Disinvestment of PSUs is like selling the family silver!
Disinvestment of PSUs is like selling the family silver!Is PSU disinvestment amounting to selling the family silver or is it a mere piggy bank?
PSUs refer to government owned corporation and are owned by Union Government of India or of state or territorial governments or both in a partnership.
Economic policy had earlier advocated Government interaction and higher ownership in companies and industries to create balanced economic development. This was at a time when private sector could not commit sufficient capital. But now times have changed and the bigger debate centres around whether selling stakes in PSUs can be a way out to compensate for structural problems and operational efficiency brought about by Government ownership?
Let us see whether disinvestment is all about selling precious national resources or righting the balance between government and private control?
1. Disinvesting profit making PSUs will result in losses - There will be loss of dividend earning for governments which are disinvesting profit making public sector enterprises. Currently, the expenditure of the government far exceeds its revenue and selling the stake of profit making PSEs will lead to squeezing of the revenue sources for the government. This will result in higher fiscal deficit. Loss of revenue from disinvestment will not always be compensated by capital appreciation gains. Equity shares are sold at higher prices in the market and only then is higher revenue generated for the government. Moreover, dividend earning from PSUs is coupled with expenditure which nullifies the effect of dividend earnings.
2. Benefits of disinvestment are largely appropriated by the corporate sector - Nationwide survey by NCAER has indicated only 0.5% Aam Admi retail participation in the equity markets. Benefits of disinvestment are mainly snared by corporate houses and large institutional investors. A widespread contention is also that disinvestment is done for benefiting corporates who fund political parties in return.
3. Funds received from disinvestment are used for financing fiscal deficit - This is a move that is bad for the economy because it’s like selling family jewellery to finance a short term expenditure on something small and insignificant. Disinvestment income is a one time income to create production capacity within the economy. However, current returns on these investments is low so it is important to use funds in social sector scheme rather than locking capital within asset. To reduce the fiscal deficit, eventually the government has to reduce expenditure.
Wasteful revenue expenditure is what becomes the eventual fate of this capital rather than increasing the production capacity of an economy.
4. Tax rate in PSUs is higher - Corporate houses shell out less in terms of tax returns while PSUs are charged with higher tax rates. Disinvestment goes one step further in capitalising on PSUs and feting corporates at their cost.
5. Profit making PSUs are already making money - Profit making PSUs should not be disinvested as they are performing well.
6. Job losses are an unavoidable consequence - PSU disinvestment comes with a rider- job losses are a natural consequence for the employees when privatisation sets in.
7. Disinvestment can lead to private monopolies - Monopoly after disinvestment is apparent in many cases such as VSNL.
8. PSUs being sold at cheap prices -PSUs are being sold to preferred parties at cheap prices and there is need to bring transparency in the disinvestment policy. Without it, selling PSUs is like selling treasured heirlooms for cheap trinkets.
9. Disinvestment in name only - To complete the target of disinvestment, government has sold stake of PSEs to other PSUs. The sum total result of this is that government ownership remains which is counterproductive considering the aim of disinvestment is privatisation.
10. Loss of regular income for government - Selling stakes in profit making and dividend paying PSUs will result in regular income loss for the government. Bulk sales of stakes lead to lesser sale values than anticipated.
11. Right of Citizens should be protected -Citizens have every right to own part of the share of PSUs. Big corporate houses may get this privilege instead.
1. Disinvestment raises valuable resources for government - This can be used to reduce fiscal deficit and cause the government to garner more resources for infrastructure development.
2. Lean government is clean government - Disinvestment will ensure that government ownership is limited to only certain organisations. It will also result in reduction in number of ministries and bureaucrats.
3. Greater efficiency - Another good point which ensures disinvestment is not about selling precious resources is that privatising these organisations will only increase their efficiency and effectiveness levels.
4. Government gets to spend on development - Disinvestment frees up government’s spending capacity in key areas such as military and welfare.
5. Disinvestment is part of major structural reforms - Government initiated structural reforms in the 1990s such as liberalisation and opening of foreign trade. Disinvestment was a welcome addition to this. It also sought to increase competitiveness of public sector undertakings and creating investments and job opportunities.
Nearly 70% of the Indian banking sector is dominated by PSUs and there are as many as 250 government owned PSUs accounting for 22% of the GDP of the nation. Other key areas where government has significant control include petroleum, coal, crude, power and defence. These are areas where privatisation is not in national interest. Anything in excess is bad and this includes disinvestment. Rather than selling profit making PSUs, the focus should be on turning around sick PSUs. The cure lies in seeking a lasting remedy rather than just a quick fix.
- RE: Disinvestment of PSUs is like selling the family silver! -Deepa Kaushik (01/11/16)
- It is understandable that some public sector undertaking should not be put under disinvestment for ensuring public interest or national security. But this is mostly an economic / business decision and should not be mixed with emotional decision (including vote bank politics). Most people in our country believe in buying gold and silver on festivals and occasions (like weddings) and in majority of cases this gold or silver becomes a blocked asset, as it is either used as jewellery or kept under lock and key either at house or bank; only in case of dire emergency it is sold or mortgaged. Thinking that selling a company or its shares is like selling family silver is wrong, if the value of the asset i.e. shares is allowed to deteriorate as has happened then how is this sensible?
When it comes to disinvestment of PSUs, one needs to understand that they will be very low take up in the market if the PSUs subject to disinvestment is making losses and has accumulated huge debts to pay, so the Government would need to look at profitable PSUs to make this successful.
In any case, I believe that the efficiency of PSUs and thus the benefit for end users will increase once the management changes hand. Private enterprises are always motivated to work on efficiency and effectiveness to improve revenues, reduce costs and meet customer expectations in order to survive. Given an opportunity for the market forces to act freely, they will bring about healthy competition thus competitiveness, which at the end are good for both customers, Industry & the economy.
There should of course be some restriction on FDI in companies/industries where public interest or national security can be affected. Also, it is not necessary to sell 100% shares to private sector. Where the Government wants to keep the decision making under its control it can still do so by ensuring that it retains 51% of the shares and only releasing up to 49% for public subscription. Also understand that this will ease budgetary constraints for the Government in providing capital and loans to 100% Government owned PSUs, but so far this has been mostly supported by government backed corporations (for instance LIC).