06 Nov 09 Selling the family silver
That the Government is making it mandatory for all profitable Central Public Sector Enterprises (CPSEs) to disinvest 10% equity to the public is welcome. The Government is running too many businesses that are really not its business to run. And any downsizing of this activity is good.
That the proceeds of the sale (though not entirely) will be used to reduce budget deficit is also good news. The Indian Government is lucky to have this option for reducing its debt, unlike say, the US, which is likely to suffer the negative consequences of its steep borrowing for many years to come. Part of the proceeds will also be used for “capital expenditure of social sector programmes identified by the planning commission”. And this is the uncomfortable part – for who is naïve enough to have faith in the ability of the Government to do this effectively? While it is true that the social sector needs loads of investment (health and education are the key segments that that come to mind), the government is not necessarily the best provider. The key parameter of the success of disinvestment, to my mind, is not how much the government can raise from the sale, but how effectively it can use the funds. The best option given the reality of our Babus is to simply reduce debt.
On another note, to the extent that the Government will compete with the private sector for public money, the disinvestment will definitely crowd out private investment. The top 9 PSUs in the list could be looking to mop up around Rs250 billion. This is far greater than the Rs146 billion raised through IPOs in the last 7 months. At a time when “growth” faces the risk of losing the current “growth versus inflation” debate in India, this is a bit dicey. Also, given that 9 of the 14 companies listed in recent months are trading below their listing price, will the Government get a good price?
But then again, given that in the last 18 years, the government has only actually achieved a very small fraction of the planned disinvestment (barring one year), perhaps we need not worry too much about it after all!