Will Divestment in Public Sector Companies Improve Our Economy?

The government on 20 November 2019 announced that it is willing to give up on its stake in various public sector companies as a part of its plan to boost the ailing economy which has seen fresh lows of late. Surprisingly, the government is even willing to do away with the management and administration of these companies. 

The government is looking for buyers of popular public sector undertakings such as Shipping Corporation of India (SCI), Bharat Petroleum Corporation Ltd (BPCL), and Container Corporation of India Ltd (CONCOR). The sale of the government’s stake in these companies will result in buyers gaining control over the management. 

The government is willing to give up its full stake in the North Eastern Electric Power Corporation Limited (NEEPCO) and 74.2% of its stake in the Tehri Hydro Development Corporation of India (THDC India Limited). The government’s stakes in these companies will be taken over by NTPC Ltd, which is another public sector undertaking company. 

Strategic sales are when the government cedes control over the management of a company to the buyer. Divestment deals are those in which the government’s stake is given up, but control over the management still belies with it. Divestment deals can either be made through direct deals or initial public offering. 

Strategic sales are also different from those scenarios in which the government sells its majority of stake to another public sector company over which it has control. The history of disinvestment dates back to the era of liberalisation. A few of the most popular companies in which the government divested are Hindustan Zinc, Maruti, and Videsh Sanchar Nigam Limited.

Also Read: A slowing economy impacts growth in income tax returns

The government, in its latest round of divestment, is looking to raise a sum around Rs 80,00,000 crore. If things go as planned, the government’s divestment value will amount to touch Rs 1.05 lakh crore in this fiscal year. The economic slowdown has taken its toll on the government’s earnings this year.

The collection of indirect tax has not touched the expected mark and is well below par. Keeping this in mind, the government announced a reduction in the corporate tax rate to push companies to payout dividends or to use the same to come up with new projects to create employment opportunities.

As the consumption has hit record low levels, the government may consider reducing the personal income tax rate to place more cash in the taxpayers’ hands. The result of lowering tax rates will ultimately lessen the government’s inflow of funds for its expenses and will reduce investments in social and realty sectors. 

Furthermore, if the fiscal deficit goes helpless, then India will be in an awful position as the credit rating agencies will further lower the grade of investments in India. This will make it extremely difficult for Indian companies and the government to avail loans in foreign currencies. 

Amidst an economic slowdown, the proceeds that the government would receive on selling its stake in the public sector companies will act as a cushion of comfort to the government. The current fiscal year has not been noteworthy for the government when it comes to its finances. 

The Reserve Bank of India (RBI) has given the government a whopping Rs 1.76 lakh crore as dividend payout. However, the happiness was temporary as the government rolled out a reduction in the corporate tax rate to boost the ailing economy. This move will cost the government an annual loss of nearly Rs 1.45 lakh crore.  

Hence, if the government can meet its divestment target this year, then it will provide the government with additional cash to cope with negative financial news of late. 

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in