Helping You Build Wealth With Honest Research
Since 1996. Try Now

MEMBER'S LOGINX

     
Invalid Username / Password
   
     
   
     
 
Invalid Captcha
   
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  


Is Disinvestment the Answer for Loss-Making PSUs?
Fri, 30 Jun Pre-Open

The government is caught between a rock and a hard place. It wants to create jobs through massive spending on infrastructure. But for that it will have to spend money that it does not have. This, in turn, means that it will have to go in for borrowing or raising resources through public sector units' (PSUs) disinvestment.

The government is banking on the highest-ever receipts of Rs 725 billion from disinvestment in PSUs to finance social and infrastructure spending and rein in the fiscal deficit at 3.2% of GDP in 2017-18.

How far all this will be realized is an open question given that the government has been unable to meet its Budget estimates for the last few years.

All options are being explored to meet the disinvestment target: minority stake sales, strategic sales and listing of general insurance companies.

The way to do this is by taking a fresh look at valuing PSUs. It is similar to the valuation exercise that was done during the nineties and is similar to what has been recommended for banks.

Just Released: Multibagger Stocks Guide
(2017 Edition)

In this report, we reveal four proven strategies to picking multibagger stocks.

Well over a million copies of this report have already been claimed over the years.

Go ahead, grab your copy today. It's Free.

NO-SPAM PLEDGE - We will NEVER rent, sell, or give away your e-mail address to anyone for any reason. You can unsubscribe from The 5 Minute WrapUp with a few clicks. Please read our Privacy Policy & Terms Of Use.

Government has set the target of Rs 205 bn from 'strategic sales.' This is where things get interesting. 'Strategic sales' is another term for privatisation.

It is also imperative to note that all previous attempts have been hampered by labour union protests. In fact, there have been no strategic sales between fiscal 2004 and 2016.

Recently, Air India was added to the list for strategic disinvestment. The national carrier has debt/dues worth Rs 600 billion, half of which may be written off by the government before it looks for a suitor.

Air India is not the only example of the government not being able to withstand competition. Sector after sector has seen the government companies being decimated wherever they have had to face competition. As Vivek Kaul writes in his Diary:

  • ...The same goes for telecommunications, where former state monopolies like MTNL and BSNL have been allowed to slowly wither in the face of more nimble private telecom companies, and together they now account for less than 30 million of India's 900 million telecom subscribers.

But the governments (this government as well as the ones before it) have kept these companies going. Of course, a lot of taxpayer money which could have been better utilised elsewhere has been lost in the process.

The point is not just that it would have been better for the government to have sold off these companies long back. There is also the critical need to penalise legislators and bureaucrats who sometimes allow PSUs to become sick, so that they could be allowed to be taken over by private interests (Air India could fit this bill).

There is a need to fundamentally re-examine the concept of the PSUs. The role of the government was not to run industries. That was the private sector's job. However, this did not mean leaving the task to them alone. The State had an active role in supporting the private sector.

So, the need is to privatize the PSUs in areas where they are successful and use the proceeds to establish new PSUs in areas that require intervention. This will liberate the PSUs from the inefficiency and corruption inherent in government control. And also provide much needed money to invest in new areas.

It is time that divestment is not seen as an option to cover for short-term fiscal gains; instead, it should be part of a strategic plan to improve the production of goods and services in India.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary


Equitymaster requests your view! Post a comment on "Is Disinvestment the Answer for Loss-Making PSUs?". Click here!