PSU divestment: now is the best time
25 June 2009
As opportunities dry up in the recession-hit 'advanced' economies, foreign funds are increasingly looking
at India. The government should seize the moment to accelerate disinvestment in PSUs, argues
Jagannadham Thunuguntla
What a turnaround! The United States, long considered the 'cradle of
capitalism', is now busy trying to nationalise its iconic brands such as AIG,
Freddie Mac, Fannie Mae, General Motors and Chrysler, under various guises
but using taxpayer money.
On the other hand India, long known for its close ties with the erstwhile
USSR, and officially a 'socialist' republic under the Constitution, is now busy
finalising the nuances of its disinvestment policy, giving the ownership of
'public sector' undertakings back to the public, at least in part. The economic
world has thus been almost turned upside down.
A further indicator of this is the well-documented shifting of economic power from the West of Atlantic
Ocean (the United States) to the East of Indian Ocean and particularly the Arabian Sea (the Asia). Global
investors, including foreign institutional investors, are flocking to these parts, including India. This
should help the country's divestment policy.
Slow but steady disinvestment
India's disinvestment process may be too slow for many people's liking, but it has been fairly steady over
recent years. The earlier UPA government which was in power from 2004 to 2009 could not pursue its
disinvestment policy with full vigour due to opposition from its Left allies. Even then, during five year
period the UPA government managed to complete 13 IPOs of public sector undertakings, garnering an
amount of Rs27,385.21 crore.
The message from the election results 2009 is loud and clear: the Indians have changed their mindset
from status quo to progress. Evolution is a continuous process in any country's life and we have displayed
it thoroughly this time. The ever-maturing Indians have taken note of the UPA's efforts and given them a

thumping win in this year's elections. As the new government is free from 'left' load, now it can think of
'right' things.
This naturally gives a free hand to the new government to launch clear and relatively aggressive
disinvestment policy taking into account the burden of fiscal deficit in India.
Opportunity to slash deficit
If the government plans to sell its stake in the listed PSUs while maintaining a controlling stake of at least
51 per cent as per the President's inaugural speech in the 15th Lok Sabha in parliament, the total amount
that can be raised is about $94.77 billion (Rs4,61,245 crore) based on the current market prices of listed
PSUs. This works out to about 9.48 per cent of current GDP.
The current fiscal deficit of India is at $62.26 billion (Rs303020 crore), which is about 6.23 per cent of
GDP. This means the deficit is much lower than the amount that the government has the potential to
garner by selling up to 49 per cent stakes in listed PSUs alone. Besides listed PSUs, as per the
disinvestment policy, the government is planning IPOs of several unlisted PSUs such as NHPC, OIL,
Coal India, BSNL, RITES, IRCON International, etc.
This signifies that a clear and aggressive disinvestment policy would give the government a lot of cushion
and headroom in its fiscal policy making. With an aggressive disinvestment policy, the fiscal deficit may
be brought well under control, giving the government latitude to spend on the critical social sector.
On the other hand if the government goes slow on disinvestment, then it will be forced to fund projects
vital for growth by raising taxes, which - particularly indirect taxes - are already at swingeing levels.
When the country as a whole owns assets such as BSNL, Coal India Limited and the Railways, and global
money is eager to pay hefty valuations for these assets, how far is it reasonable not to accept that money,
instead burdening the country with additional taxes?
Disinvestment means transparency
Besides that, disinvestment also helps to bring the financial condition and functioning of unlisted PSU
companies into the public domain, where people can have an informed debate on the way several PSUs
are operated. After all, the PSUs are pubic wealth and hence Indians have the right to know about the
operations and financial health of these companies.
The listing of these companies would bring greater transparency and better corporate governance
standards into these companies as they will be subjected to all the disclosure standards of the Securities
and Exchange Board of India and the stock exchanges. Further, it could encourage more competitiveness
in the operations of the PSUs.
Also, the listing of these companies provides the best opportunity for Indians to participate in the growth

of Indian economy. Currently, even if investors believe in the Indian growth story, they have to
essentially base investment plans on the private sector.
Hedge funds can finance growth
There is a lot of money with hedge funds, which are unregulated by nature. Also, they are free to invest in
any asset class in any country, as long as they see a profit at the end. Now, due to the severe destruction to
the assets in the developed economies, all that money is eagerly searching for good opportunities in the
East. And India is very much on their radar.
So this is the perfect opportunity for India to create sufficient investment options to attract such money.
When they are keen to invest, it would be wise to accept their money through disinvestment in PSUs.
To put it in terms that should appeal to the ever-hungry Indian government, the money that would be
invested by these hedge funds in the PSUs will go directly into government's coffers. Ideally, this could
be deployed for infrastructure projects that are crucial to continuing and accelerating economic growth.
Finally, it should be noted that the Indian electorate has given a clear verdict favouring the pro-
disinvestment UPA government. This essentially means the Indian voters have favoured disinvestment.
Then, why should we argue with the collective wisdom of the Indian public?