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Government in disinvestment overdrive - Views on News from Equitymaster
 
 
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  • Feb 1, 2000

    Government in disinvestment overdrive

    According to newspaper reports, the government is considering a move to sell off a 74% stake in the national carrier Air India. The news comes shortly after the government's decision to sell off large stakes in Modern Foods and Indian Airlines.

    The central government seems to be stepping on the gas as far as the disinvestment process is concerned. In the central budget for FY00, the finance minister had factored in receipts of Rs 100 bn from this source. Currently, the mobilisations under this head stand at Rs 16 bn. The government has admitted that it will exceed the fiscal deficit target set at 4% of GDP by a wide margin (estimated to be at 5.5% of GDP).

    The move to sell a 74% stake in Air India will benefit the government in a number of ways. The overall public sector deficit will reduce as the company currently makes a loss. Furthermore, the government would no longer have to fund the expansion plans of the carrier. This will reduce the pressure on government resources. And, of course, the inflows from the disinvestment would help alleviate the government's tight fiscal position.

    For Air India's point of view, having an experienced parent with deep pockets would be very beneficial. With international carriers becoming increasingly competitive it needs to improve services and cut down costs (by improving efficiency). The new partner could provide the company with funds and technology to fulfil both these needs.

    The main stumbling block, as in all other public sectors, will be the large work force. In all probability the employees will resist privatisation, as in the case of Modern Foods and Indian Airlines. This could derail the privatisation process or lead to the government realising a lower valuation for its stake.

     

     

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