Union Budget 2023–24 & Public Sector: Can Government Really Boost Disinvestment?

Government investment in PSEs being ten times of disinvestment proceeds, does not sound right but that is reality.

Image: Vibhushita Singh/The Quint

(This is part 6 of our series and special coverage of the upcoming Union Budget, 2023)

India’s Public Sector- Legacy of Nehru-Indira Era

Nehru’s industrial policies, by reserving many sectors of the economy for the public sector only, gave birth to much of the Public Sector Enterprises (PSEs) we see today. Indira’s license-permit raj and nationalisation policies built the PSE empire further and brought the banks and numerous sick pre-independence industrial enterprises within the public sector fold.

India’s public sector did not occupy the commanding heights of the economy as Nehru envisaged but turned India into a command economy which produced shoddy products, low economic growth, and losses/ non-performing assets everywhere.

While many countries in Asia began enjoying the fruits of higher economic growth, India sank to the bottom of investment productivity, exports dynamism and GDP growth in the first 40 years of our independent existence as a nation.

1991 Reforms Put Sand in the PSU Juggernaut

Realising the enormity of these policy missteps, Narsimha Rao-Manmohan Singh team revamped the public sector policy. It stopped building new public sector enterprises, opened up the reserved sectors and the financial sector to private and foreign investments. This generated competition for the public sector enterprises. The government also initiated listing and disinvesting minority shareholding in these enterprises.

It was the first BJP government led by Atal Bihari Vajpayee, which started dismantling the public sector, albeit in a guarded manner. Some public sector enterprises—IPCL, Hindustan Zinc, Balco, ITDC hotels etc were privatised during 2001-2003. Listing process also gathered momentum.

Unfortunately, the Manmohan Singh Government (2004-2014) put a complete break on the privatisation agenda during 2004-2014 and carried on only with minority disinvestments.

Modi Government Made Right Initial Moves

Narendra Modi-led BJP Government began with clear intent by announcing privatisation openly as a policy in 2015 under the larger vision of minimum government maximum governance to translate its belief into action that the government had no business to be in business.

Later, the government came up with a comprehensive public enterprises policy framework in 2021-22 Budget and committed to privatisation or closure of all non-strategic sector enterprises and PSEs in excess of four in the strategic sectors.

The government also announced privatisation in financial sector with a commitment to sale two banks and one insurance company in the same budget.

The government has, however, not walked the talk. At the current juncture, it seems to have lost all appetite for privatisation. More worryingly, the Modi government has moved in the reverse direction and expanded investments in public sector enterprises massively.

No Privatisation but Significant Disinvestment Ramp-Up in the First Term

The government initiated the privatisation of Air India in its first term (2014-2019) but did not complete the transaction. A few pseudo-privatisations were nonetheless carried out—sale of its equity in Hindustan Petroleum to ONGC, in REC to PFC and a couple of other small transactions.

The government, however, ramped up disinvestment receipts. During the last two years (2017-19) of that term, those receipts averaged over a lakh crore per annum although a good part of these receipts came from the public sector acquiring the other public sector entities. The government also carried out quite a few IPOs, including of banks and insurance companies.

The government continued to make substantial investments in Railways, National Highways and in some new enterprises like the Dedicated Freight Corridor, Metros etc. Large scale bank recapitalisation programme was initiated in 2017-18. The government made much higher equity investment in public sector enterprises in 2017-18 and 2018-19.

In these two years, despite the record disinvestment receipts, the investment in public sector enterprises exceeded the disinvestment by a good margin.

Privatisation and Disinvestment Programme Tanked in Second Term

The government adopted the posture of making very aggressive privatisation and scaling up disinvestment in the second term. In reality, however, the programme simply floundered.

It fixed very large disinvestment targets in budgets for three years— Rs 105,000 crore in 2019-20, Rs 210,000 crore in 2020-21 and Rs 175,000 crores in 2021-22. However, the actual performance sputtered out quite badly. The government’s disinvestment receipts amounted only to Rs 50,299 crore, Rs. 32,815 crores, and about Rs 16,000 crores in 2019-20, 2020-21 and 2021-22 respectively.

Air India indeed, got privatised, but yielded a paltry receipt of Rs 2,500 crore. On the contrary, the government took over its equity and loan liabilities of over Rs 150,000 crore. No other major privatisation succeeded. In fact, some PSEs have been officially taken off the privatisation agenda like the BPCL.

