Disinvestment in Indian

Economy:
Is it a prudent strategy?

By:
1) Jyoti Gupta (G15085)
2) Kumar Utsav (G15087)
3) Rishabh Singla
(G15105)
4) Shashank Jain (G15110)
5) Udit Asati (G15115)

History
Indian Economy near bankruptcy in the year
1990-91
Predominant reason: Balance of payments
Rupee devalued
Fiscal Deficit at 8.40% of GDP
Gross Public Sector Deficit at 10.90% of GDP
Foreign exchange reserves near to depletion
67 tons of gold pledged as collateral for loans
from IMF; structural reforms imposed

What are Structural Reforms??

Pre-conditions for loans from IMF and World
Bank
Key aspects:
Trade liberalization
Removal of price controls and subsidies
Encouragement to FDI and FII
Balance of budgets (austerity)
Improving governance

Trade Liberalization
Liberalization implies to be less strict
Economically, loosening of government
regulations in a country to allow free
international trade
Trade Sector Reforms : Elimination of Import Licensing
Rationalization of Tariff Structure
Adoption of Flexible Exchange rate
Abolishment of quantitative restrictions

Pre-liberalization vs Post-liberalization
Fluctuations in Indias foreign trade
Total Trade
5000000

% of change --50.00%

4500000
4000000
3500000

40.00%

30.00%

3000000
2500000

20.00%

2000000
1500000
1000000

10.00%

0.00%

500000
0

-10.00%

Pros and cons

Pros
Economic welfare: goods and
services at lowest opportunity cost
Lower prices
Increased competition leads to
increase in efficiency

Cons
Unequal growth of industries;
more unemployment

Exploitation of environment

Economies of scale
Increased employment
Exercising control over exchange
rates

Restrictive growth for developing

nations

India Today
28 Free Trade Agreements (FTAs) and Comprehensive
Economic
Cooperation
and
Partnership
Agreements(CECAs) with countries like Singapore,
Mauritius, Australia, Indonesia, Thailand, New Zealand,
Japan, South Korea etc.
202 Special Economic Zones (SEZs) in 7 Zones.
India accounts for 1.44% of exports and 2.12% of imports
for merchandise trade and 3.34% of exports and 3.31% of
imports for commercial services trade worldwide.
One of the most sought investment destination, attracting
highest foreign investments in 2014.
Fastest growing economy in the world.

Impacts
1. Stock market on a rise

2. Share of import/export in GDP has increased by almost 200%.

3. From being an agrarian economy to one of the biggest

exporters of services.

Growth in per capita

13

Disinvestment in
PSUs

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14

Disinvestme
nt

Divestment or disinvestment, as the name suggests,

implies the conversion of assets into cash

New economic policy; July 1991 clearly indicated that

PSUs had shown a very negative rate of return on
capital employed
Pillars of growth had become a burden on the
economy
10 to 15 % of the total GDP were getting reduced on
account of low savings from PSUs

15

Factors responsible for low profit in PSUs

Price policy of public sector undertakings
Underutilisation of capacity
Problems related to planning and construction of projects
Problems of labour, personnel and management
Lack of Autonomy

16

Objectives of Disinvestment
To reduce the financial burden on the Government
To improve public finances
To introduce, competition and market discipline
Fund growth
To encourage wider share of ownership
To depoliticise non-essential services

17

Importance of disinvestment in PSUs

Presently, the Government has about Rs. 2 lakh crore locked up in PSUs

Disinvestment of the Government stake is, thus, far too significant.

Financing the increasing fiscal deficit

Financing large-scale infrastructure development
The importance of
disinvestment lies in
utilisation of funds for

For investing in the economy to encourage spending

For social programs like health and education
For retiring Government debt- Almost 40-45% of the
Centres revenue receipts go towards repaying
public
debt/interest

18

Needs of Disinvestment
1. More Economic Sense: To extract the locked out funds beyond
51% equity for redeployment in area where development is
needed and resources for funding social sector programmes.
2. Increased Competition: All key developments in these PSUs
will be closely scrutinized by the investor community and hence
competitive spirits will increase in the operations of the PSUs.
3. Robust Economy: The funds help in reducing the current
account deficit of the country and hence make Economy more
robust and attractive for foreign investments, thereby opening
doors for employment and socio-economic growth

19

Types of disinvestment
Minority divestment

This ensures that the government retains a

majority stake in the company, typically
greater
than
51%,
thus
ensuring
management control.

