The United Progressive Alliance (UPA) government's recent approach to divestment has been puzzling. In July 2006, it decided to keep on hold all decisions on divestment of government equity in public sector undertakings (PSUs). The decision was a direct fall-out of the UPA's problems with the Left parties. But in less than a year, divestment seemed to be back on the agenda.
In February 2007, the government decided to ride piggyback on the initial public offer of shares by three PSUs - Rural Electrification Corporation (REC), Power Grid Corporation of India Limited (PGCIL) and National Hydro-electric Power Corporation (NHPC).
There were no murmurs of protest from any quarter. The share issue of Power Grid Corporation of India Limited actually went through and the government raked in Rs 995 crore (Rs 9.95 billion).
The IPOs of other PSUs - REC and NHPC - should also yield some additional divestment revenue for the government whenever they hit the market. Enthused by the response to the PGCIL issue, the government has also gone ahead with a similar IPO by Oil India Limited and a sale of its government stake in favour of other oil PSUs, namely Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.
Of course, all such divestment proceeds will not go to the Consolidated Fund of India. In other words, the government will not be able to use these funds to bridge its fiscal deficit. And true to its promise, the UPA government constituted the National Investment Fund (NIF) through a resolution adopted on November 23, 2005. But since divestment was put on hold within eight months of NIF's formation, the fund remained without any resources till the proceeds from the PGCIL divestment came in.
With Rs 995 crore in its kitty, NIF will now have to allocate about Rs 745 crore (Rs 7.45 billion) to help the government finance some of its social sector schemes. The remaining 25 per cent of the available money will be used for capital investment in selected profitable and revivable PSUs. The big relief is that NIF's work will now be supervised by a senior officer designated as its chief executive officer. An advisory board of the Fund has also been constituted.
With the Left busy with Nandigram and the Indo-US nuclear deal, the UPA government's divestment plans are not likely to face any hurdles. After a lull of about two years (total divestment proceeds in 2005-06 and 2006-07 were estimated at only Rs 1,570 crore compared to Rs 2,684 crore (Rs 26.84 billion) in 2004-05), divestment proceeds in the current fiscal year are likely to reach a record level.
Already the UPA government has mobilised Rs 3,362 crore (Rs 33.62 billion) in the current year so far. If the remaining IPOs and Oil India's share transfer go through in the next four months, total divestment proceeds may cross Rs 5,000 crore (Rs 50 billion).
Two questions arise. Why has the UPA government been allowed to go ahead with divestment after it decided to put all such proposals on hold in July 2006? Has the Left relaxed its stand on the issue or are these divestment proposals going through on the sly?
The question is relevant because uncertainty over the future direction of policy on divestment is not desirable.
Secondly, with the National Investment Fund expected to have a kitty of over Rs 5,000 crore by the end of this financial year, the UPA government would do well to make a proper plan on how to spend these resources. Since three-fourths of the proceeds are to be spent on social sector schemes, an effective mechanism needs to be in place to monitor how the money is spent.
Equally important is to identify a list of viable PSUs which will be eligible to receive 25 per cent of these proceeds. Now that divestment is back on the agenda, necessary follow-up steps to use the divestment proceeds more productively have become important.
The Divestment Development