Art of disinvestment

One of the most effective us­es of government investment in public enterprises is to disinvest them when necessary and aim at an appropriate time sequence allowing maximum raising of resources. When our experim­e­nt with public enterprises started, our policymakers, especially Pandit Jawaharlal Nehru, we­re fully aware of the potential impact of this disinvestment pr­o­cess. Public ownership of as­s­e­ts was not as much the purpose of this exercise as the possibility of selling and purchasing of public assets. Controlling public policy was considered the mo­st effective use of the comm­anding heights of the economy.
The essential role of this policy instrument was to enter the market economy with substantive sale and purchase of the assets that would raise revenue and also guide the policy development. For example, se­lling government shares of specific enterprises would raise revenue while at the same time influence the prices of those assets to attract resources from the private market and also in­f­l­u­ence the private investment de­cisions according to market pr­ices. If the government decided to sell some of its assets in the market it would set a floor to prices allowing the private in­vestors to buy those assets and thereby convert a part of the private savings into public in­v­e­s­tment. The sale and purchase of assets is an art to get the maximum revenue out of such sales but is also meant to influence the market prices to guide investment.
Sometimes there is a misunde­r­standing that if public assets are sold we are giving up control of ownership and through that control of policies. So long as a total share of public investment in an enterprise does not go below 50 per cent, the government does not lose control of ownership and, therefore, control of policies. On the contrary, selective sales and purchase all­ow the government to make use of its public investments as an instrument of policymaking. If the aim of those instruments are clear, policy can be fine-tuned, selling assets when they can get maximum market revenue and buying assets when they can raise the prices of those assets. Thus when this instrument is deployed to maximise flexibility it also earns maximum revenues. The management of public investment is an art trying to serve several goals at the same time, with the relative usefulness dependent on market conditions. Essentially, this allows government to have much better control over the market economy without upsetting norms of market behaviour.
I am mentioning all this because our policymakers often make a fetish of the sale and purchase of the public investments. The purpose of disinvestment just as well as investment in our public assets is to maintain a control on the prices of these assets and thereby overall process of economic development. Towards that end, sometimes the government has to sell out its assets or repurchase them, guided by market prices and the potential realisation of market revenues. So long as the net result is not a change in the ownership, the government should have the maximum flexibility to use these instruments.
Recently, the government has taken a decision towards large disinvestment through which, if necessary, the government can sell substantial amount of public assets. That will allow them to raise resources from the market but also influence the relative prices of different assets through their selective sales and purchases. Of late, there has been a substantial increase in the prices of petroleum assets. This is the time when the government should decide on wh­e­ther to buy or sell more of these as­sets. You should sell the as­sets when you think the expected prices of those assets in the future will be going down. You should buy the assets when the expectations are for a further increase in the prices.
When India embarked on massive expansion of public in­v­estment it did not have quite the idea of how effective were the methods of controlling the pr­ices and therefore investment in many of these assets. Public in­vestment was regarded more as gaining control over ownership rather than effective operations, that is why, in the initial ye­ars, any attempt to disinvest th­ese public assets tended to be equated to giving up the ownership and deviating from the so-called socialist pattern of industry. The Indian policymakers ha­ve very quickly learned how to use public investment to control markets, influence their pr­i­ces and use them for attracting investments from the private sector whether in India or ab­r­o­ad. As the Indian economy de­v­e­loped and the strength of Indian markets and investment in­c­r­e­ased, the value of the use of these instruments for controlli­ng the markets also expanded. Ev­en if the market shares of a public enterprise are not always large, they could be used by In­d­­ian policymakers to get the ma­ximum benefits from the ma­rket operations. In other wo­r­ds, while public investment is se­en mostly as a question of ownership and benefiting from the rent in terms of net benefit of the economy and also to the enterprises themselves, the fl­e­x­ible use of public investment in different enterprises was ob­v­iously of a major value to the policymakers.
In this whole exercise of disinvestment or investment of public sector enterprises would ob­v­iously have substantial benefits, provided their operations re­main flexible. The essential precondition of that flexibility was the ability of the public sector management or owners to in­vest or disinvest at any particular time and the acceptance or non-acceptance of the liability of the investment. Any attempt to control such investments for reasons other than the need of that enterprise detract from the net value of such operations. So, disinvestment should be ta­ken as a normal policy tool of an enterprises to be used in our interest of that enterprises, increase or decrease in ownership should be compared with increase or decrease in flexibility of that operation.
But India has learned over the last several decades of industrialisation how to use public in­v­estment in specific sectors such as petroleum, steel and other heavy industries and also to operate on the basis of market incentives. Investments must yield adequate returns reckoned in terms of not just commercial benefits but also social benefits calculated according to social preferences. So, disinvestment has assumed the role of a major instrument of policy intervention — a clear sign of the maturing of an economy.
Apparently, the government has worked out a programme for disinvestment with these goals in mind and we only hope they will prove to be successful in due course of time.

Dr Arjun Sengupta is a Member of Parliament and former Economic Adviser to Pri­me Minister Indira Gandhi

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