FE Edirorial: UPA-II takes one big step

Sat, Nov 7 01:51 AM

It seems the stress of fiscal profligacy has finally pushed the UPA into unveiling an ambitious plan for divesting government stakes in PSUs. The thus-far muted voices of allies like DMK and Trinamool suggests that there may not be that much resistance to offloading stakes. As we have argued in these columns, it is politically easier for the government to offload stakes gradually via the stock market route as opposed to strategic sales, which usually attract more controversy. The roadmap for divestment seems well thought out. First, all listed PSUs are required to put at least 10% of their shares on the bourses. A significant number of profitable and listed PSUs still have government stakes in excess of 90%. Overall, this is low-hanging fruit, which should not attract much controversy. A second step requires all profitable PSUs that are not listed at all to initiate the process of getting listed on the stock markets. This may take time, but is a step in the right direction nonetheless. Divestment will help PSUs improve their corporate governance structures, will free them from some amount of government control, and will enable them to better compete in India and even abroad. There is, therefore, no ambiguity in stating that divestment is always good for PSUs.

Where more questions need to be asked is on the use of divestment-obtained funds by the government. The government has sensibly dispensed with the National Investment Fund—a creation of UPA-I under pressure from the Left parties. This limited the use of divested funds—the government could only use interest accruing to the fund for capital expenditure purposes alone. Now, the government has more flexibility to use what will be a significant sum of money. However, the government must consider carefully whether it wants to use the money to bridge its fiscal deficit on a one-off basis, or whether it wants to spend it on its numerous social sector schemes? Ideally, money from disinvestment proceeds should be used to retire public debt. That ensures that the gains that accrue to the government are not one off. Interest payments on debt constitute a significant part of government expenditure. And as government borrowing grows, there is a constantly increasing cost. Now's the perfect time to use the proceeds from PSU stake sales to reduce the government's debt burden. At any rate, this is a very welcome reform measure from UPA-II, which had been going slow on reform thus far. It will give an important boost not just to markets, but also to investor sentiment in general.

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