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Disinvestment benefits all - Views on News from Equitymaster
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  • Jun 5, 2003

    Disinvestment benefits all

    India's GDP has not looked back after the economy was opened in the early 1990's. This aspect is evident from the fact that the average GDP growth in the last decade has been close to 6%, which is well above the growth rate of the global GDP in the same period. And with reforms underway, albeit at a slower pace, it is more likely than not that this growth rate is likely to be sustained for a few more years down the line. This argument in itself is a good case for India being attractive as an investment destination for the long-term. However, one of the causes of concern has been the slower rate of reforms in the country. In order to gain confidence of the international investor community, the government must and will have to speed up the reforms process. Divestment is just one of them.

    Divestment is not only important to build up investor confidence and improve the efficiencies of the companies being divested; it also leads to better productivity and efficient use of available resources. Divestment is also important and beneficial for the government. As is common knowledge, the plight of government finances is something to be concerned about. With fiscal deficit at just a shade under 6%, divestment could well provide the much needed help to support the government kitty. Budget' 04 has targeted proceeds from divestment at Rs 132 bn, which seems a distant dream looking at its track record in the past. However, it is interesting to note how the government benefits from the sale of its holdings. The table below throws some light on the same.

      Annual savings to government (Rs bn)
    (a) Total Central PSU's (CPSU) as on FY00 (nos.) 240
    (b) Government equity as on FY00 784.8
    (c) PSU's divested during FY00 & onwards (nos.) 36*
    (d) Equity sold (% of total CPSU equity) 8.9 (1.1%)
    (e) Divestment receipts (incld. receipts committed) 113.4
    (f) Government borrowings at 10% - effective saving 11.3
    (g) Dividends received by government on equity sold (avg. last 8 yrs.) 0.5
    (h) Annual loss being incurred on the 36 divested PSUs 1.3
    (i) Average annual net outgo from Government on equity sold (h-g) 0.7
    (j) Savings per annum to Government on account of divested equity (f+i) 12.1

    Source: Ministry of Disinvestment, November 2002
    * Profit making - 12 companies

    As can be seen above, in the last 4 years, the government has divested its holdings in 36 companies. This equity sold is a meager 1.1% of the total government equity in PSU's as on FY00. The Rs 113 bn receipts from divestment helped to reduce government debt on which, effectively, the government saved interest outgo at 10%. This works out to a savings of Rs 11 bn. Moreover, since the annual losses incurred on the PSU's was higher than the dividend receipts from these companies, the government further saved an approximate Rs 1 bn as net outgo. Thus, in effect, the government has managed to save Rs 12 bn by divesting just 1% of its equity holding. Moreover, assuming that the government is prudent enough at controlling its debt, the benefits of reduced interest outgo will continue to accrue over a longer-term.

    The above argument is a good reason for the government to speed up its divestment process. The biggest advantage to the government in this will be the huge reduction in interest outgo. Currently, of the total expenditure of the government, almost 28% of it goes towards servicing of debt. If the divestments proceed as targeted, then the government will be able to reduce its interest outgo considerably by utilising the divestment proceeds toward retiring and restructuring high cost debts. This would provide a huge relief to the ever-burgeoning fiscal deficit of the country. Further, the money saved could be used for other development works. Going forward, if the government's intentions on this front hold true, then we are likely to see a good shift of investor perception towards the Indian economy.



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