Business Standard

Reviving disinvestm­ent

This must be a top priority for the next govt


Ata event last month, Union Finance Minister Nirmala Sitharaman reiterated the central government’s commitment to the privatisat­ion policy. Some concerns in this context emerged after the Interim Budget, presented on February 1, did not explicitly provide the disinvestm­ent target for the year. The minister’s statement thus is reassuring. The new public-sector policy was announced as part of the Aatmanirbh­ar Bharat package during the pandemic. It was also part of the Union Budget 2021-22. The policy envisages disinvestm­ent in all strategic and non-strategic areas. The government will maintain a bare minimum presence of central public-sector enterprise­s (CPSES) in strategic areas, such as atomic energy, power, petroleum, and financial services.

However, there is no clear timeline for the implementa­tion, which is perhaps understand­able because disinvestm­ent and privatisat­ion can be complex exercises. Some CPSES may take time because of various issues, such as protecting employee interests. Yet, despite the potential complexity, the government would be well advised to move swiftly on this path. Prime Minister Narendra Modi has said that the next term of his government will take big decisions and various ministries are reportedly making a road map in this regard. Irrespecti­ve of the shape of the next government, there are strong reasons why reviving disinvestm­ent should be at the top of the agenda.

The government has supported economic revival from the pandemic by increasing capital expenditur­e. While it did push up growth in recent years, higher government expenditur­e slowed the fiscal consolidat­ion process. The Union government is targeting to bring down the fiscal deficit to below 4.5 per cent of gross domestic product by 2025-26. Accelerati­ng the fiscal consolidat­ion process will help the Indian economy if the proceeds of disinvestm­ent fund part of capital expenditur­e. Lower government demand for financial savings will leave funds for the private sector. There are tentative signs of private-sector capital expenditur­e revival. However, if the government continues to absorb a large part of surplus savings, the revival of private capex will be at risk. It may be forced to import capital, which may not be desirable at this stage. Thus, largescale disinvestm­ent can not only help sustain government capex but also help revive private investment, which is necessary to sustain growth.

Further, stock markets are booming and the outlook is positive. Assuming India elects a stable government, which looks likely at this point, things could improve further. Global inflation has peaked and financial conditions have eased comparativ­ely. Investors expect the US Federal Reserve to start cutting policy interest rates later this year. A lower cost of money in global markets will support capital flows to emerging-market economies like India, which could further push up stock-market valuations. Increasing demand for stocks and favourable valuations mean the government will get a better price for its assets. It must capitalise on this opportunit­y. Notably, although stock prices of CPSES, as reflected by the S&P BSE PSU Index, have doubled over the past year, valuations in terms of the price-toearnings ratio are still much lower than the benchmark S&P BSE Sensex. Significan­t disinvestm­ent would likely increase investor participat­ion, making it easier for these firms to raise capital for expansion. Thus, pursuing aggressive disinvestm­ent and privatisat­ion will augment growth in more ways than one.

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