LIC disinvestment: Right and wrong

News: The Government of India (GoI) is disinvesting 5 per cent of the shares of the Life Insurance Corporation of India (LIC). However, the GoI will retain control of the company.

Why LIC should be privatized rather than disinvested?

First, the previous experience shows outcome of disinvestment in public sector banks has not been good for the taxpayer or for the economy. On the other hand, in case of proper privatization experience has been better.

Second, LIC has grown substantially over time and has a monopoly. That’s why it is suggested that GoI should privatise LIC, and it should give up the control to the private sector at the right price.

Third, it is said that it is not the business of the government to be in business. But it is very much the business of the government to provide public goods and services, which the private sector fails to provide. The proceeds of privatization can be utilized to improve public service delivery.

How proceeds of privatization can help in providing public goods?

First, there are several public goods and services that need to be expanded and improved.

For example, the police, judiciary, and tax administration. The policing system is small considering the population of the country. Also, more spending is needed on the infrastructure and the human capital in the judiciary. And, the tax administration, because the tax-gross domestic ratio (GDP) ratio is low in India.

Second, the public authorities have not over time invested adequately in research, planning, and the administrative machinery for the purpose of collecting more taxes. A higher tax-GDP ratio can pave the way for larger public spending on education and health. The spending on these merit goods will enhance equity and productivity.

Third, better public services enable more people to carry out an economic activity, which leads to an increase in GDP. There will be social return also. Hence, the GoI and the public at large can benefit more from spending on public services rather than spending on highways.

For example, disinvestment proceeds of LIC will be used in highways construction, but actually highways are not always public goods because a toll can be charged by a private player to cover the costs and even make some profit.

What is the way forward?

Instead of mere disinvestment, it is important to privatize LIC and use the sale proceeds for expanding and improving basic public services that are effectively productive. It will benefit the common person much more than those who are well-placed.

Source: This post is based on the article “LIC disinvestment: Right and wrong” published in Business Standard on 15^th Feb 2022.