All other announced privatisations are also only limping along—Shipping Corporation, CONCOR, two banks and one insurance company (which have not even been identified after two years of announcement), IDBI Bank. There is very little likelihood of any of these PSEs getting privatised in the current term (2019-2024) of the government.

Investments in Public Sector Enterprises Surged Instead

The government has, however, opened the floodgates of investments in PSEs from the budget in the last four years.

Financial sector enterprises have seen big investments in equity of public sector banks, non-bank financial corporations like IIFCL, IFCI, EXIM Bank and insurance companies.

The government has pumped massive equity and debt exceeding Rs 4 lakh crore in Railways. NHAI has been made fully dependent on budgetary resources for its road construction programme. Equity investment in NHAI will exceed Rs 3 lakh crore in four years ending March 2023.

The government has also turned protector of the sick and investment-sinking public sector enterprises. It has invested over Rs 250,000 crore in Air India Asset Management Company, BSNL, MTNL, High Speed Rail Corridor, Dedicated Freight Corridor etc, during this period knowing fully well that these investments would yield no return and nothing of it would most likely come back.

Modi Government Has Become Net Investment-Heavy Government

For this, we just need to look at the actual net investments made as disclosed in the budget papers in the last four years.

In 2019-20, the government invested Rs 192,564 crores in equity and provided loans of Rs 17,550 crores to the PSEs, totalling Rs 210,114 crores. As the disinvestment receipts were only Rs 50,299 crores, the government made net investment of Rs 142,265 crores.

In 2020-21, the government’s equity investments were of the order of Rs 116,734 crores and loans Rs 88,849 crores totalling Rs 205,583 crores. As the government received Rs 32,845 crores only as disinvestment receipts, its net investments in PSEs amounted to Rs 172,738 crores.

The situation became quite bad in 2021-22. As per the RE, the government’s equity investments were of Rs 305,788 crores and loans Rs 31,968 crores totalling Rs 337,756 crores. Disinvestment proceeds, however, turned out to be only Rs 16,000 crores during the year. Consequently, the government ended up making net investments in excess of Rs 321,700 crores.

Budgetary provisions of 2022-23 brought still worse news. The government undertook to provide big equity support to NHAI, BSNL etc. Equity investments were projected to be Rs 334,134 crore and loans of Rs 26,489 crores, totalling Rs 360,623 crore. With disinvestment receipts not expected to exceed Rs 50,000 crore again, the government would end up making net investment in public sector exceeding Rs 310,000 crores.

In the four years of the current term, it is hard to believe, the government will end up making net investments exceeding about Rs 9.5 lakh crores in its public enterprises.

Is this minimum government? Is this a march towards getting the government out of business? No. Public sector in India is not withering away or getting downsized. It is, on the contrary, thriving.

Will Government Make a Course Correction in 2023–24 Budget?

Quite unlikely.

All indications suggest that the government has put the privatisation and disinvestment agenda on the backburner.

Budget 2022-23 was conspicuous by not mentioning the privatisation programme at all and making quite small disinvestment receipts projections.

Backtracking on the BPCL privatisation, continued reluctance to bring amendments in the Bank Nationalisation Acts for enabling privatisation of banks, and slow resolution of policy issues in CONCOR, IDBI Bank etc, are clear indicators that the government has got quite disinterested in the privatisation agenda.

Recently, the government decided to call off privatisation even in the non-strategic sectors as well by taking privatisation of fertiliser companies off the table.

It is quite evident that the government, instead of pushing privatisation, seems quite willing to carry on with the public sector enterprises. The legacy of Nehru-Indira era lives on.

What Can We Expect. My Take

I don’t expect any serious announcement regarding pursuit of any privatisation or even bolder disinvestment policy in the ensuing budget.

Investment, however, is likely to be scaled up further with the government likely to further increase capital investments in NHAIs, Railways and other public enterprises.

With capital expenditure having become the new Unique Selling Proposition (USP) of budgets, the government might scale up the investment budget to Rs 4 lakh crore or more in 2023-24, keeping disinvestment projections at about Rs 40,000 crore.

The government investment in PSEs being ten times of the disinvestment proceeds, does not sound right but that is the reality.

(The Author is the Chief Policy Advisor, SUBHANJALI, Author: The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)