Kaleidoscope Biz & Economy

What The Spree Of Government Disinvestments Mean For India?

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When you’re in need of quick cash you might think of selling your jewelry, house, etc. Similarly, disinvestment is the government’s way to make quick cash by selling a part or whole of their company to another entrepreneur.  Here’s a quick explainer.

Thanks to this cash, the government has more to spend on public services, welfare schemes and programs. So, disinvestment is great. Until…..

1. People lose their jobs

Overstaffing is one of the main reasons PSU’s don’t make profits. When the government disinvests in such PSU’s by selling a majority stake to a private company, some people are likely to lose their jobs. For example: During the BALCO disinvestment in 2001, there was uncertainty amongst employees about their jobs, their VRS (Voluntary Retirement Scheme) packages, their social security and their revised service conditions. Due to lack of transparency and information they opposed the privatisation through large-scale strikes and agitations. All this taints the government’s reputation and gets worse today with social media. For instance, 10,000 Air India employees took to Twitter, YouTube, Instagram and Facebook to protest against its sale. This becomes a major roadblock in the process of disinvestment. And the only way out is to keep employees in the loop at all stages of disinvestment.

2. Customers have to pay more
PSU’s are government-owned companies to provide public goods and services at affordable prices to the country. But when they get privatised (the government disinvests 100% stake and sells it to a private player) the prices of the products are likely to rise. The reason being that public companies get raw materials at subsidised prices due to which cost of production is low and they aren’t profiting making organisations. On the other hand, private companies want to make a profit so they increase their prices. Case in point being Modern Foods- the first company to be privatised in India after which bread costs increased by 60%.  Another good example is oil prices which are currently subsidised by the government. If the government disinvests in oil companies then fuel and petrol prices will be determined by market forces and prices will rise.

 3. Funds are used to pay government debts

Disinvestment is good till the time the government uses the money for welfare schemes and projects. But when it’s used to bailout government-owned companies that are in debt, it becomes a vicious cycle. Here’s how: Government-run companies perform poorly – they run into debt – government uses taxpayers money to help them out – fiscal deficit (Expenses > incomes) increases – government disinvests in PSU’s – money from disinvestments goes to fix PSU’s and reduce fiscal deficit. Until 2013 the National Investment Fund managed money from disinvestments, the proceeds of which went directly to Social Sector Schemes allocated by Department of Expenditure/ Planning Commission. But after 2013 the fund was restructured and money from disinvestment was used to help debt-ridden government companies. Think of it like selling the family gold to pay for drugs. Pretty disappointing, right?

4. It becomes an unlimited ATM machine for the government

Traditionally disinvestment means the sale of an investment but over time this definition has been skewed. Here’s how:

Ideally, the government disinvests because a company is performing badly and it needs a private player to bring professionalism. But instead, the government just sells a small stake of its ownership to the public or a private player and retains control of the company. This means the company is still run by the government and continues to perform badly. In order to salvage such debt-ridden companies (example Air India) 100% disinvestment (privatisation) is needed. But political parties are against this and have time and again opposed it.  Air India in the 1990’s was very valuable to investors but its privatisation kept on getting delayed and losses mounted (estimated loss as of 2017-2018 is Rs.3, 500 crores). Today, there aren’t any buyers for Air India and it has accumulated a debt of Rs.50, 000 crores! How will the government pay for this?

Today disinvestments have become an ATM machine for the government. They merely sell one of its own company to another one of its own company. Example PSU Hindustan Petroleum Corp (HPCL) was sold to PSU Oil and Natural Gas Corporation (ONGC) for 36,915 crore!

Post-independence government-run companies made absolute sense. But now the government should focus its resources on health, education, and social needs, instead. Rather than disinvestments government should look for ways to privatise.

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