irrespective of their financial health.
Unwillingness to go for strategic sale would be a tactical blunder. True, good governance and government’s commitment not to interfere in working of management will help improve performance of PSUs. But, problem of resources and access to technology would still remain. This void can only be filled by inducting a strategic partner. The government should seize the current feel good factor [courtesy, its pro-reform image] and promptly act on strategic divestment to unlock value and help them face challenges of contemporary times.