Jaitley should enact a Right to Disinvest

Dear Arun Jaitley, As you prepare to present your first budget, you will be struggling to make ends meet. Your predecessor did some financial jugglery (like not paying overdue bills) to bring down the fiscal deficit, but that’s unsustainable. You also face an infrastructure crisis: the public-private partnership model has broken down, since private players cannot raise enough equity or loans, so the government must provide a far greater share.

You also have to find an additional Rs 5.8 lakh crore (estimated by the PJ Nayak Committee) to recapitalize the banking system between now and 2018. Alas, you lack cash even to meet current expenses, let alone hugely increase infrastructure spending or bank recapitalization. Instead of searching desperately for financial fixes, let me suggest a broader approach to tackle both budgetary woes and economic growth. This might be called the right to disinvest, which would include the right to privatize.

Right now, the government’s right to disinvest is severely restricted. The Vajpayee government sought to privatize government-owned oil companies (HPCL and BPCL). But these had been nationalized through legislation, and the courts said the government couldn’t sell a majority stake without fresh legislation. The Vajpayee government lacked a majority in the Rajya Sabha, and so dropped the whole idea.

The court decision effectively banned private coal mining. Coal was nationalized by law in the 1970s. Courts held that new legislation was required to divest more than half the government stake in Coal India, or allow any private mines save for captive consumption. For want a majority in both houses, neither the NDA nor UPA governments could push forward on this.

Without fresh legislation, the government cannot drop its stake in nationalized banks (which account for 70% of the banking system) below 50%. After the financial crisis of 2008, it has been agreed globally that banks must hold much more equity capital before increasing lending. So, Indian banks must raise massive equity to keep lending in coming years.

Can the government find lakhs of crores from its budget to recapitalize public sector banks? Sorry, so much cash is not available. A second way would be to let these banks raise equity from the markets, but that would dilute the government’s share below 50%, violating the nationalization law.

The PJ Nayak Committee has suggested creating a government holding company which then holds stakes of less than 50% in individual public sector banks. But this too will require fresh legislation.

Court decisions mandate that no state government can approve a private university by executive decree: this needs fresh legislation, with all the red tape, politics and corruption involved. Private universities are a badly needed form of education reform, but the legislative requirement means they are hamstrung.

Mr Jaitley , don’t see these as separate issues. Tackle them all in one go by enacting a new omnibus law giving the government the right to disinvest by executive action, overriding existing laws. In one sweep, it will allow you to sell majority stakes in any government companies you want, raising resources for the budget and infrastructure. It will let you denationalize coal and rapidly kick-start new private universities. It will let public sector banks raise fresh capital on the markets, reducing the government’s stake below 50%.

Time is of the essence. You lack a majority in the Rajya Sabha. If a Bill passes the Lok Sabha but fails in the Rajya Sabha, you can convene a joint session to pass it, and you now have an overall majority . But this is a politically painful and time-consuming process, which you cannot wish to go through for every economic reform. It’s surely preferable to have one omnibus Bill giving the government the right to lower its shareholding in any government companies to any level it pleases. This will facilitate rapid reforms in many areas, including coal.

The implications will be hugely positive for the budget as well as economic growth. Easier disinvestment of government stakes will raise large sums for curbing the fiscal deficit, financing new infrastructure, and recapitalizing banks.

You need to fix the ailing banking system. The PJ Nayak Committee has provided excellent recommendations for improving bank autonomy and performance. However, this will be possible only if government stakes in PSU banks fall below 50%, freeing these banks from cumbersome oversight by the CVC, CAG and other government institutions, and putting them on par with private banks. This alone will enable PSU banks to compete. You are a lawyer too. You will appreciate the need for a strong legal basis for multiple reforms that are urgently needed. Go for it.