Disinvestment as soap opera

Paranoia, followed by delusions of grandeur. That describes the soap opera that the governments disinvestment programme became last week. Originally, the government hoped to raise Rs 12,000 crore through disinvestment.

To maximise prices and improve efficiency, Disinvestment Minister Arun Shourie pleaded for strategic sales (selling a controlling stake to businessmen). He argued, with a wealth of facts and data, that selling minority stakes in PSUs fetched lower prices and did not improve efficiency.

But politics triumphed. Shourie’s strategic sales were foiled, and disinvestment stalled. But then something else happened. The comatose stock market took off. The Sensex doubled between March and December 2003, spurred mainly by foreign institutional investors (FIIs).

In this boom, the government realised that it could sell minority stakes in PSUs at decent prices. Public sector banks like Vijaya Bank and UCO Bank, came out with issues that were oversubscribed.

Building on this, the government decided to sell a whopping Rs 15,000 crore of minority stakes in six PSUs, over three weeks in February-March.

Why the rush? Why not spread the sales over several months, as finance experts had suggested? Because the financial year ends in March and the government wanted to use the sales to reduce its fiscal deficit to decent levels. India Shining, you see!

Now, this constitutes poor politics and poor economics too. I have been at the very forefront of those calling for the privatisation of public sector undertakings. But I view the current round of disinvestment as populist politics rather than economic sense.

Shourie used to be an economist with the World Bank. So he is doubtless aware of the elementary maxim that increased supply depresses prices, others things constant.

Increasing the supply of shares in the stock market by Rs 15,000 crore will tend to depress prices, especially in an overheated market that is due for correction anyway.

Yet when the market did indeed fall last week, Shourie suddenly discovered plots hatched by supposed bear cartels and other dastardly investors engaged in the sinful pursuit of profit.

These slimes, said Shourie, aimed to hammer down the market and spoil his little disinvestment party. SEBI, the rather ineffective watchdog of the markets, was asked to launch an inquiry.

Shourie proposed an Economic Intelligence Unit under the Cabinet to oversee the slimes. His old lieutenant, Pradeep Baijal, described market operators as sharks attempting to boost profit margins.

Now, why would anybody be in the stock market save to boost margins and make big profits? Even in the USA , market operators routinely sell shares before a big public issue, hoping to buy them back at a lower price.

Shourie accelerated this process in India by setting price bands for disinvestment that were well below the prevailing market rate.

But his main concern was not falling prices so much as the possibility that the issues would not be subscribed to. Subscriptions got off to a slow start. This was not unusual: big investors typically wait till the last day before putting in their bids.

But the slow start led Shourie to press panic buttons, issuing threats to market operators and issue managers.

Nowhere else in the world does a minister call the Prime Minister because of a 5 per cent fall in the stock market.

As the week progressed, subscriptions to the issues picked up. Ultimately, they were oversubscribed. End of drama. Obvious conclusion: Shourie went into an unwarranted, panicky funk.

But this interpretation does not go down well with Shining India. So instead, Shourie claimed that his threats exorcised the evil demons of the market, and made them behave.

Really? If indeed economic miracles can be achieved by commands and threats of arrest, surely we need to return to socialism rather than sell PSU shares.

The law-and-order approach to prices is an old socialist one. I remember when YB Chavan shifted from the Home ministry to Finance ministry. Laxman had a brilliant cartoon of Chavan telling the police to go out and arrest inflation. So sad to see Shourie following suit. Politics, politics!

I preferred the old Shourie who denounced the sale of minority shares in PSUs. What he is doing today will not improve efficiency. It will not even reduce the fiscal deficit, as he should know as an economist.

A deficit arises when spending exceeds revenue. This can be funded either by borrowing more (thus increasing the governments liabilities) or by selling assets like PSU shares.

India persists in the accounting fiction that selling shares reduces the deficit while additional borrowing increases it. In fact the governments net worth remains the same whether it sells assets or increases liabilities.

So, the disinvestment has little economic significance. Mainly, it is a political ploy to sell shares cheaply to a large number of voters, hoping to reap electoral dividends.

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