Indian Economy, 5th edition (43 page)

Reforms with the human face’
was one such attempt of the United Progressive Alliance in 2003 when it formed the government at the Centre. It was believed that the ‘India Shining’ slogan of the outgoing government (i.e. the NDA) was correct but remained localised in its effects to the urban middle class only.
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The new government seemed taking lessons from the past and tried to make India shine for the rural masses, too. Its one programme, the
Bharat Nirman
(a rural infrastructure focused programme), could be seen as a political attempt to make it happen.
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Only the coming times will tell as to what extent the Government has been able to educate the masses (better say the voters who vote!) the needful logic of the reforms.

Disinvestment

Disinvestment is a process of selling government equities in public sector enterprises. Disinvestment in India is seen connected to three major inter-related areas, namely—

(i)
A tool of public sector reforms
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(ii)
A part of the economic reforms started mid-1991. It has to be done as a complementary part of the
‘
de-reservation of industries
’.
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(iii)
Initially motivated by the need to raise resources for the budgetary allocations.
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The approach towards public sector reforms in India has been much more cautious than that of the other developing countries. India did not follow the radical solution to it—under which outright privatisation of commercially viable PSUs is done and of the unviable ones is completely closed.
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There was an emphasis on increasing functional autonomy of public sector organisations to improve their efficiency in the 1980s in India as part of the public sector reforms. Once the process of economic reforms started in early 1990s, disinvestment became a part of the public sector reforms. The C. Rangarajan Commission on the Disinvestment of the Public
s
ector Enterprises (1991) went on to suggest the Government on the issue in a highly commendable and systematic way taking empirical notes from the experiences of disinvestment around the world. The government started the process of disinvestment in 1991 itself. In 1997 the Goverment did set up a Disinvestment Commission to advice upon the various aspects of the disinvestment process. The financial year 1999–2000 saw a serious attempt by the Government to make disinvestment a political process
to expedite the process of disinvestment in the country—first a Disinvestment Department and later a full-fledged Ministry of Disinvestment was set up.
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The new government (UPA) dismantled the Ministry of Disinvestment and today only the Department of Disinvestment is taking care of the matter, working under the Ministry of Finance.

Types of Disinvestment

Since the process of disinvestment was started in India (1991), we see its
two official types.
A brief discussion on them is given below:

(i) Token Disinvestment

Disinvestment started in India with a high political caution—in a symbolic way known as the
‘
token
’
disinvestment
. The general policy was to sell the shares of the PSUs maximum upto the 49 per cent (i.e. maintaining government ownership of the companies). But in practice, shares were sold to the tune of 5–10 per cent only. This phase of disinvestment though brought some extra funds to the government (which were used to fill up the fiscal deficit considering the proceeds as the ‘capital receipts’) it could not initiate any new element to the PSUs which could enhance their efficiency. It remained the major criticism
of this type of disinvestment, and the experts around the world started suggesting the Government to go for it in the way the ownership could be transferred from the government to the private sector. The other hot issue raised by the experts was related to the question of using the
proceeds
of disinvestment.

(ii) Strategic Disinvestment

In order to make disinvestment a process by which efficiency of the PSUs could be enhanced and the government could de-burden itself of the activities in which the private sector has developed better efficiency (so that the government could concentrate on the areas which have no attraction for the private sector such as the social sector support for the poor masses), the government initiated the process of strategic disinvestment. The Government classifying the PSUs into
‘strategic’
and
‘non strategic’
announced in March 1999 that it will generally reduce its stake (share holding) in the
‘non-strategic’
public sector enterprises (PSEs) to 26 per cent or below if necessary and in the
‘strategic’
PSEs (i.e. arms and ammunition; atomic energy and related activities; and railways) it will retain its majority holding.
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There was a major shift in the disinvestment policy from selling small lots of share in the profit-making PSUs (i.e. token disinvestment) to the strategic sale with change in management control both in profit and loss-making enterprises. The essence of the strategic disinvestment was—

(a)
The minimum shares to be divested will be 51 per cent, and

(b)
the wholesale sale of shares will be done to a
‘strategic partner’
having international class experiencfe and expertise in the sector.

This form of disinvestment commenced with the Modern
f
ood Industries Ltd. (MFIL). The second PSUs was the BALCO which invited every kind of criticism from the opposition political parties, the Government of Chattisgarh and experts, alike. The other PSUs were CMC Ltd, HTL, IBPL, VSNL, ITDC (13 hotels), Hotel Corporation of India Ltd. (3 hotels), Paradeep Phosphate Ltd (PPL), HZL, IPCL, MUL and Lagan Jute Manufacturing Company Ltd. (LJMC)—a total number of 13 public sector enterprises, were part of the
‘strategic sale’
or
‘strategic disinvestment’
of the PSEs.
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The new government at the Centre did put this policy of strategic disinvestment on the hold practically and came up with a new policy in place.

Current Disinvestment Policy

The present disinvestment policy
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was articulated by the UPA-II under its restructured Common Minimum Prgramme (CMP) in 2009 which is based on the
main ideology
that:

(a)
Citizens have every right to own part of the shares of Public Sector Undertakings

(b)
Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people, and

(c)
While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the PSUs.

