Cabinet Gives Nod To Disinvestment In Nearly 60 PSUs; All You Need To Know

The Logical Indian Crew

November 3rd, 2017

Courtesy: Live MintThe Economic Times | Image Credit: News Time Nowallexamgurublog

The NDA government has moved towards disinvesting several PSUs (Public Sector Undertaking) to make up for the losses and is expected to raise nearly Rs 20,500 crore from these strategic sales in the current fiscal year.

“Strategic sales will involve a change in management control. Some of these are important units. Since each unit will be considered on its own merit, timing will also be decided accordingly. Valuations will also be done,” Finance Minister Arun Jaitley said to reporters.

Nearly Rs 50,000 crore of loss, a debt bill of Rs 55,000 crore is what the PSU sector has to show since 2012. Although the government did not disclose the number and names of the PSUs in which it will sell stakes, the government think-tank NITI Aayog has listed nearly 60 companies that are a combination of loss-making and profit-bearing units, and the government is looking to disinvest more than 50% in some of them. 26 of them have been suggested to be shut down. One of the PSU sale stakes lined up is rumoured to be Air India.


What are PSUs?

Public Sector Undertaking (PSU) or a Public Sector Enterprise is a government and/or state-owned company, where most of the stock is majority-owned by the government. They can be classified as Central Public Sector Enterprises (CPSEs) and State Level Public Enterprises (SLPEs).

The pushing factor for the setting up of PSUs was to find a way to speed up the growth of the primary and vital sectors of the economy; to better the equipment needs of these sectors and to generate employment.

The Industrial Policy Resolution 1956 classified industries into three categories with regards to the role played by the State:

The first category (Schedule A) includes enterprises that are solely controlled by the State.

The second (Schedule B) category includes enterprises whose prime development would be overlooked by the State, but private participation is allowed to support the government.

Finally, the third category included the remaining enterprises, that are left to the private sector to handle.

PSUs were created in India post-Independence to build a strong state-led and robust economy. PSUs were the major players in the economic condition post liberalisation. Unfortunately, India has been plagued by a very inefficient public sector, in the sense that nearly 254 PSUs incurred substantial losses and always return less than the investment made on them. While CPSEs contribute over 20% to India’s GDP and employ over 10 lakh people, many now tend to be a drain on the national exchequer. Between 2007 and 2016, sick CPSEs reportedly faced losses worth Rs 19.68 lakh crore.

Post 1986, state-owned enterprises had 39% of the GDP invested in them, but only generated 14% of the GDP. Finally, due to the rising success of privatisation and resistance from labour unions, the government started divesting from PSUs, beginning from 1991. The BJP-led Vajpayee government (1999-2004) made four disinvestments – in Bharat Aluminium Company (BALCO) and Hindustan Zinc (both to Sterlite Industries), Indian Petrochemicals Corporation Limited (to Reliance Industries) and VSNL (to the Tata group).


The Issue at Hand: Sale of PSUs

Some PSUs, on the other hand, are branching into different sectors to be more relevant. BHEL (Bharat Heavy Electronics Ltd.) has now, apart from investing in renewable energy, now wants to help in making parts for the metro rail and defence sectors.

Vinayak Chatterjee, chairman, Feedback Infra, says to The Economic Times, “To facilitate public spending, new PSUs are sprouting in areas like inland waterways, metro rail and renewable energy.”

New mechanisms are also being looked at to help PSUs operate better. For example, the National Investment and Infrastructure Fund (NIIF) will be used to support fund projects where the maximum stake of the government will just be allowed to be 49%.

Gaurav Taneja, partner, EY, says PSUs are necessary for areas where the private sector is not keen to invest, like public health in rural areas. “In fact, the government should convert many of these operations into public sector outfits and set up a strategic framework to evaluate their performance,” he says. Experts are also of the idea that the public and private sectors needs not be separated from each other- while PSUs can invest in the infrastructure of the enterprise, the private sector could invest in efficient management.


Effects on employment

As one of the primary reasons for setting up PSUs was to increase employment, the selling and divesting of stakes would lead to large-scale hesitancy amongst employees. By divesting, the government is no longer as responsible for its employees, and hence things like pension amounts and other facilities tend to be changed. Salaries paid to the employees would also vary. As a now private company, the enterprise would pay wages from its own revenues

According to research, employment in public sector has dropped from Rs 22.36 lakhs in 1989- 90 to Rs 18.71 lakhs in 2002-03 and further down to Rs 17.66 lakh in 2003-04 due to divesting. Similarly, the share of SCs and STs in employment sector has declined from 30% in 1998 to 27.4% in 2003.


Other Cabinet decisions on PSUs

In the same line of decisions, the cabinet also approved a 2% increase in dearness allowance for central government employees and pensioners (approximately Rs 5622 crore per year). This would lead to nearly 10 million former and current government employees benefitting from the move.

The cabinet also nodded ‘yes’ to a Rs 500 crore package for horticulture farmers, especially to apple farmers in Kashmir and Jammu.

A support of Rs 719 crore to Hindustan Machine Tools Ltd (HMT) to pay salaries and other employee-related dues was approved, while also deciding to shut down the tractor division and transfer small parcels of HMT land in Bengaluru and Kochi to various government entities.

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