FE Editorial : Sell, then pay off debt

The Financial Express
Posted: Thursday, Jul 09, 2009 at 2124 hrs IST
Updated: Thursday, Jul 09, 2009 at 2124 hrs IST

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: One of the key debates in the context of disinvestment is how to use the money. This issue probably explains why Pranab Mukherjee went almost quiet on disinvestment in the Budget, but subsequently said a roadmap will be ready in 90 days. In accordance with a policy initiated by UPA I, all proceeds from disinvestment must accrue to the National Investment Fund. The corpus of this fund, just under Rs 1,000 crore at the moment, is managed by three public sector mutual funds. Any returns obtained through investment by the fund managers can then be used to fund social sector schemes and assist in the restructuring of public sector companies in a 75:25 proportion. The corpus amount has to remain intact. The problem with the concept of the National Investment Fund is that it greatly reduces the flexibility the government needs to use the proceeds of disinvestment properly.

The view of these columns on the use of disinvestment funds has been laid out clearly on a number of occasions. The proceeds from disinvestment, we believe, should be used to retire public debt, something that the National Investment Fund route prevents. Interest payments on national debt amount to close to 4% of GDP. And public debt, already Rs 3 lakh crore, is fast rising—above the already high 60% of GDP level. Any significant retiring of public debt would have the double positive effect of reducing government expenditure on debt repayment and creating more space for private sector borrowing at cheaper rates. These will be recurring benefits, and not simply one-off benefits from disinvestment. On the other hand, if all the proceeds of divestment are channelled into the National Investment Fund, and only the returns to investment can be used, the government would risk locking up a lot of money, which could otherwise be used very productively and immediately. Of course, this is not the same as suggesting one-time spending on big ticket social sector schemes—that would be the worst option and unsustainable. But to get a reasonable absolute amount as return on investment, the corpus of the National Investment Fund will have to be very high—especially now since the returns to investment are low in the slowdown. It seems unlikely that the government will go for a big bang divestment in one go. If the process is going to be in small parts, it’s best not to lock any...

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