When the Chandra Shekhar government took over in early November 1990, India was battling a balance of payments crisis, and a real danger of default on sovereign repayments loomed. Yashwant Sinha, the new Finance Minister, needed to quickly mobilise additional revenue, and cut expenditure. By end November, foreign exchange reserves had dropped to Rs 3,142 crore, inadequate for even a month’s imports.
Raising resources by selling shares in state-owned companies was a proposal under discussion. Finance Ministry officials were in negotiations with the International Monetary Fund for the Compensatory and Contingency Financing Facility (CCFF), but the use of the proceeds of the sale of equity of state-owned companies was a sticking point. The government wanted to use the proceeds to reduce the budget deficit. But the Fund was not agreeable initially because the proceeds, classified in accounting terms as capital receipts, wouldn’t then be used to retire debt, or in other economically efficient ways.
Chief Economic Advisor Deepak Nayyar, however, managed to persuade the Fund that given India’s economic challenges, it would be better to allow fiscal managers to use it to lower the deficit at that juncture. Internally, Nayyar had always argued that money raised through assets sales should be used either to retire public debt or to restructure state-owned firms, rather than on consumption expenditure. India got the first tranche of the IMF loan and CCF aggregating $ 1.8 billion.
It was Yashwant Sinha who first mentioned the sale of assets of Public Sector Undertakings in his interim budget of March 4, 1991. He used the word disinvestment — suggested apparently by Nayyar because ‘privatisation’ was politically unpalatable. Sinha said the government would shed 20% of its equity in select PSUs in favour of mutual funds and financial or investment institutions to broadbase equity, improve management, and enhance the availability of resources. The target was a modest Rs 2,500 crore.
However, the Congress had just withdrawn support to the government, and the plans remained on paper. The first sale of shares of PSU firms in small bundles to mutual funds and institutional investors happened in 1991-92, under P V Narasimha Rao.
But Rao’s government, with Manmohan Singh as Finance Minister, too faced a difficult time. The World Bank, with which it was in talks for assistance, took the stance that funds raised through sale of equity of government companies should be used only to reduce the government’s debt. In negotiations in September 1991, Finance Ministry officials, again with Nayyar in the team, persuaded the Bank that given the fiscal challenges, this couldn’t be done in the short run.
After the I K Gujral government took over, Finance Minister P Chidambaram announced the formation of a Disinvestment Commission, which, under G V Ramakrishna, recommended the sale of shares or outright sale of several PSUs, including Air India. There was a promise in that Budget about utilising the revenue from these share sales for education, health, and to create a fund to strengthen Public Sector Enterprises. But for years, much of the money has been routed to what some officials and economists have described as a black hole, the Consolidated Fund of India, to lower the deficit (or gap between revenue and expenditure).
The policy on disinvestment next evolved under Atal Bihari Vajpayee’s NDA government. In the 1998-89 Budget, Yashwant Sinha, who had returned to North Block as Finance Minister, said that in general, the government would lower its shareholding in state-owned firms to 26%, while continuing to hold majority stake in public sector companies that were considered strategic. There was a promise to protect the interests of workers, and to create a restructuring fund to provide compensation to workers. It was during this period that the concept of strategic sales of state-owned companies came into vogue — some of which, including the sales of Modern Bakeries, Hindustan Zinc and Balco, fuelled major controversies.
The Vajpayee government’s determination to push the policy through was reflected in the creation of a new Department of Disinvestment in 1999, which, in 2001, became a full Ministry. Resistance from ministries to which some PSUs reported was overcome with Vajpayee backing Arun Shourie, who was in charge of disinvestment.
The UPA government under Manmohan Singh was clear on not taking the strategic sale route. The Congress manifesto in 2004 said it would approach privatisation selectively. Unlike what the NDA had done, there would be no disinvestment just to raise revenues to meet short-term targets. Disinvestment revenues would be used for designated social development programmes. The manifesto added that generally profitmaking companies would not be privatised, and that all privatisation would be considered on a transparent and consultative case-by-case basis.
In 2005, the government formed a National Investment Fund or NIF, to which the proceeds of disinvestment were channeled. The mandate of the Fund, managed by professional investment managers, was to utilise 75% of annual funds in social sector schemes to promote education, health and employment. But with the economic slowdown of 2008-09, and later a drought, this was waived for three years — and later, in 2013, restructured to provide flexibility in using the Fund.
The Narendra Modi government has enjoyed the best of market conditions, with equities soaring in its first year, but like many previous governments, is yet to carry out asset sales consistently over a fiscal year — pushing it till the end, with resultant impact on valuation and proceeds.
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