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Friday, March 05, 2021

Explained: Asset sale targets and revenue generation

Governments have often failed to meet their targets for disinvestment. The current year has seen economic activity being severely impacted by the pandemic, and the fiscal deficit is set to worsen.

Written by Nushaiba Iqbal | New Delhi |
Updated: January 27, 2021 8:25:23 pm
In the current year, all aspects of the government’s functioning was severely impacted by the Covid-19 pandemic. (Photo by Himanshu Bhatt/NurPhoto/Getty Images via Bloomberg)

Presenting the Union Budget last year, Finance Minister Nirmala Sitharaman had surprised everyone when she announced a disinvestment target of Rs 2.1 lakh crore.

As annual targets go, this was easily three to four times the usual targeted amount. Given its size, it was a vital element in the government’s strategy to keep its fiscal deficit under check. However, the tardy pace of sales of public assets during the pandemic year suggests the government is unlikely to meet its target.

What is disinvestment?

The Union government invests in several public sector undertakings (PSUs) such as Air India, Bharat Petroleum, Delhi Metro Rail Corporation etc. Since it is the majority shareholder (meaning that it owns more than 51% of the shares), the Centre can raise money through the liquidation of its shareholding in these PSUs.

Such asset sales can either reduce the government’s share — like when it attempted to do with the public listing of Life Insurance Corporation in 2020 — or it can also transfer the ownership of the firm altogether to the highest bidder — as it did with Bharat Aluminium Company, which was sold to the Vedanta group in 2001.

Why are PSUs up for sale?

Broadly speaking there are two main motivations behind disinvesting in PSUs.

One is to improve the overall efficiency of their functioning. As PSUs, they are managed by the government on a daily basis. But in doing so, there are chances of political considerations overshadowing economic and corporate interests. This is especially true when the PSU transacts with the government — for example when it sells its products and services to the government, the pricing may be influenced by factors other than market factors.

By disinvesting (or reducing the government stake), an attempt is made to make such a PSU more efficient as it would not be accountable to people and entities other than the government. The underlying hope is that private or corporate ownership will result in more efficient management.

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The second factor is the government’s need to plug its deficit. Indian governments perennially run budget deficits. In other words, the government is unable to meet its expenditures just from its tax revenues. In times of extreme monetary stress, governments have thought of selling off their stake in PSUs to raise funds and meet the gap between its expenses and revenues. Before economic liberalisation, such efforts to monetise government’s assets were criticised as selling the family silver. But post-liberalisation, reducing government stake, especially in sectors — such as the strategic sectors like defence — where government presence is not necessary, disinvestment is welcomed. With the proceeds of these sales, the government can reduce its debt liabilities and raise money for investments in other parts of the economy — such as building infrastructure in the form of new roads and bridges or increased spending on providing welfare to the poor and needy in the country.

How are these revenues generated?

All PSUs work under different departments and ministries within the government. However, the Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is tasked with managing the Centre’s investments in the PSUs. Sale of the Centre’s assets falls within the mandate of DIPAM.

Each year, the Finance Minister sets a “disinvestment target”. Accordingly, bids are invited, or as in the case of LIC, public offerings are made and the PSU is privatised partially or fully.

Source: CGA, Ministry of Finance

Are disinvestment targets met? Will they be met in 2020-21?

The table above shows the government’s performance in meeting its disinvestment target over the past 15 years. Except in a few years, the government has been unable to raise as much money as it wanted at the start of the year.

In the current year, all aspects of the government’s functioning was severely impacted by the Covid-19 pandemic. According to data from the Finance Ministry, the total disinvestment receipts so far this year have amounted to Rs 17,957.7 crore.

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