Economic Survey: Private sector fears loom over divestment

The fear of being seen as favouring the private sector is one of the biggest impediments to disinvestment in India, the Economic Survey has said. Citing retrospective taxation cases such as those of Vodafone and Monsanto, it noted that despite the government’s commitment not to act retroactively on tax and other issues, they continue to remain unresolved.

“Evidently, it seems politically difficult to uphold a widely shared—and judicially endorsed— principle against expropriation and retroactivity because of the fear of being seen as favouring the private sector, especially the foreign private sector,” the Survey said. The issues pointed out by the Survey may continue to trouble the Narendra Modi-led government, which is all set to embark on the biggest strategic sale in public sector companies next fiscal with cabinet approvals for stake sale in around six companies that include BEML Ltd and Pawan Hans.

Short of naming loss-making national carrier Air India, the Survey pointed out the commitment to make the perennially unprofitable public sector airline “world class”. It pointed out the reluctance to privatise public enterprises, even for firms where economists have made strong arguments that they belong in the private sector.

The Survey further argued the practice of adhering to strict rules such as auctions of all public assets and asserted that this may not necessarily be the optimal public policy. “But the understandable distrust of discretion means that methods other than auctions could be perceived as favouring particular parties,” it noted. It said the issue of privatisation is further compounded given there is abundant caution in bureaucratic decision making, which favours the status quo.




The government, which had in the last Budget announced to consider the option of reducing its stake in state-run IDBI Bank to below 50%, has not been able to move any forward. “Discussion of disinvesting the government’s majority stake in public sector banks is often difficult in part because of the view that they are legitimate instruments for the state to allocate and redirect resources,” it said. Experts say the government can instil confidence-building measures by holding an open and transparent process for strategic sales.

“In fact, they should transfer the government shareholding in all PSUs to a centralised organisation thus ensuring faster decision-making process and doing away with the pulls of the respective administrative ministries, which are often reluctant,” said Prithvi Haldea, chairman of Prime Database, a leading primary market database provider in the country.