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Thumbs down to disinvestment

Jun 26, 2000

The government has, as in all previous instances, scuttled the opportunity to minimize its deficit by limiting participation in commercial activities. In India it seems that 'it's the government's business to be in business'.

Rs bnBudgetedActualActual as % of
FY92 25.0 30.4 121.5%
FY93 25.0 19.6 78.4%
FY94 35.0 - 0.5 -1.4%
FY95 40.0 50.8 127.0%
FY96 70.0 3.6 5.2%
FY97 50.0 3.8 7.6%
FY98 48.0 9.1 19.0%
FY99* 50.0 58.7 117.5%
FY00 100.0 26.0 26.0%
FY01 100.0  NA
* achieved by creating cross holdings among PSUs

As is evident from the chart above, the government's measures to raise resources by divesting its holdings in public sector units (PSUs) has been a non-starter. Last week, the government came close to laying out a concrete plan for disinvestment of key PSUs. The result was, however, not totally unexpected - another meeting, another plan. However as a sweetener the government did initiate some face saving measures.

The stock market it seems had built in expectations that the disinvestment process would finally get going. The disappointment took its toll on overall market sentiment even as key PSUs tumbled from their highs. The government, in turn, witnessed erosion in the value of its holdings. In the process every one lost - the PSUs, the government, shareholders and, of course, consumers.

The situation is getting critical. The central government alone is expected to run a deficit of over Rs 1,100 bn this year. Take in the state contribution to the deficit, and you have a fiscal deficit that is nudging the 10% mark. The fiscal deficit in turn contributes to inflation, higher interest rates and, as some economists say, a current account deficit i.e. all the ills that plague the Indian economy.

It is not that there is an easy solution to eradicating the deficit. The disinvestment is only a part of it. Measures would need to be initiated to reduce government expenditure, broad base the tax net and ofcourse, invest in stepping up productivity in the country. Nevertheless, PSUs can form a significant arm of any policy to correct the deficit. Just to put the size in perspective, the capital employed in central PSUs exceeded Rs 2,230 bn (FY98).

Should investors holding PSU stock lose hope? They probably should not. Disinvestment of holdings in PSUs is the logical conclusion to the fiscal problem that plagues the country. It is also an inevitability, which may, however, take its own time to unfold.

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