[Editorial Analysis] Divest and spend

Mains Paper 3: Economy
Prelims level: Divestment
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

CONTEXT:

• The government earlier had attempted to divest its stake in the troubled Air India but failed to gain traction.

• Yet again in another attempt to divest its stake in Air India, it has found to be gaining traction now.

WHAT IS DIVESTMENT?

• Divestment is the process of selling subsidiary assets, investments, or divisions of a company in order to maximize the value of the parent company.

• Also known as divestiture, divestment is effectively the opposite of an investment and is usually done when that subsidiary asset or division is not performing up to expectations.

• In some cases, however, a company may be forced to sell assets as the result of legal or regulatory action.

• Companies can also look to a divestment strategy to satisfy other strategic business, financial, social, or political goals.

CURRENT STATUS:

• The Centre has received multiple “expressions of interest” for the debt-laden airline.

• The process will now move to the second stage with the qualified bidders expected to be notified by next month.

• Government has modified its earlier terms of sale with an objective to make it an attractive proposition after previous efforts to sell its stake in the airline failed to find buyers. This time interest from prospective buyers has been greater.

• Separately, reports also reveal that an evaluation committee is meeting to consider the expressions of interest received for the government’s stake in Bharat Petroleum Corporation Limited.

• There is a confusion over whether either of these transactions will close by the end of the current financial year as only three months remain.

• Disinvestment of either of these entities could help plug, to some extent, the revenue shortfall that the Centre is facing this year.

• So far this year, proceeds from disinvestment have been paltry — as against a budgeted target of Rs 2.1 lakh crore, the government has so far managed to garner only a mere Rs 6,533 crore.

BENEFITS OF DISINVESTMENT POLICY:

Benefit of government:
• It will reduce government’s debt.
• It will save resources by spending less on PSUs which can be used by government for welfare purposes.
• It will help in reducing fiscal deficit.
• It enables government to raise funds that can be used to strengthen physical and social infrastructure.

Benefit of society:
• It will increase government’s focus on society welfare.
• It will ensure resources in the hands of public.
• Consumers will get better services.
• Companies will expand that will lead to more jobs.

Benefit of market:
• It would bring more competition into various sectors thus improving the quality of services.
• It will increase market profitability and hence companies’ profits.

Benefit of PSUs:
• It will ensure modernization of PSUs with changing times.
• It distributes loss and failure risks of PSUs to the private sector.

CHALLENGES OF DISINVESTMENTS:

• There would be loss of regular income to the Government by the sale of profit-making and dividend paying PSUs.

• There would be chances of “Asset Striping” by the strategic partner. Most of the PSUs have valuable assets in the plant and machinery, land and buildings, etc.

• Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security since Oil is a strategic natural resource and possible ownership in the foriegn hand is not consistent with our strategic goals.

• It affects labour forces’ social security. It also raises concerns about cronyism.

• The depressed state of the markets and the paucity of reasonable buyers would land in a bad deal.

• Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and a short-term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.

• Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits.

• A majority stake sale done to another CPSE results in no real change in ownership, and is thus of no effective use.

STAGNANT GROWTH:

• In fact, revenue from disinvestment (as a percentage of GDP) has been almost stagnant in the past few years.

• In the last financial year, too, even as the budgeted target of Rs 1.05 lakh crore was revised downwards to Rs 65,000 crore at the revised estimates stage, actual collections stood even lower at Rs 50,304 crore as per data from the Controller General of Accounts.

• Part of the problem is the manner in which successive governments have approached the issue of disinvestment/privatisation.

• Disinvestment is often viewed as a means of plugging the gaps in the revenue, often to be carried out towards the end of the year, when the budgeted revenue shortfall becomes glaring.

• For instance, despite announcing it in the budget, not much progress has been made on the LIC IPO.

WAY FORWARD:

• The government must lay out a roadmap for disinvestment/privatisation of PSUs, listing out in detail the entities where it intends to cut its stake, and the timelines it intends to follow.

• The burden on the exchequer for continuing to finance loss-making public sector entities in sectors where competition exists and no public purpose is served is unreasonably excessive.

• And coming at a time when the government is facing a huge hole in its revenues, garnering extra resources though this route could provide it with some fiscal space.

• Proceeds from such stake sales could be guaranteed, only to be used to finance fresh public investment.

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Prelims Questions:

Q.1) With respect to “AYUSH DAY CARE THERAPY CENTRES”, consider the following statements:
1. The aim of the scheme is to improve the health and wellbeing and reduce health care expenditure.
2. All Central Government Health Scheme (CGHS) beneficiaries, serving as well as pensioners will be able to avail the benefit of these centres.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: C

Mains Questions:

Q.1) What do you mean by the divestment? Highlights the major classification of the different divestment policy?

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