The
action plan
for disinvestment in profit making government companies is:

(i)
Already listed profitable PUSs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ by Government or by the PSUs through issue of fresh shares or a combination of both;

(ii)
Unlisted PSUs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed;

(iii)
Follow-on public offers would be considered taking into consideration the needs for capital investment of PSUs, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding;

(iv)
In all cases of disinvestment, the Government would retain at least 51% equity and the management control;

(v)
All cases of disinvestment are to be decided on a case by case basis; and

(vi)
The Department of Disinvestment is to identify PSUs in consultation with respective administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity.

Proceeds of Disinvestment: Debate Concerning the Use

In the very next year of disinvestment, there started a debate in the country concerning the suitable use of the proceeds of disinvestment (i.e. the accruing to the government out of the sale of the shares in the PSUs). The debate has by now evolved to a certain stage coming off basically in three phases:

Phase I:
This phase could be considered from 1991–2000 in which whatever money the Governments received out of disinvestment were used for fulfilling the budgetary requirements (better say bridging the gap of fiscal deficit).
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Phase II:
This phase which has a very short span (2000–03) saw two new developments.
First,
the government started a practice of using the proceeds not only for fulfilling the need of fiscal deficit but used the money for some other good purposes, such as—re-investment in the PSEs, pre-payment of the public debt and social sector.
Second,
by the early 2000–01 a broad concensus emerged on the issue of the proposal by the then Finance Minister.
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The proposal regarding the use of proceeds of disinvestment was as given below:

Some portions
of the disinvestment proceeds should be used

(i)
in the divested PSU itself for upgrading purposes

(ii)
in the turn-around of the other PSUs

(iii)
in the public debt repayment/pre-payment

(iv)
in the social infrastructure (education, healthcare, etc.)

(v)
in the rehabilitation of the labour-force (of the divested PSUs) and

(vi)
in fulfilling the budgetary requirements.

Phase III:
The current policy regarding the use of the disinvestment proceeds are as given below:

1.
National Investment Fund:
In January 2005, the GoI decided to constitute a ‘National Investment Fund’ (NIF)
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which has the following
salient features
:

(i)
The proceeds from disinvestment of will be channelised into the NIF which is to be maintained outside the Consolidated Fund of India.

(ii)
The corpus of the National Investment Fund will be of a permanent nature.

(iii)
The Fund will be professionally managed, to provide sustainable returns without depleting the corpus, by selected Public Sector Mutual Funds
(they are – UTI Asset Management Company Ltd.; SBI Funds Management Company Pvt. Ltd.; LIC Mutual Fund Asset Management Company Ltd.).

(iv)
75% of the annual income of the Fund will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable PSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.

2.
Using the Proceeds Itself:
In view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought that was likely to adversely affect the 11th Plan performance, the GoI, in November 2009, decided to give a
one-time exemption
to utilisation of proceeds from disinvestment for a period of three years from April 2009 to March 2012, i.e. disinvestment proceeds during this period would be available
in full
(the proceeds itself and not the income accruing from the NIF!)
for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. Now as the Country is facing very difficult economic conditions due to continued financial/economic problems in Europe, impacting the economic growth in India, higher subsidy burden relating to petroleum, food and fertilizers, high interest rate impacting the manufacturing sector, affecting excise collection, falling revenue collection,
the exemption cited above has been extended upto March 2013
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.

Accordingly, from April 2009, the disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programmes of the GoI, namely:

(i)
Mahatma Gandhi National Rural Employment Guarantee Scheme

(ii)
Indira Awas Yojana

(iii)
Rajiv Gandhi Gramin Vidyutikaran Yojana

(iv)
Jawaharlal Nehru National Urban Renewal Mission

(v)
Accelerated Irrigation Benefits Programme

(vi)
Accelerated Power Development Reform Programme

INVESTMENT CHALLENGE

As per the recent informations released
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by the GoI, the concerns and policies regarding the investment scenario in the industrial sector is as given below:

Gross Capital Formation (GCF):
Investment and capacity additions are critical for sustained industrial growth- data clearly indicate a moderation in the growth of GCF in industry- the rate of growth of GCF in four broad sectors of industry comprising mining, manufacturing, electricity, and construction averaged 10.9 per cent during
2004-11
, almost the same as the rate of growth of GCF in the economy as a whole. The micro, small, and medium enterprises segment had
the lowest
medium-term growth of only 0.8 per cent during this period. The share of GCF in industry as per cent to the overall GCF, after peaking to a level of
54.9
per cent in 2007-8, moderated to
48.3
per cent in 2010-11.

Investment Intentions:
While GCF indicates actualisation of investment, investment intentions indicated in the
Industrial Entrepreneur Memorandums
(IEMs) filed are lead indicators of likely investment flow to industry and of entrepreneurs’ perception. The investment intentions also provide the sectoral preferences of investors and shifts in these preferences over time. During 2001-10, overall investment indicated in the IEMs filed increased at an average annual rate of 38.7 per cent.