Advantage of disinvestment

For the PSU

1. Listing leads to better and timely disclosures, bringing in greater transparency and
professionalism, thus protecting the interest of the investors
2. Greater efficiency by way of being accountable to thousands of shareholders
3. Listing provides an opportunity to raise capital to fund new projects/undertake
expansions/diversifications and for acquisitions. An initial listing increases a company's ability
to raise further capital through various routes like preferential issue, rights issue, Qualified
Institutional Placements and ADRs/GDRs/FCCBs, and in the process attract a wide and varied
body of institutional and professional investors.
4. Listing raises a company's public profile with customers, suppliers, investors, financial
institutions and the media. A listed company is typically covered in analyst reports and may
also be included in one or more of indices of the stock exchanges.




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You are here: UK Essays Essays Economics Impact Of Disinvestment For Indian Economy
Economics Essay
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IMPACT OF DISINVESTMENT FOR
INDIAN ECONOMY
Public sector undertakings were established in India as a part of mixed economy with the
objective of providing necessary infrastructure for the fast growth of economy & to safeguard
against monopoly of industrialist community. However, the entire mechanism did not turn out as
efficient as it ought to be, all thanks to the prevailing hierarchy and bureaucracy.
To illustrate the trailing scenario, the average return on capital employed (ROCE) by PSUs have
been way too low as compared to the cost of borrowing. For instance, between 1940 and 2002,
the average ROCE was 3.4% as against 8.6% average cost of borrowing. PSE survey by NCAER
shows that PAT has never exceeded 5% of sales for or 6% of capital employed. The government
pays a higher interest though, by at least 3 percentage points.
As per an NCAER study report the cost structure of PSES is much more than the private sector
(the following table shows a comparative scale) :
PSES
Private sector
POWER& FUELS/NET SALES
19.5
5
Wages/net sales
23.3
6.5
Interest/net sales
11.7
4.7
Lack of autonomy, political interference, nepotism & corruption has further deteriorated the
situation. For instance, the head of a PSU is appointed by the Government, who in turn appoints
all employees who play major roles in the organization. So directly or indirectly the Government
itself controls the appointment of all manpower in these organizations. It is not the business of
the Government to do business, i.e. it is best controlled by experts and professional managers.
To quote some figures, on 31.3.1997, there were 242 central public sector enterprises with a total
investment of Rs.1,93,121 crores. At the end of the fiscal year 2000-01, PSEs had a total
investment of Rs.274,114 crores. Of these, 104 were loss-making enterprises and about 53
chronically sick enterprises. If we exclude the profit making enterprises, mostly restricted to a
few sectors like petroleum and allied sectors, which basically enjoy a position of State
monopoly, the total loss of the 104 loss making units was a mind boggling Rs. 58,620 crores as
on 31.3.1997. As the losses continue, there is an increasing dependence on direct budgetary
support, and such losses are continuing to be a recurring draft on the budget.
Due to the current revenue expenditure on items such as interest payments, wages and salaries of
Government employees and subsidies, the Government is left with hardly any surplus for capital
expenditure on social and physical infrastructure. Additionally, the continued existence of the
PSEs is forcing the Government to commit further resources for the sustenance of many non-
viable PSEs. The Government continues to expose the taxpayers' money to risk, which it can
readily avoid. To top it all, there is a huge amount of debt overhang, which needs to be serviced
and reduced before money is available to invest in infrastructure. All this makes Disinvestment
of the Government stake in the PSEs absolutely imperative. Disinvestment of the Maruti Udyog
Ltd.will work as a beacon for future.
In an era of globalization, liberalization and dissolution of boundaries between nations, industrial
competitiveness has especially assumed an important role, necessitating privatization or
disinvestment of PSUs. Though it is claimed by many that ownership isnt all that an important
indicator of an organizations functioning as is its management, it has been proven by an ample
number of examples that private controls of an organization bring about drastic changes in its
effectiveness. This is especially true today when competitiveness is essential not only for leading
the industry but for mere survival.