Complete Privatization
Complete privatization is a form of majority
disinvestment wherein 100% control of the
company is passed on to a buyer. Examples of
this include 18 hotel properties of ITDC

Majority
divestment
Sale of a large block of shares along with sale
of a large block of shares along with transfer of
management control to a Strategic Partner
identified through a process of competitive
bidding.
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Disinvestment Process
20

Selection of PSU by MODI

Approved by CCD
Formulation of IMG and selection of global advisors
2-3 Months

Submission of expression of interest

Submission of initial technical proposal
Due diligence/commercial negotiations

2-3 Months

Finalize shareholders agreement and share purchase

agreements
Financial bids

1 Week

Selection of strategic partner and signing of SHA and SPA10/2/15

21

Potential Untapped

Rs 4.03
lakh crore
in power
companie
s

Rs 2.98
lakh crore
in oil &
gas

The current value of market capitalization of

CPSEs of the country is Rs. 13,52,950.42 Crore

CPSEs constitute 13.34% and 13.68% of the total

market capitalization of companies listed at BSE
and NSE respectively

Rs 1.70
lakh crore
in metals

For the last 03 years, the targets set for

disinvestments funds are being missed.

For 2015-16, the government has set a target of

Rs 69,500 crore from PSU disinvestment (Rs
41,000 crore minority stake sale in PSUs and Rs

Rs 3, 76, 711 crore can be

unlocked to bring up to 51%
govt. stake

28,500 crore from strategic stake sale)

10/2/15

22

Historical Data
30000

Total Receipts per year

25000
20000
15000
10000
5000
0

Total
Receipts

23

Historical Data

The Government of India till now has raised a sum of Rs 1,78,792.42 crore
through disinvestment since 1991.

The Government of India has raised Rs 100,143.45 crore in the last five years
through disinvestment.

As on 31st March 2014, there were 290 Central Public Sector Enterprises
wherein, 169 are Holding CPSEs and 121 are the Subsidiary. Out of this, 07 are
Maharatna, 17 are Navaratnas and 54 mini-ratnas.

ONGC Public Offer in 2003-04 has been the largest CPSE FPO, raising Rs.
10,542 crore.

Coal India Public Offer in 2010-11 has been the largest CPSE IPO, raising Rs.
15,199 crore.

24

Impacts of Disinvestment

Exposes the privatized companies to market discipline, thereby forcing them

to become more efficient and survive or cease on their own financial and
economic strength

Wider distribution of wealth through offering of shares of privatized

companies to small investors and employees

Have a beneficial effect on the capital market, the increase in floating stock
would give the market more depth and liquidity, give investors easier exit
options.

End of public sector monopoly in the telecom and civil aviation sector and
privatization has brought to consumers greater satisfaction by way of more
choices as well as cheaper and better quality of products and services.

Opening up the public sector to appropriate private investment would

increase economic activity and have an overall beneficial effect on the
economy, employment and tax revenues in the medium to long term

25

Challenges
Bearish market
Volatile stock markets have forced the government to delay the proposed stake sales in PSUs.

Global economic cues

Global equity markets have been on a downslide on fears over the spiralling debt crisis in the euro zone, as
well as credit crunch in the US.

Soft budget constraint

Many loss-making PSUs are kept afloat by either direct government subsidy or by directed bank credit from
state-owned banks

Government policy
Government does not have a well-defined disinvestment policy
Government has failed to maintain transparency in the various stages of disinvestment process
Lack of co-operation and co-ordination between disinvestment ministry and other concerned ministries

Multiple objectives
PSUs were often not designed to be primarily profit-making enterprises but expected to promote social
objectives such as generating guaranteed employment, taking industries to backward areas, buying inputs
from other PSUs to support them, providing output at `reasonable' prices to people, irrespective of costs,
and so on
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Pros & Cons

26

Cons
Private sector cannot achieve equal distribution of
resources for all classes. Private enterprises only focus
on profit maximization. They wont cater poor people.
Therefore Government needs to control all or some
industrial sectors.

Pros
Government controlled units cannot compete in free
market economy due to political interference and
price control mechanisms. Ultimately more public
money is wasted in running these loss making
entities.

Governments dividend income will decline. (Because Government has spent far more crores rupees to
theyll have fewer shares). Consequently, Fiscal deficit revive these PSUs compared to the dividend it has got.
will increase.
The funds received from disinvestment are used to Need amendments in FRBM act to ensure this
finance fiscal deficit. This is an unhealthy practice.
doesnt happen.
Employees of PSUs will be affected and may lose their Overstaffing is one of the main reasons why PSUs
jobs due to disinvestment
dont make optimum profit.
Disinvestment would lead to private monopolies

Unlikely to happen in todays world. CCI is always

watching and punishing the firms that try to create
monopoly or oligopoly.

To complete the disinvestment targets, Government Need for a clear policy on disinvestment to stop this
asks one PSUs to buy shares of another PSU. In such practice.
cases, disinvestment doesnt decrease Government
control over those companies.

