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The Government’s Latest Attempt to Address Disinvestment & Fiscal Deficit Targets


 Reeling under the adverse ramifications of internal and external pressures, the UPA – II Government continues to grapple with a myriad of issues and challenges that only appear to become more daunting with each passing day. With rising inflation, inconveniently high food prices, stuttering economic expansion and other financial woes amongst other critical issues already to contend with; the Government appears to have more on its plate than it can judiciously handle. Add to that mix; a slew of corruption scandals, an eroding public image and a general lack of goodwill; and the Centre appears to be on the precipice. The pressing need for proactive policy formulation and implementation backed by positive leadership is the need of the hour. Set in this tumultuous backdrop, in order to meet its fiscal deficit targets, the Government has announced that it would be adopting a marginally departed approach to pursue its disinvestment goals. (Disinvestment - The action of an organization or a Government when it indulges in the selling or liquidation of an asset or subsidiary. Also known as "divestiture”. Source: www.investopedia.com).

Disinvestment has always been an “elusive target” as successive Governments have struggled to formulate a balanced strategy mix to accomplish the same over a protracted period of time. However, with the Government admitting that achieving the fiscal deficit objective of 4.6% of the GDP for the year ending March, 2012, would be a tough proposition; disinvestment assumes even greater significance. As crude oil prices continue to hover at astronomic levels, the Government’s endeavour to achieve its fiscal deficit targets becomes even harder. Target projections by the Centre in recent months have gone woefully awry, as the economy continues to feel the “ripple effects” of the global economic slowdown and fluctuating commodity prices. While projections may have gone haywire owing to market vagaries and extraneous caprice, the Government cannot deny the fact that it has displayed a veritable degree of laxity as far as meeting its disinvestment targets this year is concerned. Having only managed to raise Rs. 1,145 crores from disinvestment, out of an eventual target of Rs. 40,000 crores, the Government has finally decided to up the ante and adopt a different tack in their attempt to get closer to their initial targets. It is considering open auctions of small portions of its stake it holds in Public Sector Undertakings (PSUs), instead of going in for shares sales through public offers.

On the face of it, the Government’s newly drawn up strategy appears good on paper. However, it runs into a major stumbling block as it goes against the laid down stipulations in the Disinvestment Policy to begin with. The Policy does not allow for such a method to be undertaken. Hence, in order to circumvent the hindrance posed by the limitations of the present Disinvestment Policy, the Finance Ministry would have to obtain approval from the Cabinet before going ahead with its ambitious plans. This also underscores the need to incorporate changes to the current Policy to account for a market in flux and radical policy implementation strategies. However, obtaining the Cabinet’s approval before actually putting its plans in place promises to waste precious time…time that the Government cannot afford if it is to gainfully work towards achieving its deficit targets.

A failure to effectively meet fiscal deficit targets is guaranteed to have certain adverse effects on the economic spectrum per se. The Government had recently announced that it would borrow Rs. 52,800 crores more than its budgeted projections in the second half of this fiscal year. It vehemently promised that the excess borrowing would not adversely impact the fiscal deficit. However, not meeting its deficit goal may actually entail the Government exceeding the revised budgetary borrowing. Analysts have pegged the fiscal deficit to end up at about 5.3% of the GDP and believe that if the Government significantly overshoots its borrowing in the latter half of the fiscal year, it would have a negative impact on the fluctuating bond market. Apart from a plausible shortfall in achieving its disinvestment targets; lower tax revenue collections and higher fuel subsidies also promise to collectively increase the fiscal deficit levels by the end of the fiscal year. The “fiscally challenged” Government certainly has its work cut out and ought now to channel its efforts and resources effectively in order to improve economic performance in the remainder of the fiscal year.


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Pradyut Hande
The Writer is presently pursuing his Bachelors in Business Administration at NMIMS, Mumbai. He attempts to address myriad issues of both domestic and global consequence, ranging from Business and Economics to Geopolitics...from Sports to Arts and Culture. He is also a keen Debater, Munner, Quizzer, Painter and Amateur Freestyle Rapper.

 

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