Strategic Disinvestment : The Importance Of Letting Go

THE FACT:

In the Union Budget 2023-24, the government set a disinvestment objective of 51,000 crores.

THE IMPLICATIONS:

This line highlights a bigger vision. When we examine it on both a macro and micro the disinvestment strategy becomes  a critical gamechanger which allows the government to shake off its rusty parts and take on a sleek outlook for the future.

Simply put, disinvestment refers to the sale of a Public Sector Undertaking/Holding to a non-government entity, in most cases the private sector.

Strategic disinvestment would imply the sale of a substantial portion of the Government shareholding of a central public sector enterprise (CPSE) of up to 50%, or a such higher percentage as the competent authority may determine, along with transfer of management control.

It comes with multiple advantages:

• It relieves burden of the government of maintenance of under performing holdings, and the cash inflow is channeled into more profitable units.
• Disinvestment also promotes open market trading and private asset ownership.
• As private sector ownership and management can introduce new ideas and a more market-oriented attitude, the government can increase the efficiency and competitiveness of these businesses by divesting from public sector corporations.
• Under private sector management, it promotes transparency and accountability.

When the new economic policy was introduced in 1991, the government pinpointed inefficiencies in management, under utilization of resources, pricing practices of government agencies, labour and staff issues, on the numerous loss making divisions.

By liquidating these divisions, the government chooses to exit non-core business and refocus on industries such as infrastructure and banking that benefit the society.

But there are challenges when it comes to Strategic Disinvestment :

• Loss of revenue to the government should a profit making PSU be sold
• There might be incidences of ‘Asset Stripping’ as in the buyer will strip the PSU of its valuable assets such as buildings, tools, machinery etc.
• Disinvesting in strategic assets such as oil refineries may be a threat to national security as oil is an important strategic asset.
• Although using funds from disinvestment can be a major boost for the government exchequer, it is a short term measure mainly and cannot be used often.
• Complete privatization may result in the government losing its monopoly in certain sectors.

CASE STUDY:

One of the best cases of strategic disinvestment is Air India.

Political interference, poor management, and labour issues played a vital role in Air India’s decline. In 2007, the airline merged with India Airlines. Air India’s senior executives lacked decision-making authority due to political impingement, resulting in a lack of focused, proactive, and long-term business planning.

With these considerations in mind, the NITI Aayog suggested that Air India should be sold in 2018

As of March 31st 2019, the airline’s total debt was approximately a total sum of INR 60,000 crore. This debt was a major reason behind the disinvestment. As the current status stands, the new owners i.e., Tata will bear responsibility for INR 15,300 crore and pay an additional INR 2,700 crore in cash to the government.

Now one year on the road of Tata Ownership, Air India seems to be on the right course as turnaround strategies begin to see fruit.

THE BOTTOM LINE :

Strategic Disinvestment can be a useful tool for short-term cash injection without having to raise new taxes, if used properly that is. Otherwise it is akin to selling the ‘family silver’ for short term monetary gains. Additionally the money gained through the sale of public sector holdings must be used judicially and not wasted away