27

Way Ahead.
Clear policy & framework for disinvestment process
De-link disinvestment with budgetary control exercise
Disinvestment process be audited by at least 2 reputed auditing firms
Creation of separate disinvestment fund
Yearly action plan should be taken

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28

IPO Summary - Coal India Limited

(CIL)
Navratna PSU and the largest coal producing company in the world with the
highest market capitalization is Coal India Ltd. at Rs. 2,65,951 crore (BSE)

IPO in October 2010. Biggest in history of Indian Stock Market

Fund raised - close to INR 1,500,000 million by selling 631.63 million equity
shares

The price band of the IPO was fixed at INR 225-245

Issue was highly successful in terms of the response from investors and was
oversubscribed by 15.28 times

The highest oversubscription came from non-institutional investors at 25.4 times

November 2010 - Listed at price of INR 287.75 and closed at INR 342.35 on the
BSE with the huge turnover of INR 63,241 million

Went past the INR 400 mark to peak at INR 422 on the National Stock Exchange
(NSE) on May 31, 2011

From about 78 million tonnes at the time of its formulation, production reached a
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level of about 436 million tonnes in 2011/12

Subsidies as Structural
Reforms

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Subsidies

Instruments of Fiscal policy through which government

provides assistance that can be shared by the population
at large.

Subsidies in India amount to around 14% of total

expenditure of central government.

Over the last 10 years, subsidy pay out of the

government has witnessed a steady increase from Rs

48,000 crore in FY06 to Rs 2.61 lakh crore (budget
estimate) in 2014-15 - an annual increase of about 22
percent on an average.

Why are subsidies vital to economy?

Affect decisions concerning production, consumption and
allocation of resources.
Account for a significant part of government's
expenditures
Distinctly affect the supply or demand curves of a
product.

Types of Subsidies
SUBSIDI
ES

DEMAND
SIDE

SUPPLY
SIDE
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SUBSIDIES 2015-SALIENT
FEATURES
Rs 2.27 lakh crore ($37 billion) expected to be spent on major
subsidies during the fiscal year starting 2015- 16
Out of Rs 2.27 lakh crore, Rs 1.24 lakh crore ($20.11 billion) to
be given in food subsidies.The subsidy bill on food, petroleum
and fertilizers is estimated at Rs 2,27,387.56 crore for 201516Of the total food subsidy, nearly Rs 65,000 crore is for
implementation of National Food Security Act (NFSA).
Fertilizer subsidy has been pegged at Rs 72,968.56 crore for
the next fiscal, higher than Rs 70,967.31 crore estimated for
this year.
Petroleum subsidy has been halved to Rs 30,000 crore for
2015-16 from estimated Rs 60,270 crore in the current fiscal.

Why are structural reforms

important?

Economic Benefits of subsidy reforms:

1. Effects on budgetary expenditure
2. Effects on sectoral efficiency and productivity

Social Benefits of subsidy reforms:

1.Effects on income distribution across producers and consumers
2.Effects on social capital

Environmental benefits of subsidy reforms:

Ill designed subsidies can harm the environment in indirect way.

Pros

Cons

Economic welfare: goods and services at

lowest cost

Ill structured and ill designed

subsidies lead to greater fiscal
deficit.

Reduces cost of production

Exploitation of environment

Increased employment

Inefficient transfer to receipients

Positive externalities in the society

through better healthcare and education

Firms may become inefficient in

production if they rely upon
subsidies

Reduced pollution levels

Higher taxes.

Pros and cons

40

FDI as Structural Reform

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41

FDI

refers to capital inflows from abroad that invest in the

production capacity of the economy.

Current Status
42
Net FDI inflows touched 1.7% of gross domestic product (GDP) in the
just-ended fiscal year

Foreign investment inflows to India are predominantly to infrastructure,

mainly telecom, oil and gas, mining sectors, as well as the services
sector

Macroeconomic Analysis of FDI

43

FDI causes a flow of money into the economy which stimulates

economic activity and as a result employment increases.
Long run aggregate supply shifts outwards and Aggregate demand also
shifts outwards as investment is a component of aggregate demand.
It may give domestic producers an incentive to become more efficient
The government of the country experiencing increasing levels of FDI
haves a greater voice at international summits as their country will
have more stakeholders in it.

Merits
44
Economic growth
Benefit to Trade
Employment and skill levels
Technology diffusion and knowledge transfer
Linkages and spill-overs to domestic firms

34

Demerits
Domestic firms may suffer if they are relatively uncompetitive.
Inflation may increase slightly if there is a gap between demand
and supply sides.
If there is a lot of FDI into one industry e.g. the automotive
industry then a country can become too dependent on it and it
may turn into a risk
It is conspicuous that FDI can affect local communities, when
larger projects come in

35

FDI and Current Account Deficit: Has India taken FDI

seriously ?
FII make our FOREX market extremely volatile --- rupee rises with
the rise of SENSEX and falls with the fall in SENSEX on the back
of infusion of dollars by FIIs or their withdrawal.
We cant overnight become an exporting nation - 'Make in India'
is yet to catch the imagination of foreigners.
Thus Modi government should pull all stops and welcome FDI

36

Conclusion
There is a long way in front of India to fully extract the benefits of FDI
and a lot needs to be done to exploit the benefits of FDI as a facilitator
to India's behemoth economy.

THANK
YOU
10/2/15