Divestment Is Essential To Good Governance

Published in 1776, Adam Smith’s The Wealth of Nations defines the basic premise of business – profit. Smith argues that a voluntary exchange between two parties will take place if and only if both believe that they stand to benefit. In this context, how fair is a system that limits individuals from exercising their choices? Can a system that limits individuals from expanding their businesses, in the name of public good, be considered fair to the society itself? Consider this: It is the government that lays down the rules for business, or in other words, acts as a regulator and constructs the framework within which businesses must operate. How can, then, the government run its own businesses without being unfair to individuals who raise capital through markets?

PSUs and Grants in the Name of Public Good

Public good means an organised aggregate of people, participating in advantage, profit, and responsibility. Is it feasible to believe that more than 1 billion people can obtain benefit from, or possess any interest in the enterprises run and the property owned by the government? It is obvious that people only end up funding these enterprises in the form of taxes, without having any say in their running or benefitting from them.

Most of us have heard that the government comes to the rescue of the poor – farmers, weavers, or even small time traders – by writing off loans or providing subsidies. The government also goes to the extent of waiving loans to foreign countries. In May 2012, finance minister Pranab Mukherjee announced that India would write off $200 million of the $1 billion loan given to Bangladesh for various projects. A genuine question that arises here is – Whose money is it that the government uses to waive off these loans or provide subsidies? The answer is simple. It is the money of the people that the government collects in the form of various taxes.

Another point to be observed is that the Indian government’s fiscal deficit will be around 5.1 per cent of GDP for the financial year ending March 2013, as published in recent newspaper reports. This translates into Rs 5.2 lakh crores. Why is the government splurging? Where is the money going?

It must be understood that the government’s largesse is a con trick. Whatever the government returns to the people is only a fraction of the money people make through their hard work.

What’s the Solution?

Sell PSUs and cut down the size of the government. The government must be like a lean and mean machine, flexible and fast enough to respond to challenges facing the nation instead of running sick PSUs and giving grants to the poor – who are nothing but an outcome of the government’s malfunctioning and arbitrary controls on the economy.

Positive Signs from the Government

A recent Business Standard report cites data from CRISIL which states that about Rs 300,000 crore have been lent to state-owned utilities and a quarter of this has been restructured. However, there are positive signs on the horizon as the government seems to have learnt lessons from its mistakes. It is now learnt that the government has decided not to offer cheap loans to government owned companies that have poor ratings. The decision in the union finance ministry was triggered after Air India, the state owned airline, failed to pay off its debt. Public banks are of the opinion that the condition of state electricity boards has also resulted in this government decision.

Is Government Serious about Disinvestment?

The NDA government had aggressively pursued the agenda of disinvestment but the present regime has not been able to continue with the policy due to poor market sentiments and political compulsions. However, every now and then, there is a cry to sell stake in the public sector undertakings. The Union Cabinet is expected to consider proposals on disinvestment in June 2012. But the fact remains that several PSUs including BHEL, Indian Oil and SAIL could not be divested and the government will most probably end financial year 2012-13 with divestment revenues of not more than Rs 13,500 crores as against Rs 40,000 crore outlined in the budget.

Why Divest – Lessons from the Past

Government enterprises that are unable to compete and only survive because of the government’s monopoly are a burden on the taxpayer. The huge amount of unused capital lying with the government can be used for the betterment of the country by promoting free enterprise, competition and a favourable business environment. Instead of eliminating competition through legislation, the government must focus on creating an environment of trust so that businesses can operate freely and generate more employment. This is because the private sector ensures optimum use of resources for wealth generation. It is time India learned lessons from the former East Germany and the USSR.