The spirit of disinvestment

News: The Comptroller and Auditor General (CAG) of India has raised questions in a recent report on a smaller deal, involving the purchase by Chennai Port Trust.

What is the issue?

The government is forcing one PSU to buy another to achieve its disinvestment target. For instance, in the recent past, the ONGC took over HPCL.

In the more recent incident, the Chennai Port Trust (ChPT) was forced to buy the government’s two-thirds stake in Kamarajar Port Ltd (KPL).

The CAG has rightly pointed out that the current ChPT deal and other similar deals defeat the spirit of disinvestment.

What are the issues/challenges associated with it?

Firstly, It reduces a comapny’s ability to invest and operate. The ChPT is burdened by further debt and an additional interest burden of Rs 142 crore a year. In the case of ONGC, it was forced into a very adverse cash situation.

Secondly, high cost of borrowing. ChPT had to borrow a large part of the Rs 2,400-crore it had to pay for acquiring KPL. This had to be borrowed from the market at 8 per cent interest, according to the auditor. The government could have borrowed the same amount at a much lower interest rate than ChPT did.

Thirdly, the overall drag of public sector borrowing on India’s financial savings increases.

Fourthly, the government is not ready to provide the benefits of ownership to the PSU’s. For instance, even after ONGC has taken over the HPCL, the government continues to appoint the senior management of HPCL.

Why are the reasons behind the government’s steps?

First, the government is faced with a stressed fiscal resource.

Second, an inadequate realization of disinvestment targets; For example, only 5 percent of the 1.75 trillion targets has been achieved so far.

Third, if one public sector unit buys another, then disinvestment does not amount to a higher private share in ownership.

Source: This post is based on the article “The spirit of disinvestment” published in Business standard on 24^th Dec 2021.