THE GIST of Editorial for UPSC Exams : 30 January 2020 (Strategic disinvestment does not deserve the criticism it gets (Mint))

Strategic disinvestment does not deserve the criticism it gets (Mint)

Mains Paper 3: Economy
Prelims level: Strategic disinvestment
Mains level: Strategic disinvestment opportunities and challenges

Context:

• State-owned Air India is on the block.

Disinvestment a good idea:

• True wisdom lies in the use of resources, including the so-called “family silver", to meet emergent needs.
• It is also required for better returns.
• Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.

Weakening of Indian economy:

• This fiscal year’s second quarter growth in gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent.
• Private sector investment is sagging. Gross capital formation has dipped. Aggregate demand has contracted.
• Public sector expenditure is the single engine that’s driving economic growth.

Challenges ahead for the government:

• There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk.
• Direct tax collections registered a growth of only a little more than 6%.
• The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc.
• The political executive seems determined to honour its commitment to low inflation and macroeconomic stability.
• India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.

Market liberalisation and optimization of wealth:

• Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same.
• The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation?
• Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created.
• Stake sales can achieve value creation: For a validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.
• It is also true that not all companies in the private sector do well. However, in those cases, the losses are not funded by innocent tax payers.

Way forward:

• The government, however, must ensure that it is not taken for a ride.
• In a democracy, voices of dissent must always be heard and respectfully taken into consideration, but disinvestment decisions must be taken on merit.
• The cabinet’s decisions are well justified, and pressure groups should not be allowed to hijack the country’s reform agenda.

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Prelims Questions:

Q.1) With reference to the Jeevan Raksha Padak, consider the following statements:
1. Jeevan Raksha Padak series of awards are given to a person for meritorious act of human nature in saving the life of a person.
2. Persons of all walks of life are eligible for these awards.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) What do you mean by strategic disinvestment? What are the major advantages of strategic disinvestment?