Is it prudent to fund the deficit via PSU selloffs?

“Proceeds should be diverted towards capital creation”

The government should not be treating the proceeds from the PSU disinvestment as a
revenue stream to fund its ballooning fiscal deficit. Although the country’s fiscal deficit has surpassed estimates and is a cause of immense concern at $42 billion (Rs 1.98 trillion) for the period April to September (49.3 per cent of the full year target), using the divestment vehicle as a tool for this would give no real comfort from the point of fiscal prudence otherthan providing some temporary relief.

Moreover, the move to use the earnings from disinvestment to finance welfare projects such as education, employment and healthcare could be viewed as a political compulsion. Even though the sale proceeds are to be used to fund capital expenditure of social sector projects, it is often difficult to distinguish between government expenditure spends and capital creation spends. Read More


Given the government’s record in managing funds, the earnings from disinvestment could just go to servicing debt, which is at nearly 80 per cent of GDP. Using disinvestment proceeds as a tool to reduce the unsustainable fiscal deficit curtails fruitful investment in other growth areas, hampering future economic growth. The proceeds from the disinvestment process could best be used for funding expansion of the firm, or of the sector, or for infrastructure, which would go a long way in aiding the growth momentum. Investing in infrastructure like power and roads would be more effective and beneficial in comparison to welfare schemes — mainly education and health. Education is not very capital intensive and for investments in health, which is capital intensive, adequate planning is required for the investment to be effective. Instead, allocations towards capital expenditure for the health sector should be provided for in the budget after considerable planning.

In fact, the country’s rural infrastructure is grossly inadequate and needs urgent attention. Inadequate infrastructure is a major setback for development and poverty eradication. Spending on infrastructure would undoubtedly lead to job creation.

With the government strapped for funds, the proceeds from disinvestment when used to build essential infrastructure in rural areas would help small enterprises and improve overall health and education facilities. Better infrastructure would attract higher investment (foreign) especially in the manufacturing sector, providing a major boost for the sector. The disinvestment proceeds should be best used to build physical capital which would in the long run help achieve the larger public objectives.