Detach PSU share sale from budget

At a briefing following the presentation of the interim budget for the financial year 2024-25 by Finance Minister Nirmala Sitharaman on February 1, Finance Secretary TV Somanathan stated that the “government no longer views disinvestment — fancy nomenclature for sale of Union government shareholding in central public sector undertakings (CPSUs) — from the perspective of balancing the budget”. The statement is out of sync with Sitharaman setting a target of Rs 50,000 crore as proceeds from disinvestment for the FY 2024-25 though it wasn’t mentioned in her speech.

If the government’s intent was not to view it as an exercise in balancing the budget, as stated by the finance secretary, then it made no sense to fix a target. Yet, setting a target for boosting non-tax revenue receipts means that it hasn’t shed its age-old stance of linking this exercise with the budget.

To plan for garnering resources from the sale of government shares in CPSUs is inherently flawed. This is because unlike tax revenue, which can be projected with a degree of certainty based on the existing tax rate and a reasonable assessment of the growth in nominal GDP, the same cannot be said about proceeds from disinvestment. In this case, a lot depends on the market scenario and, in particular, the perception of investors about the PSU concerned.

In cases where the strategic sale (it reduces the government’s holding in the CPSU to below 50 per cent or privatisation) is mooted, the government faces a bigger challenge as apart from a favourable market, it needs bidders with deep pockets. The lengthy and cumbersome process of approval and bureaucratic red tape further undermines the chances of its kicking the ball rolling just around the time when the strategic investors are ready to put in their bets.

The Modi government has missed its disinvestment targets ever since it started the process in 2015-16 with a particular focus on ‘strategic’ sales. Only during two years, viz. 2017-18 and 2018-19, did it achieve the target. That was primarily because, in those years, it had conducted two big-ticket sales of its shares from one CPSU to another, namely the sale of 51.11 per cent shareholding in HPCL to ONGC in 2017-18 and 52.63 per cent in REC to PFC in 2018-19.

For the current FY, Sitharaman had set a target of Rs 51,000 crore for proceeds of disinvestment. This has since been revised downwards to Rs 30,000 crore. Against this, as of February 1, 2024, the government has raised only about Rs 12,500 crore, and it is unlikely that even the revised divestment target will be met.

At a fundamental level, disinvestment of the government’s shareholding in a PSU is in effect sale of its assets. Therefore, receipts arising there can’t be treated as revenue receipts (RRs); hence it won’t be logical to plan for such receipts in the same manner as it is done for tax revenue. It should pursue share sales ‘independent’ of the budget exercise.

The FM has referred to the approach to share sales outlined in her budget speech for 2021-22. Under it, CPSUs are divided into two broad categories, i.e. strategic and non-strategic. The strategic group covers atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. The rest is non-strategic. While the government wants to sell CPSUs in the strategic sector with the caveat that at least one will be retained in the public sector, it will privatise ‘all’ undertakings in non-strategic sectors.

It needs to unshackle the process from a host of legacy issues. Foremost, the majority ownership and control by the government for several decades has ingrained in the bureaucrat a feeling of exercising command over the management of the PSU. Although things have improved under the Modi dispensation, the basic ingredients remain intact. This mindset has to go.

Second, in her budget speech for FY 2019-20, Sitharaman had stated that the government’s intent was to change the existing policy from “directly” holding 51per cent or above in a CPSU to one whereby its total holding, “direct” plus “indirect”, remains at 51per cent. Put simply, the government wants to remain in the driver’s seat even after the strategic sale.

Third, it remains inclined to use CPSUs for achieving other unrelated objectives. For instance, despite the deregulation of petrol and diesel prices, the government continues to regulate their prices. For this purpose, it rides piggyback on oil PSUs which control over 90 per cent of the total sales. No wonder then that the strategic sale of BPCL hasn’t happened till date after it was initially mooted in 2019-20.

Fourth, the government wants to use CPSUs to build infrastructure and invest in green transition to meet climate mitigation goals. These objectives can be pursued even after their privatisation.

Modi should remove all legacy obstacles and de-bureaucratise the process of share sale.

(The writer is a policy analyst)