The Senior Analyst Jan. 2014 | Page 24

THE SENIOR ANALYST New Indian Way – Disinvest to Invest Disinvestment can be defined when a Government subsidiary or an asset will be liquidated or its stake is divested to put a better use of those proceeds. For a better understanding of it let us begin with the quote “Every rupee that we get out of Coal India (after disinvestment) I am willing to put it in the public sector bank. So we are not converting assets into current expenditure. We are converting one asset into another asset” - Mr. Chidambaram (Finance Minister of India) These words were addressed to the trade union of CIL which was threatening to go on strike, if the disinvestment process takes off. It is of little interest to the Government to act against the wishes of these unions, and then what is that bigger picture the Government is seeing by doing this act? GLANCE the STANCE The Government of India introduced the disinvestment policy “To promote people’s ownership of Central Public Sector Enterprises to share in their prosperity through disinvestment”. Key features of the policy are    Citizen of India have every right to own a part of share of the Central Public Sector Enterprise CPSE’s are the wealth of nation and it must rest in the hands of people. Government will ensure that it retains the majority shareholding (>51%) in CPSE even during this process. The question would be when these CPSE’s are very much a part of our society since post independence era and they have been known to be cash cows of Government of India (Dividend is Jan 2014 remitted under the revenues). Why would it want to part with them? MYSTERY- Unlocked As per union budget 2006-07 the fiscal deficit of India was at 3.8%, which was very much in line with the norms laid down as per FRBM act (Fiscal Responsibility & Budget Management). This act specified in 2004 proposed to reduce fiscal deficit to 3% of the GDP by 2008-2009 with annual reduction target of 0.3% of GDP per year. But post the sub-prime mortgage crisis, FII’s have dried up and capital account was shaky which potentially raised questions about sustaining 8% GDP growth levels. Taking cue from these developments Government decided to spur the growth by increasing expenditure on various infrastructure and economic activities. This resulted in a sharp rise of country’s fiscal deficit as depicted in Exhibit#1. NAME Disinvestment Receipts(in cr) Fiscal Deficit (Actual %) Fiscal Deficit (Estimated %) 200910 201011 201112 201213 1120 25958 18088 24000 6.8 6.7 5.7 5.2 6.4 6.3 5.4 5 EXHIBIT#1 (http://indiabudget.nic.in) An important question here is why is the fiscal deficit of a country should be within controllable limits. Besides it is always debatable if a healthy GDP growth or low fiscal deficit should be preferred by a country. Increased borrowing which leads to higher debtequity ratio thereby reducing the credit rating of a country which impacts foreign cash flows(Rating agencies have twice downgrade [