BL Explainer: Divestment and its importance in a Union budget
What is divestment?
Divestment is the action of a government or organization selling or liquidating an asset or subsidiary. We also speak of disinvestment or sale. In India, divestment is a policy in which the government partially or totally liquidates its assets in public sector enterprises.
What are the main approaches to divestment?
The three main approaches to divestment are minority divestment, majority divestment and full privatization.
A minority divestment is such that at the end of it, the State retains a majority in the company, generally greater than 51%, thus ensuring management control. In the event of a majority divestment, the government retains a minority stake in the company.
Full privatization is a divestment where 100% control of the business is transferred to a buyer.
What is the value of State shareholding in Central Public Sector Enterprises (CPSE)?
A CAG report published in 2020 pointed out that the total paid-up capital of 434 covered CPSEs stood at ₹5,45,338 crore as of March 2019. This central government stake is around ₹400,909 crore.
The long-term loans taken by these 434 CPSEs amounted to ₹16,46,888 crore. The market capitalization of the then publicly listed 54 state-owned companies was ₹14,29,111 crore (investment in shares being ₹85,041 crore) as of March 31, 2019. The consolidated return on capital employed (ROCE) of 434 companies of State in 2018-19 was 10.06%, less than 10.47% the previous year. The return on equity (ROE) for these 434 companies was 11.81% for 2018-2019.
How has the central government performed on divestment?
It was sub-optimal. The Modi-led government only achieved its divestment target (budget estimate) in only two (2017-18 and 2018-19) of the seven years.
In 2019-20, the government had set a divestment target of ₹1 lakh crore and the actual receipt was only ₹50,000 crore. Similarly, the government raised just over ₹30,000 crore in the financial year 2020-21 against a budget estimate of ₹2 lakh crore. For the current financial year, it has budgeted ₹1.75 crore and so far the divestment proceeds are around ₹9,291 crore. The government is betting big on LIC’s upcoming IPO to help it achieve its divestment goal.
What challenges does it typically face in the divestment process?
The government must overcome several challenges to succeed with the divestment program. From identifying the right candidates to choosing the right path (whether through a strategic divestment or via the stock exchanges) and the amount of the stake sale, the government must make a delicate balancing act. It also faces opposition from labor unions and opposition parties. Another critical decision concerns the price of the sale of the shares to ensure that there is no future criticism for selling the family money cheaply in the public markets. The timing of the stock sale is also a big challenge.
What is the importance of disinvested products in the financing of the budget?
They are useful to partially finance the deficit. The decision to divest is mainly aimed at reducing the tax burden and making up for the government’s shortfall. Divestment proceeds are primarily used to fund the budget deficit, fund large-scale infrastructure development, invest in the economy, repay public debt, and fund social programs such as health and education. The successful divestment of a loss-making unit also means that the government does not have to finance its losses in the future.
January 30, 2022