Is it prudent to fund the deficit via PSU selloffs?

“Strike a balance between social and infrastructure spend”

At times, the intentions and likely policy actions of the government can be better judged by analysing the way in which it presides over the management of public funds. The recent announcement of the government regarding partial disinvestment in profit-making PSUs needs to be seen in this context.

It is pertinent to view the context of the decision. The fiscal stimulus necessary to boost the economy is expected to impact revenues. Further, the failure to control expenditure during the UPA’s first stint and financial profligacy manifested in the many populist schemes, have led to significant imbalance in government finances. The stimulus package only aggravated the situation. As it seems, the withdrawal of fiscal sops may not be feasible immediately, as the economy is yet to take a firm upward path. In this backdrop, the disinvestment decision was inevitable and political stability derived from a fairly decisive mandate helped in speeding up the decision making.Read More


The question that arises is about the usage of disinvestment proceeds. The gross fiscal deficit has two main components in the form of capital expenditure and revenue deficit. To the extent that the government uses the funds in its developmental capital expenditure, the usage would be proper and disinvestment justified. However, if the temptation to direct the flow towards reckless schemes prevails, the entire purpose would get defeated. Government’s stakes in the PSUs were long-term invest-ments and the benefits accruing out of such long term investment should again be put into creation of long-term assets which can be done by directing it towards creation of much-needed infrastructure. Government could also plan to retire some debt from the disinvestment proceeds. After all, fuelling future growth through non-interest bearing financial resources is essential to control deficit and disinvestment provides just that.

Energising the sluggish lPO market, maximising stakeholders’value and inducing better corporate governance practices through listing of PSUs should be looked upon as fringe benefits arising out of the disinvestment decision.

A debate that also presents itself is whether social sector schemes should be funded from disinvestment proceeds. It needs to be understood that while the country needs rapid and modern infrastructure, it also requires efficient healthcare and education systems so that the vast human resource — the key to India’s future growth — gets adequate attention. A proper balance must be struck between infrastructure and key social sectors with regard to capital expenditure from disinvestment proceeds. The strategic objective should be to derive perpetual benefit — economic or social, from these proceeds.