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22nd February 2021 – Editorials/Opinions Analyses

Content

  1. The road map for reducing public sector role
  2. Navigating the storm

Editorial: The road map for reducing public sector role

Context:

  • Finance Minister. in her Budget speech for 2021-22, announced a new policy for central public sector enterprises (CPSEs), which she said will serve as a clear roadmap for disinvestment of government-owned firms across sectors.

Relevance:

  • GS Paper 3: Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein

Mains Questions:

  1. How will the new disinvestment policy oversee the future of all central public sector enterprises? 15 Marks

Dimensions of the Article:

  • Disinvestment in India
  • What goes outside government control?
  • Why is this significant?
  • Issues related to Disinvestment
  • Significance of the disinvestment
  • Way Forward

What is Disinvestment?

  • Disinvestment or divestiture refers to the government selling or liquidating its assets or stakes in PSE (public sector enterprise).
  • The Department for investment and public asset management (DIPAM) under Ministry of finance is the nodal agency for disinvestment
  • It is done when a PSU start incurring the loss of exchequer.
  • Disinvestment proceeds can help the government fund its fiscal deficit.

Disinvestment in India

  • The new economic policy 1991 indicated that PSUs had shown a very negative rate of return on capital employed due to;
  • Subsidized price policy of public sector undertakings.
  • Under–utilization of capacity
  • Problems related to planning and construction of projects.
  • Problems of labour, personnel and management and lack of autonomy

What goes outside government control?

  • Atmanirbhar Bharat package unveiled: The strategic sectors identified at the time for retaining certain public sector entities within the government’s control remain the same in the final policy approved by the Cabinet.
    • These are atomic energy, space and defence, transport and telecommunications, power, petroleum, coal and other minerals, and lastly, banking, insurance and financial services.
    • While the initial plan was to retain one to four public sector firms in these sectors, this has now been replaced by the phrase “bare minimum presence”.
  • Bare Minimum Presence: Once the government decides what is the bare minimum number of firms it wants to retain, the rest of the firms will be privatised, merged or subsidiarized with other CPSEs, or closed.
  • Non-Strategic Firms: For all firms in sectors considered non-strategic, privatisation or closure are the only two options being considered.
  • The policy’s objective is to minimise the public sector’s role and create new investment space for the private sector, in the hope that the infusion of private capital, technology and management practices will contribute to growth and new jobs.
  • The proceeds from the sale of these firms would finance various government-run social sector and developmental programmes.

Why is this significant?

  • A bold push for disinvestment of the public sector was expected soon after Prime Minister Narendra Modi assumed office in May 2014 and announced that the government had “no business to be in business”. This was seen as a clear intent to privatised a huge chunk of India’s large public sector, a legacy from post-Independence policies that placed government firms at the ‘commanding heights’ of the economy.
  • The new policy is significant as it goes beyond such an approach and lays down a rationale for deciding the future ownership pattern of 439 CPSEs, including their subsidiaries.
    • For instance, it is now clear that 151 public sector firms in non-strategic sectors (including 83 holding companies and 68 subsidiaries) will either be closed or sold. The policy also brings public sector banks and insurance entities into the disinvestment ambit for the first time.

Issues related to Disinvestment

  • It is against the socialist ideology of equal distribution of resources amongst the population.
  • It will lead to monopoly and oligopolistic practices by corporates.
  • Proceedings of disinvestment had been used to cater the fiscal deficit of the state which would lead unhealthy fiscal consolidation.
  • Private ownership does not guarantee the efficiency (Rangarajan Committee 1993).
  • Disinvestment exercise had been done by undervaluation of public assets and favoritism bidding, thereby, leading to loss of public exchequers.
  • Private ownership might overlook developmental region disparity in order to cut the cost of operation.

Significance of the disinvestment

  • Trade unionism and political interference often lead to halting of PSUs projects thereby hampering the efficiency in long run.
  • Problem of disguised unemployment and outdated skill in PSUs employee are the major cause of inefficiency.
  • Private prayers works out of Red Tapism bureaucratic mentality and focus on performance-driven culture and effectiveness (Disinvestment Commission 1996).
  • More robust competitive bidding leads to competition in private sectors to participate in PSUs.
  • Moreover, it ensuring that product service portfolio remains contemporary by developing/ acquiring technology.

Way Forward

As economist Pronab Sen has warned, privatisation is a good idea, but doing it during a recession may dampen economic recovery as investors will end up buying existing capacities instead of embarking on fresh investments.


Editorial: Navigating the storm

Context:

  • The Fifteenth Finance Commission has adapted well to swiftly shifting sands

Relevance:

  • GS Paper 2: Fiscal federalism

Mains Questions

  1. If the Centre takes states along, it might help attain the balance envisaged by the Commission, which is needed to drive the country onto a double-engine growth trajectory from the current nadir. Discuss. 15 Marks

Dimensions of the Article:

  • About 15th Finance Commission
  • Vertical Devolution
  • Horizontal Devolution
  • Way Forward

About 15th Finance Commission

  • A pair of balanced scales representing the Union of India and the States, the cover visual of the Fifteenth Finance Commission’s report for the period 2021-22 to 2025-26, seeks to highlight the Commission’s endeavour to maintain an equitable approach at a time when the Centre and States are facing unprecedented revenue stress and fiscal demands.

Vertical Devolution

  • An aggregate share of 41 percent of the net proceeds of Union taxes (divisible pool) should be devolved to States in the year 2020-21.
  • The 1% decrease is to provide additional resources for the newly formed union territories of Jammu and Kashmir, and Ladakh.

Horizontal Devolution

  • Need-based Criteria:
    • Population– As mentioned in the terms of reference (TOR) of the Commission, it has used the 2011 population data while making recommendations. It has been assigned a weight of 15%.
    • Area– The previous weight of 15% has been continued.
    • Forest and Ecology– This criterion has been arrived at by calculating the share of dense forest of each state in the aggregate dense forest of all the states. (The weight has been increased to 10%.)
  • Equity-based Criteria
    • Income Distance- Income distance is the distance of the state’s income from the state with the highest income. A three-year average (2015-16 to 2017-18) per capita comparable GSDP has been taken for all the States. States with lower per capita income would be given a higher share to maintain equity among states. Its weight has been reduced to 45%.
  • Performance-based Criteria
    • Demographic Performance– During the previous commission, many states, particularly the southern states had complained of being penalized with lower devolution for having good performance in population control.
    • Tax Effort– Many States had suggested inclusion of tax performance criteria to incentivize States with higher efficiency of tax collection. The commission has assigned a total weight of 2.5% to reward the states with higher tax collection efficiency.

Way Forward

15th Finance Commission has resisted the Centre’s nudge to review what it felt was a too-generous 42% share granted to States by the previous Commission, and deftly dealt with most of the unusual terms of reference foisted on it. As N.T. Rama Rao said, India lives in the States. If the Centre takes them along, it might help attain the balance envisaged by the Commission, which is needed to drive the country onto a double-engine growth trajectory from the current nadir.

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