Repeating an error

Centre leaves all its disinvestment to the last minute

The Centre's disinvestment programme demonstrates the danger of marrying economic policymaking with government fiscal imperatives. In the last few years, the Union government has increasingly turned towards unorthodox measures, such as stake sales in central public sector undertakings (PSUs), to plug the widening gap between revenues and its various expenditure commitments. And, as the gap has widened, so has the government's desperation. The result has been a financial and economic disaster. In the last four years, the government has cumulatively raised just over Rs 61,000 crore by selling minority stakes in various PSUs, little more than 40 per cent of the target. In three of the last four years, nearly 90 per cent of the amount was raised in the last quarter of the fiscal year, and quite often in its last two months. Bureaucrats and their political bosses were either trying to time the market (to get the highest possible valuation) or working under pressure to meet the target by any means. This exposed them to the vagaries of the market.

For Dalal Street, setting a divestment target is akin to announcing a fire sale; it depresses the stock price of companies listed for divestment - not that the government has many options on this count. With the exception of the Coal India initial public offer (IPO) in October 2010, all other divestments have been follow-on public offers (FPO) or offers for sale (OFS) of already listed companies. A company's prevailing share price becomes the benchmark, and shares have to be sold at a discount for the issue to be successful. Given this, there is an incentive for market participants to sell shares of a PSU in the open market, and then re-acquire them in the FPO at a lower price. The government's difficulties have been compounded by investors' general lack of appetite for new share issues - indicated by a virtual drought of IPOs in the last two years - and the absence of domestic investors. Markets are now being driven by foreign investors, and public sector companies do not really fit their investment criteria. Mainly, foreign funds go into high-performance, low-risk companies in sectors such as information technology, pharmaceuticals and consumer products. In contrast, investors now ask for a discount to invest in government-owned companies to compensate for the extra risk that they have to bear. This is unsurprising, since PSUs have mainly been laggards, with the combined revenues of even non-oil and non-bank PSUs growing by just 10 per cent in the last four years, as against the 72 per cent growth recorded by India's top 200 companies. The numbers are actually worse for banking and oil PSUs, which see the bulk of public investment. In addition, risk-averse investors will see a Centre riding roughshod over the rights of minority investors in its PSUs. Is it, then, surprising that targets are never met?

Meanwhile, legitimate questions can be asked about the point of the disinvestment programme. Is it meant to make the public sector more efficient by exposing it to market discipline? If so, then the revenue it brings in shouldn't matter. Treating it as just another revenue-raising exercise invites financial and economic failure.