{"id":97928,"date":"2021-03-25T23:20:13","date_gmt":"2021-03-25T17:50:13","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=97928"},"modified":"2021-03-26T11:18:20","modified_gmt":"2021-03-26T05:48:20","slug":"similarities-between-disinvestment-and-fiscal-deficit","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/similarities-between-disinvestment-and-fiscal-deficit\/","title":{"rendered":"Similarities between Disinvestment and fiscal deficit"},"content":{"rendered":"\n<p><b>Synopsis<\/b><span style=\"font-weight: 400;\">: Selling of Public assets (Disinvestment) has similar macroeconomic results to fiscal deficit. Both increase wealth inequalities in the society and hence should be avoided.<\/span><\/p>\n<h5><b>Background<\/b><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The government has set a target of 1.75 lakh crore rupees from the disinvestment of PSUs in the current financial year.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The only rationale shown by the government behind such a move is to generate additional resources for spending.<\/span><\/li>\n<\/ul>\n<table>\n<tbody>\n<tr>\n<td><b>Basic Terms:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Fiscal Deficit:<\/b><span style=\"font-weight: 400;\"> It is the difference between the total revenue of the government (excluding borrowings) and its total expenditure. A fiscal deficit situation occurs when the government\u2019s expenditure exceeds its income.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Disinvestment<\/b><span style=\"font-weight: 400;\">: It simply means the withdrawal or reduction of investment.<\/span><\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h5><b>Fiscal Strategy of selling Public Sector Undertakings<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Under disinvestment, equity (shares) of PSUs is offered for sale to the private sector.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">However, the purchase of public assets crowds out private investment in other sectors.<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It happens as the amount kept for investment in varied projects like road, rail, energy, etc. is used for the purchase of public assets. It reduces the pool and hence crowding out takes place.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>Moreover, there is not much difference between fiscal deficit and disinvestment.<\/p>\n<h5><b>Relationship between Disinvestment and Fiscal Deficit<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In Fiscal Deficit, the government issues bonds to the private sector for raising money. While in case of disinvestment, ownership of public assets is offered.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Both have similar macroeconomic consequences:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Enhancing private savings<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Crowding out some private investments<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Allowing the production of idle output and resources by increased government spending<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Creating wealth inequalities<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The only difference is the nature of the paper handed over to the private party.\u00a0<\/span><\/li>\n<\/ul>\n<h5><b>How does fiscal deficit increase wealth inequality<\/b><span style=\"font-weight: 400;\">?<\/span><\/h5>\n<p><span style=\"font-weight: 400;\">Fiscal Deficit generates additional private savings. It enhances wealth inequality.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Firstly, the government expenditure financed by fiscal deficit generates additional demand in the economy.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Secondly, this further increases output and incomes until additional savings generated out of such incomes match the fiscal deficit.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Thirdly, these savings are generally more in the case of the rich who have a higher propensity to save.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Fourthly, these additional savings result in greater wealth creation for the rich and enhance wealth inequalities.<\/span><\/li>\n<\/ul>\n<h5><b>How selling of public assets increases wealth inequality?<\/b><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The process of disinvestment involves the transfer of ownership of public assets to the private sector.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Wealth Inequality gets enhanced as:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><b>Additional savings are created<\/b><span style=\"font-weight: 400;\"> in the economy just like in the case of fiscal deficit, which enhances inequality.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Further, the transfer usually happens at prices well<\/span><b> below the capitalized value of earnings<\/b><span style=\"font-weight: 400;\">. This makes new owners more wealthy in the future and enhances inequalities in society.<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Capitalized value refers to the current value of an asset, based on the total income expected to be realized over its economic life span.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h5><b>Alternative of disinvestment for increasing spending<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The focus should be on<\/span><b> tax-financed government expenditure. <\/b><span style=\"font-weight: 400;\">In this case, there would be no addition to private wealth, and hence no increase in wealth inequality.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the current scenario government can take the following steps:<\/span><\/li>\n<\/ul>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It can impose<\/span><b> a wealth tax <\/b><span style=\"font-weight: 400;\">that would help it extract a bigger chunk of private profits and doesn\u2019t increase inequalities.<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Elizabeth Warren had proposed the idea during her nomination for the American presidency and 18 billionaires supported this.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><b>Increase the GST rate on luxury goods<\/b><span style=\"font-weight: 400;\"> with due consultation with states. Further it should be complemented with a proportional increase in government spending. The result would be an increase in employment and output in the economy without impacting post-tax profits in real terms.<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Thus, the multiple benefits associated with PSUs like social empowerment (role in green revolution), protection against the dominance of multinational corporations, etc. cannot be ignored.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Even if we ignore these, the sale of public assets to finance government spending is undesirable and unnecessary on purely fiscal terms.<\/span><\/p>\n<p><b>Source<\/b><span style=\"font-weight: 400;\">: <a href=\"https:\/\/indianexpress.com\/article\/opinion\/columns\/privatisation-public-sector-units-banks-india-fiscal-deficit-economy-nirmala-sitharaman-7243710\/\" target=\"_blank\" rel=\"noopener\">The Indian Express\u00a0<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Synopsis: Selling of Public assets (Disinvestment) has similar macroeconomic results to fiscal deficit. Both increase wealth inequalities in the society and hence should be avoided. Background The government has set a target of 1.75 lakh crore rupees from the disinvestment of PSUs in the current financial year. The only rationale shown by the government behind&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/similarities-between-disinvestment-and-fiscal-deficit\/\">Continue reading <span class=\"screen-reader-text\">Similarities between Disinvestment and fiscal deficit<\/span><\/a><\/p>\n","protected":false},"author":10322,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[1308],"class_list":["post-97928","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-eco_0","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704887208},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/97928","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10322"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=97928"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/97928\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=97928"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=97928"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=97928"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}