“Disinvestment” came into vogue in the first wave of economic reforms unleashed in the early l990s when there was a paradigm shift from a tightly state-controlled economy towards market orientation, thus queering the pitch for subsequent globalisation of the Indian economy. It is not so much ideology - public versus private - that underlies the approach to open up state-owned undertakings to allow private investments by sell-offs of limited percentages of public equity, as the dire need to tap resources in all possible ways to fix ever-growing budget imbalances.

Requirements of a globally connected economy, which hungers for foreign investments - though they are claimed to be “insignificant” in relation to domestic funding of development - demand not only removal of barriers to such external investments, portfolio or direct, but also a sound macro-economic management, especially prudential management of public finances. This, in the words of Finance Minister Pranab Mukherjee, is “critical for maintaining stable balance of payments, moderate interest rates and a steady flow of external capital for corporate investments”.

After a long chequered history, the “privatisation”, however qualified it may be, seems to have entered a decisive phase with the current political climate favouring the Congress-led UPA Government, which has taken to heart “the mandate of the people” in the 2009 May elections. Under the latest decision of the Cabinet Committee, all that Government remains committed to is that in no state undertaking, government equity would go below 51 per cent - the majority control.

In the coming years, after some early harvests in the current fiscal year with a fiscal deficit of 6.8 per cent of GDP, proceeds from the listing of public undertakings on the stock market with the mandatory stipulation for 10 per cent of share-holding to be in public hands (non-governmental) should be a somewhat predictable flow of resources into the budgets. This ties up with Government's commitment to return to fiscal prudence and the need for additional resources for both plan and non-plan expenditures though the disinvestment receipts would be earmarked for capital expenditure in social sectors (education, health, etc) for the next three years - 2009-12 - after which such income would get deposited into the corpus created in 2005, the National Investment Fund.

Now there is a clear path laid out for disinvestment, as a durable option, not subjected to policy vagaries, and Government would identify and select in consultation with the undertakings for shedding a part of its equity and all this would be done in the context of market conditions. Where profit-making listed companies need funds for capital requirements and go to market, Government would consider selling part of its share-holding by “riding piggy back” on the public offers. The UPA-II coalition feels less constrained, unlike its earlier five-year tenure, not only to go ahead with disinvestment but also energise its reform agenda (beginning with financial sector and, if possible, extend it to the labour market), on which Government leaders become eloquent in the apex chambers of commerce from time to time.

In terms of the Cabinet decision on November 5, all profitable listed CPSEs should meet the mandatory listing of 10% public ownership and, to enlarge the public domain in state undertakings. All unlisted CPSEs having positive networth, no accumulated losses and having a net profit in the three preceding consecutive years should get listed on the stock exchanges. Such listing facilitates the entire process of disinvestment and is described as public participation in the disinvestment programme sharing “a part of the nation's wealth”.

Only 46 out of 242 central public undertakings are listed in the stock exchange, and the new policy should bring in a substantial number of the remaining undertakings into the open market, each eligible to offer 10 per cent of its total equity to the public. Since Government holding in at least 12 leading companies exceeds 90 per cent, bringing it down to the benchmark would yield more than an estimated Rs.28,000 crores. When more companies list, as per requirements of SEBI, Government could raise another Rs.32,000 crores. Whatever the magnitude of additional resources for Government expenditure accruing year after year over a period, disinvestment and subsidies readily become two areas for mitigating the strain on public finances. Government's justification of disinvestment, now being furthered through the process of market listing, is that higher disclosure levels of undertakings would bring greater transparency and credibility and enhance corporate governance with induction of some independent directors on their boards.

Stepping up of disinvestment for greater resource mobilisation for fiscal consolidation has been urged in successive official economic surveys as well as by the Reserve Bank of India, the banker for the Government, which has to sort out the potential conflict between monetary and fiscal policy in its endeavours to support growth of the economy through credit flows and help secure price stability.

With signs of revival of the economy from slackness, Government expects a pick-up in the sagging revenues, direct and indirect, in the latter half of the year to meet the expenditure over-runs, due to low growth, drought and floods and spending on security, apart from whatever saving it might have effected from the much-touted austerity drive. Mr. Mukherjee says Government is on track in ensuring that the fiscal deficit is held within the budgeted 6.8 per cent of GDP in the current year and bringing it down to 5.5 per cent next year and 4 per cent in 2011/12. His budget for 2010/11 in February next would unfold the roadmap on fiscal consolidation in the light of the recommendations of the 13th Finance Commission. (IPA Service)