Budget 2021: Divestment Continues But Little Progress On Privatisation

Each year, the finance minister puts out a number that gets much attention—the funds the government hopes to raise through divestment. In recent years, as budget gaps have widened, the divestment targets have become larger, peaking at Rs 2.1 lakh crore in 2020-21.

The divestment has come through a mix of strategies—minority share sales, some transfer of equity from the government to its own enterprises and, in a few rare cases, strategic sales. Despite this, recent administrations haven’t made much progress in the broader objective of greater privatisation of the economy.

Gross value added by public financial and public non-financial corporations accounted for 8.56% of nominal gross value added in FY19, shows data from the National Account Statistics. Data beyond that is not available. This share has come down from 10.8% in FY12.

However, the share of non-financial, non-departmental undertakings, where divestment is largely focused, has remained static at between 4.5-4.3% of nominal GVA for at least the last five years, the data shows.

The data set defines non-departmental public corporations as government companies registered under the Companies Act, 1956, and, in which, 51% or more share is owned by the government and public corporations set up under government acts. The government has not undertaken any privatisation in the financial sector. In the case of IDBI Bank Ltd., government holding was transferred to another public sector entity.

As of now, there has been no material impact of divestments in terms of GVA as they remain scattered and more to do with optics, said Radhika Pandey, a consultant at National Institute of Public Finance and Policy.

From Privatisation To Divestment

The Central Public Sector Enterprises policy was reset in 1991 when the government decided to disinvest up to 20% in select public sector undertakings. The first disinvestment commission, set up in 1996, recommended “strategic sales”, meant to bring down the government’s share to less than 50% in select PSUs.

Strategic sales were part of the policies being pursued by the first National Democratic Alliance government between 1998-2004. A bulk of the privatisation transactions, which have taken place till today, were concluded during that period, said former Finance Secretary SC Garg, while pointing to a blog post he wrote in September 2020. The policy of strategic sales was stalled when the UPA Government came to power in 2004 and no privatisation took place in the ten years of United Progressive Alliance government up to 2014, he said.

In the last five financial years, the government has attempted disinvestments through buy-backs, exchange traded funds and in some cases, transfer of stake to other public sector entities.

Data on the DIPAM website shows that the government has divested stake in over 50 companies in the last five years. But the government retains a majority stake in most, except for a handful of companies. The incumbent government has attempted strategic sales but there has not been a single success in last six years, Garg said.

Still, the present government has shown an intent for consolidating public institutions, revenue mobilisation and greater asset monetisation through divestments, said Pandey. This will continue as it will have to conduct asset sales for any infrastructure financing, she said.

A Return To Strategic Sales

According to the public enterprises survey, available till 2018-19, there are a total of 348 central public enterprises, of which 249 are operating.

In 2020, the government signalled a new public sector enterprises policy as part of which it said that it would retain a maximum of four public sector companies in strategic sectors. State-owned firms in other segments will eventually be privatised.

Since the government now holds only a little more than 51% in most profitable and large-cap CPSEs, the policy of minority stake sale may no longer yield anything meaningful, said Garg. He also remains sceptical of the attempt to exit non-strategic sectors. Government ministries still control divestments and the need to cut the umbilical cord remains, he said.

Devendra Pant, the chief India economist at India Ratings and Research, said divestment remains an obvious source of funds for the government. This is particularly true since the government needs to provide funds from infrastructure financing, amid a weak economy.