For the Modi government disinvestment hasn't been about earning money

Several recent sales and IPOs by the government have brought into question the financial reasoning behind disinvestment. But the fact is that for the Modi government disinvestment hasn’t been about earning money. It’s more about how to spend it sensibly.

The sale of Air India to the Tatas in October 2021 earned the government only about Rs 18,000 crore. Even in this, only 15 per cent went to the government. The rest was all used to service Air India’s massive debt. Most experts believed that this was a poor deal, although they did acknowledge that it was the only one the government had.

With the LIC stock tanking and about Rs 1 trillion having been wiped out from its market cap since its listing in mid-May, there are naturally questions about whether the Rs 20,000-odd crore the government earned was worth it. But again, looking at the IPO as purely a way to earn money is to miss the point.

Disinvestment first took place in India in 1991-92, when 31 PSUs were sold for Rs 3,038 crore. Since 1991 then, just a little more than Rs 6 trillion has been earned from disinvestment, of which Rs 4 trillion has happened since 2014. In other words, the Modi government has earned twice as much from disinvestment as all previous governments combined have since 1991.

While some of this can be attributed to inflation over time, there’s no question that 2014 marked a watershed moment in India’s disinvestment policy.

But let’s put these numbers in context first. In 2020-21, the latest year for which there are actual figures, the government arned Rs 14.26 trillion as net tax revenue and it is expecting to earn Rs 19.34 trillion this year. So, even during a pandemic, tax revenue in a single year was more than double what it has earned through 21 years of disinvestment. This year, it will likely be more than triple.

Looked at another way, the Modi government has earned more than Rs 8 trillion from just dividends and profits of PSUs and the RBI in 2014-21. It expects to earn an additional Rs 2.6 trillion over 2021-22 and 2022-23. If earning money was the driver, disinvestment would hardly be the strategy to employ.

While disinvestment is periodically in the limelight because of high-profile sales like Air India or because Opposition parties drum up protests, what has gone relatively unnoticed, is a marked change in the way this government is prioritising its expenditure. This is key to understanding the Modi government’s disinvestment policy.

The truth is that the government has been quietly shifting expenditure from revenue to capital expenditure. Thus in 2014 revenue expenditure made up about 88 percent of total expenditure. In 2022-23, that proportion is budgeted to reduce to about 80 per cent.

Conversely, the share of capital expenditure is set to increase from 12 percent to about 20 per cent over this period. From the National Infrastructure Pipeline to the latest PM Gati Shakti, the focus and discourse has been overwhelmingly about capex. 

That said the cause for some concern is government borrowing. Its debt stood at Rs 55.9 trillion on March 31, 2014. That figure ballooned to Rs 135.9 trillion by March 31, 2022, nearly 2.5 times more. 

It is set to grow further to Rs 152.2 trillion by March 2023. This is a real and unsolvable problem, not just in India but all over the world.