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Government gears up for disinvestment - Views on News from Equitymaster
 
 
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  • May 16, 2000

    Government gears up for disinvestment

    US$ 35 bn - thatís what the UK government raised recently by selling licenses for mobile telephony services. India on the other hand has raised less than US$ 4.6 bn (at current exchange rates) since it commenced its extremely ambitious disinvestment programme in 1992. India's failure is apparent.

    The government now seems determined to better its record. The approval to proceed has come straight from the Prime Minister (in a 13 party coalition this may not hold much weightage though). The government is said to be considering issuing stock options to employees and retaining a golden share in units where it is divesting its controlling stake. The Department of Disinvestment (DoD) has proposed to carry out the process using three methods:

    • Strategic sale
    • Cross holdings
    • Sale of equity

    Precedent compels us to be cautious of the governmentís most recent attempt to push through disinvestment of holdings in public sector units. Nevertheless in view of the central government's dismal fiscal health, a strong dose in the form of disinvestment proceeds is sorely felt.

    The government has targeted an inflow of Rs 100 bn from this source. This amounts to 9% of fiscal deficit. Any slippage on this front can thus have a drastic effect on the governmentís fiscal situation. This would in turn imply higher market borrowings (therefore higher interest rates) for the government.

    Disinvestment of holding in public sector units is a good idea. However, unless there is a change in management there is unlikely to be a significant gain in productivity and efficiency (which should be the key reason for disinvestment). Another issue that needs to be debated is the use of proceeds from disinvestment. Without clear allocation, it is likely that these funds will disappear in the ocean of government mismanagement. Counting chickens before they hatch may not be a good idea. But when amounts to the tune of Rs 100 bn are involved, itís better to be that extra bit cautious.

     

     

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