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 [