Where's the Divestment Proceeds Fund?

More than six months ago, the government had announced in Parliament that it was setting up a special Divestment Proceeds Fund. But there are no indications as yet as to when this fund would be established.

The delay is particularly inexplicable because the establishment of such a fund could take some of the sting out of the attack on the government's privatisation programme.

One would have thought that with state assembly elections in Rajasthan, Madhya Pradesh, Chhattisgarh and Delhi due to be held in November and with next year's general elections (scheduled for September-October) likely to take place ahead of schedule, the government would have expedited the setting up of the proposed Divestment Proceeds Fund.

Perhaps, the government plans to announce the formation of this fund closer to the elections. This would, however, dilute the purpose for which the fund is to be established.

It is learnt that bureaucrats in the ministry of finance and the ministry of divestment have conducted a series of meetings to discuss the modalities of setting up the fund but not much progress has been made.

Both the ministries are said to have stuck to their respective positions without budging a bit. The divestment ministry has repeatedly told the finance ministry that the fund should be set up as early as possible because the move has already received the approval of the Union Cabinet.

Further, the fund could help the government achieve certain laudable social objectives such as creation of job opportunities and retirement of public debt.

The finance ministry, on the other hand, is reportedly a bit circumspect about the establishment of a Divestment Proceeds Fund on the plea that such a move might 'compromise' the 'sanctity' of the Consolidated Fund of India into which all the proceeds of divestment go.

Demands could be raised from other quarters to set up other special funds out of the proceeds that go into the Consolidated Fund.

On December 9, 2002, Divestment Minister Arun Shourie told the Lok Sabha: "In order to provide complete visibility to the government's continued commitment of utilization of divestment proceeds for social and infrastructure sectors, the government would set up a Divestment Proceeds Fund. This fund will be used for financing fresh employment opportunities and investment and for retirement of public debt."

Almost a decade earlier, the then finance minister in the P V Narasimha Rao government, Manmohan Singh, had stated in his first Budget speech delivered on February 29, 1992, that he had taken credit for Rs 2,500 crore (Rs 25 billion) as receipts of divestment.

He added that the government would "consider a further sale of equity of Rs 1,000 crore (Rs 10 billion) to provide resources for the National Renewal Fund during 1992-93, which can be used for various schemes of assistance to workers in the unorganised sector, including women workers, who may be adversely affected by the process of economic restructuring."

That's not all. Manmohan Singh added that such "non-inflationary resources" would "also be used to fund … special employment creating schemes in backward areas."

In 1997, the first report of the Divestment Commission headed by G V Ramakrishna said the proceeds of Divestment should not be used to bridge the budget deficit but instead be placed in a separate fund to be used for the following four purposes: (a) retiring public debt; (b) restructuring public sector undertakings; (c) developing the social infrastructure; and (d) voluntary retirement schemes.

Two years and nine reports later, the commission suggested that the divestment process be completely delinked from the budget.

Earlier, the Reserve Bank of India had suggested that the proceeds of divestment be used to reduce public debt.

In his Budget speech delivered on February 27, 1999, the then finance minister Yashwant Sinha said he hoped to raise Rs 10,000 crore (Rs 100 billion) during 1999-2000 through divestment.

"This will help the government … fund the requirements of social and infrastructure sectors," he said It is, of course, a separate matter that the actual amount raised that year from Divestment was under Rs 1,600 crore (Rs 16 billion).

Three years later, again during his budget speech, Sinha remarked that he was "emboldened" to take credit for Rs 12,000 crore (Rs 120 billion) as receipts from divestment during 2001-02.

He went on to specify that out of this amount, Rs 7,000 crore (Rs 70 billion) would be used to provide 'restructuring assistance to PSUs, safety net to workers and reduction of (the public) debt burden' while the remaining Rs 5,000 crore (Rs 50 billion) would be 'used to provide additional budgetary support to the Plan primarily in the social and infrastructure sectors.'

Sinha added that the additional allocation for the Plan would 'be contingent upon realisation of the anticipated receipts.'

Once again, the anticipated receipts did not materialise -- actual receipts were under Rs 3,700 crore (Rs 37 billion).

Ever since the Union government began divesting shares of PSUs held by it from 1991-92 onwards, in all but three years (1991-92, 1994-95 and 1998-99) the proceeds of divestment have been substantially lower than budgetary targets.

For instance, in 2001-02, against the budget target of Rs 12,000 crore (Rs 120 billion), actual receipts were Rs 3,645 crore (Rs 36.45 billion).

During the two earlier years, the position was much worse. During 1999-2000 and 2000-01, the targets were set at Rs 10,000 crore (Rs 100 billion) in both years but actual receipts from Divestment were Rs 1,584 crore (Rs 15.84 billion) and Rs 1,868 crore (Rs 18.68 billion), respectively.

The 2003-04 budget target for proceeds of Divestment is Rs 13,200 crore (Rs 132 billion) and this target is certainly not going to be achieved.

Divestment Minister Arun Shourie recently distanced himself from the target saying the finance ministry had suggested it.

The fact is that the government's privatization programme is currently moving rather slowly given the pressing compulsions of electoral politics.

Nevertheless, what is strange is why the government is proceeding so cautiously in setting up the Divestment Proceeds Fund.

Such a fund could have earmarked the receipts from the sale of equity shares of PSUs for specific purposes that are laudable.

It is only after the Divestment Proceeds Fund is set up that the government could have channeled money to it. But that has unfortunately not happened.

From 1992, the Union government has raised an amount in the region of Rs 30,000 crore (Rs 300 billion) from the sale of PSUs' equity.

If a Divestment Proceeds Fund had been established earlier, the government could have rightfully pointed out that money had been used for socially useful purposes

This entire amount of Rs 30,000 crore (Rs 300 billion) raised through divestment has disappeared into the black hole called the Consolidated Fund of India -- for all intents and purposes, the money has been used to bridge the government's budget deficit.

Some would even argue that the proceeds of divestment have been utilized to serve the interests of the politicians and bureaucrats who lord over the rest of the people of the country.

Not surprisingly then, the opponents of privatisation in India have often cited a colourful phrase used by British labour leader Jim Callaghan nine years ago to criticize Margaret Thatcher's policies of privatisation.

Callaghan accused the British government of "selling the family silver to pay the butler."

To take this analogy further, it could be all right to hawk the family heirlooms to pay for a child's education or build an extension to one's home but not to pay the grocery bills or the salary of the household help.

There is no doubt that the proceeds arising out of the sale of assets belonging to the people of India have been improperly utilized by the government.

This is an important reason why large sections in the country – and not just PSU employees and trade union leaders -- remain opposed to privatisation.

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