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How to raise up to Rs 50 lakh crore

Maruti’s first disinvestment was at Rs 13 a share. When we disinvested beyond 50 per cent, government got Rs 115 per share. After privatisation, we realised Rs 678 for each share.

Pradip Baijal        Print Edition: June 28, 2009

The economic meltdown, a high fiscal deficit and election expenditure commitments are bound to put enormous pressure on the finances of Government of India. The government has to examine various options to raise resources. The options are deficit financing, higher taxation or disinvestment.

Pradip Baijal, Former disinvestment secretary
Pradip Baijal
To my mind, disinvestment, with the right policy approach, may be the best recourse for the UPA administration. The previous experiences with disinvestment have been encouraging. During the two earlier phases, the privatisation or disinvestment process was gradual.

But despite this, almost $12 billion was raised from 5 per cent equity sale in 250 companies in India. This is much more than the receipts of $8 billion each from much larger percentage sale in big public sector units in China and Russia.

The government will now have to decide the mode of disinvestment for the future. Of course, there can be minority disinvestment in companies where the PSU is being listed in the stock exchange for the first time or in sectors/companies where the government does not want private management for valid and transparent policy reasons. Otherwise, we should privatise to get the maximum price. It would not be advisable to earn small amounts from minority disinvestment—particularly when we are trying to deal with huge fiscal deficits and expenditure commitments.

The example of the sale of Maruti is interesting. It was first disinvested up to 50 per cent and each share (Rs 5) yielded about Rs 13. Later, it was disinvested beyond 50 per cent, thus privatising the company and these shares were sold at Rs 115 per share. The government also received a control premium of Rs 1,000 crore. After the completion of the privatisation process, the same shares were sold by the government at Rs 678. An assurance of a smooth privatisation, thus, gives a huge premium to the government.

Can disinvestment/privatisation bridge the fiscal deficit? Sale of less than 5 per cent equity has garnered more than Rs 50,000 crore. There is no economic rationale of not privatising the entire public sector in areas where private investment is allowed now. If that is done, the recoveries should be about Rs 10 lakh crore. The earlier sales were done when BSE Sensex was around 3,000. At 15,000 levels, the recoveries should be of the order of Rs 50 lakh crore and even a part sale could cover more than the fiscal deficit.

That’s not all. The revenue inflow to the government could be even higher due to higher tax mop-up from privatised companies. Expenditure of the government for turning around ailing PSUs, which has been very high during the last few years, would also be pruned drastically if an aggressive privatisation programme is launched.

Putting disinvestment on the front burner, then, would give the government freedom to allocate more funds for infrastructure, education and heath programmes in India. This could only be good news for the Indian economy. It could mean that the annual GDP growth rate could actually then exceed 10 per cent.

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