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Bureaucracy has been an inherent part of PSUs and attempts to overcome it have been
unsuccessful if not inadequate. Private management has proven to be a panacea in most such
cases, including VSNL and Delhi Vidyut Board. The success of these organizations after
privatization has been evident by turning from red to black within a short span of time. PSUs no
longer enjoy the privileges as they did in past times in terms of reputation and awe, on the
contrary are stigmatized by the lack of efficiency and social considerations of past times.
Despite huge injection of funds in the past decades the functioning of many public sector units
(PSUs) has traditionally been characterized by poor management, slow decision making
procedures, lack of accountability, low productivity, unsatisfactory quality of goods, excessive
manpower utilization, labor intensive units, lack of technological up gradation, inadequate
attention to R&D, inadequate human resource development and low rate of return on capital.
However, with increasing privatization, disinvestment or change of control into hands of
professional managers, many organizations have seen the tables turn. Some examples are IRCTC
and CRIS to facilitate the functioning of Indian Railways etc.
Inefficient PSUs were largely responsible for the macro-economic crisis faced by India during
1980s. Although they were set up for the purpose of providing employment and the same time
generate revenue surplus. But they could not stand to expectations. Hence steps for
disinvestment had to be taken. Experts are of the opinion that disinvestment is unavoidable for
the success of second generation reforms. Health of the stock market is essential with the
progress of economic reforms.
We have seen every socialist country adopt industrialization, rather efficient industrialization, for
appropriate growth, be it China or Russia. We preferred Russias old model. Now that we have
seen even the social countries succeed with privatization and fail without it, it is high time we
implement it too in major respects.
Implications of Disinvestment on Indian
Economy:
If India wants a continuous increased growth, it has to scale to the next level of performance.
This is not an option but a necessity and disinvestment is a tool to get there. Increased
population, unemployment, and poverty levels are main reasons why India needs to scale. The
cost of not scaling to the next level will see India eclipsed by China and other South East Asian
aspirants leaving India to its internal chaos. It needs a 10% rate of growth every year in its GDP
to continue to be competitive with China and potential emergent nations in South East Asia.
In the context of macroeconomics, time has shown us how countries like Chile ,UK, China , New
zealand ,Poland successfully used disinvestment to achieve new economic heights. Many
countries used disinvestment as a sure means of restoring budgetary balance & to revive growth
on a sustainable basis after facing economic crisis in 80s.Analysis of these countries before &
after disinvestment shows that market-driven economies are more efficient than the state-planned
economies
At the micro level, the change in ownership will increase domestic competition, hence
efficiency; and encourage public participation in domestic stock market all of which will
promote popular capitalism that rewards risk taking and private initiative, that is expected to
yield superior economic outcomes. Disinvestment shows that govt means business which will
attract FDI, FII to finance projects in India.



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Disinvestment will be extremely positive for the Indian equity markets and the economy. It will
draw lot of foreign and domestic money into the markets. It will allow PSU to raise capital to
fund their expansion plans and improve resource allocation in the economy. It will allow the
government to stimulate the economy while resorting to less debt market borrowing. Private
borrowers wont be crowded out of the markets by the government and will have to pay less to
borrow from the open market. Disinvestment will allow government to have much better control
over the market economy without upsetting norms of market behavior.
In future disinvestment will assume the role of a major instrument of policy intervention by
government as 48 PSUs listed on BSE as of February 8, 2010, account for close to the 30% of
the total market cap of the exchange. This is significant as a total of 4,880 odd companies were
listed on the exchange. As of February 8, 2010, the BSE PSU index had a total market cap of Rs
17,14,466.96 crore.
As certain no. of shares are reserved for retail investors & Splitting the stocks of some big PSUs
,will attract more retail investors. Market cap of PSUs can go higher in future & can provide
extra money in the kitty of govt. 5% Reservation for employees will work as an incentive & will
keep momentum going. This will be true democratization of capital. Disinvestment would
encourage citizens participation in management of public enterprises and improve the
capitalization of stock markets. Listing of enterprises on the bourse adds certain economic and
financial benefits to the economy. This is known as financial deepening, a term used by
development economists. Financial deepening improves the efficiency of the financial system as
well as contributes to GDP growth.
Latest loan bribery case(in LIC,PNB etc.) has shown the wrongdoing, loopholes & drawbacks in
the working of PSUs. If India has to become a economic super power, working way of PSUs
have to be changed. PSUs contribute about more than 1/4th in the GDP of India & a large chunk
of working population is employed in PSUs .Economic super power dream is not possible
without PSUs coming at par with private sector.
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