Prime Minister Manmohan Singh put UPA-II?s reform train back on track on Thursday. The government?s disinvestment policy announced on Thursday shies away from strategic sale of public sector units, but is the largest-ever plan to unlock the value of companies for investors, especially retail.

It also holds the promise of improving PSUs? governance standards while raising resources to contain the Centre?s huge fiscal deficit. The stake sale proceeds, which could touch Rs 25,000 crore annually, will be used to fund the capital expenditure of social sector projects, though economists believe it is often difficult to distinguish government revenue spends from capex spends.

According to the policy cleared by the Cabinet Committee on Economic Affairs, all listed PSUs are required to plan further stake sales to ensure that the minimum public holding in these firms reaches 10%. More importantly?in a hark back to the days when Singh was Narasimha Rao?s finance minister?all profitable unlisted PSUs with a positive net worth will be required to list on stock exchanges.

Between 1991 and 1995, the Rao government had sold minority stakes of up to 20% in 39 firms. According to the latest department of public enterprises survey, 159 units showed profits in 2007-08.

?In line with the President?s address and finance minister?s Budget announcement, the government has decided that at least 10% of all profitable listed PSUs should be owned by the public. All unlisted PSUs with a positive net worth, no accumulated losses and net profits in the preceding three years should be listed,? home minister P Chidambaram said after the CCEA meeting.

Commenting on the move, Prime Minister’s economic advisory council chairman C Rangarajan said the government?s decision to use disinvestment proceeds for capital expenditure would help create new capacities in the social sector. ?Since capital expenditure is fairly well defined, I hope the money will go to the right projects and the building up of durable assets,? he said.

Ordinarily, stake sale proceeds would go to the National Investment Fund, where disinvestment ear-nings of Rs 2,000 crore are parked.

But given the tight fiscal situation, a special dispensation is being made for the three-year period 2009-12 so that the proceeds can be used for social sector projects.

“This is a good decision. The Plan Panel was fully in favour of the proposal. It is for the finance ministry to sort out the issue of certain revenue expenditure being accounted as capital expenditure. Anyway there is a lot of capital expenditure in the social sector and the funds would be made good use of,” Planning panel deputy chairman Montek Singh Ahluwalia told FE.

The disinvestment will give the government greater leeway to corral the fiscal deficit to 6.8% of GDP this fiscal, despite the possibility that the auction of 3G spectrum expected to raise at least Rs 35,000 crore and scheduled for January may not actually take place this year.

Just two weeks ago, the PM had reiterated a message he gave to PSU chiefs in 2007 about why listing on Dalal Street made sense. ?Our government is encouraging the listing of public sector enterprises on the stock markets as this would unlock the true value of a company, improve its corporate governance standards and also help it in raising resources for funding future expansion plans. In terms of market capitalisation, of the top ten listed companies on the BSE, five are public sector enterprises,? Singh said at a PSU award function hosted by the Standing Conference of Public Enterprises.

Apart from putting taxpayers? wealth back in their hands, listing PSUs will lead to ?better corporate governance, greater transparency, accountability and public scrutiny of PSUs,? the Cabinet note on the policy stressed. Citing the recent listing of NHPC and OIL, the note pointed out that their market capitalisation had gone up by 125% and 180%, respectively, since listing. ?This has meant an increase in the value of the government?s residual stake, making it a win-win for the Centre,? the note argues.

While the PM pointed out that five of the top ten listed firms are PSUs, FE analysis of listed PSUs reveals they account for almost a third of the total market capitalisation of firms listed on the BSE. Economists welcomed the decision, but weren?t too convinced about the end use of the disinvestment funds–capital expenditure on social sector projects. ?Revenue expenditure and capital expenditure are both often miscalculated in government accounts and the line between the two is blurred. In the ultimate analysis, all expenditure is fungible,? said one.

?It would be better to spend the disinvestment proceeds on infrastructure like roads and power. Social sector schemes largely imply education and health. While education is not very capital intensive, health is relatively more capital intensive, but needs prior planning for effective investment. The absorption capacity of the social sector for investible resources is limited, unless there is prior planning and thought, so capex in the sector should be made through budgetary allocations,? said Madras School of Economics director DK Srivastava.

National Institute of Public Finance & Policy director M Govinda Rao, however, described it as ?a good move, where one asset will be replaced with another asset.? He told FE: ?The disinvestment proceeds will be used to build human capital and physical capital, and for schemes like employment guarantee and rural housing.?