As the fiscal year enters its last quarter, the centre seems desperate to collect more and more revenue from the sale of public assets (minority stake sales and strategic disinvestment/privatisation). In a last-minute rush, it has declared amendments to the FDI policy allowing global financial entities to participate in the mega IPO of the Life Insurance Company (LIC) that is in the offing. Although FDI is allowed up to 74% in other Indian insurance companies, the LIC is out of it since it is a special entity created by the Parliament.

The urgency to tweak the FDI is due to low disinvestment proceeds. So far, the centre has collected ₹9,329.9 crore, as per the records of the nodal agency, Department of Investment and Public Asset Management (DIPAM), as against the target of ₹1.75 lakh crore for the full fiscal. The LIC’s IPO is expected to yield ₹1 lakh crore, which, even if its materialises by the end of this fiscal, wouldn’t be sufficient to bridge the gap.

Nevertheless, the centre’s aggressive disinvestment drive in the past seven years between FY15 and FY21 has yielded ₹4.05 lakh crore. What happened to the proceeds is not known because the centre hasn’t deposited any of it in the designated National Investment Fund (NIF) for specific capital investment purposes, as the disinvestment policy mandates. Why the Centre hasn’t done so is not known.

All the disinvestment proceeds have gone to the Consolidated Fund of India (CFI) instead. Given the huge revenue and fiscal deficits of the centre year after year (revenue deficits of 3.3% of the GDP in FY20, 7.5% in FY21(RE) and 5.1% in FY22 (BE) and fiscal deficits of 4.6%, 9.5% and 6.8% during the corresponding period), another question arises: How does one know if the proceeds have been actually used for the intended purposes — capital investments?

Centre denies states their share in disinvestment proceeds

There is yet another important question that goes abegging: Why doesn’t the Centre share the disinvestment proceeds with states?

At the pre-budget conference of state finance ministers on December 30, 2021, Tamil Nadu Finance Minister Thiaga Rajan raised this issue, pointing out that his state had given land for free or at concessional rates for many of the CPSEs and projects, and should be compensated for the disinvestment proceeds.

In FY20, the centre offloaded its entire stake of 66.7% in Chennai-based Kamarajar Port Limited (KPL) for ₹2,383 crore. Another CPSE, Chennai Port Trust (ChPT), was forced to pay for it, for which it borrowed ₹1,775 crore at 8% interest from the market, as the latest report of the Comptroller and Auditor General of India (CAG) pointed out (detailed in Fortune India article ‘Disinvestment strategy: Centre's love; CAG's hate!’).

Presumably, Rajan hasn’t received any reply and is unlikely to get in future either because the centre has been prevaricating and denying states their right, even while claiming to champion “cooperative federalism”.

The 14th Finance Commission (FC), in its 2015 report, had recommended such division of proceeds. It said during the consultations, “the States had raised the issue of getting a share in the proceeds of disinvestment of central public sector enterprises”. It lent its support, stating that “many of them (states) have provided land, power and water at concessional rates as well as other incentives such as tax concessions” and it found “considerable merit in the union government dispensing a small share of proceeds of disinvestment to the states”.

Its suggestion to the Centre for sharing disinvestment proceeds came after it recorded the Centre’s refusal to do so: “We have been informed that such proceeds may not form part of the divisible pool, in view of the union government's decisions to credit disinvestment receipts in NIF for spending on specified purposes.”

True, the NIF and its “specific purposes” are a part of the official disinvestment policy, but these are only on paper. The proceeds don’t go to the NIF but to the CIF. As for the specific purposes for which the proceeds are to be used, seven have been listed:

  • Ensure that 51% ownership of the government in CPSEs is not diluted.

  • Ensure that the government stakes don’t go below 51% in all cases where CPSEs desire to raise fresh equity to meet their capital investment needs.

  • Recapitalise public sector banks and insurance companies to achieve Basel III norms.

  • Fresh investment in RRBs/IIFCL/NABARD/Exim Bank.

  • Equity infusion in various Metro projects.

  • Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and UCIL.

  • Capital investment in the Indian Railways.

A look at these seven purposes makes it clear that hardly any of it is followed (except recapitalisation of banks). In fact, the Centre’s disinvestment drive is contradictory to most of these purposes. Why so? For one, the concept of the NIF and the seven purposes for using disinvestment proceeds parked in it were set by the previous Congress-led UPA government.

For another, the Centre merely used these (NIF and capital investment) as a ploy to deny states their share (in disinvestment/privatisation of CPSEs) while never intending to follow in practice. It hasn’t yet explained its position.

One possible reason for junking the NIF could be the recommendations of the 13th and 14th FC reports.

The 14th FC said: “The NIF, at present, serves no purpose except for routing the disinvestment receipts through the public account for limited accounting needs. These accounting needs can be met by other means and the operation of public accounts only for this limited purpose is undesirable. We, therefore, reiterate the recommendations made by the FC-XIII to maintain all disinvestment receipts in the Consolidated Fund for utilisation on capital expenditure. The National Investment Fund in the Public Account should, therefore, be wound up in consultation with Controller General of Accounts (CGA) and C&AG.”

The 15th FC (2021-2026) reiterated it in its November 2020 report, after having recorded the concept of NIF and listing the specific purposes for which the proceeds were to be used, but without shedding any light on the status of the NIF or faithful spending of the proceeds. It, in fact, did a copy-paste job: “It is relevant to mention here that the FC-XIV had reiterated the recommendations made by the FC-XIII to maintain all disinvestment receipts in the Consolidated Fund for utilisation on capital expenditure. It was further recommended that the NIF should be wound up in consultation with the Controller General of Accounts (CGA) and the CAG.”

Unlike the 14th FC, the 15th FC maintained complete silence on the imperative of sharing disinvestment proceeds with states.

Why States deserve more resource share?

In addition to what the 14th FC and states have argued to justify a division in disinvestment proceeds, there are at least three sound reasons for larger devolution of resources to states.

One is, states have a better record of capital investment than the Centre.

As per the Economic Survey of 2021, the annual average capital expenditure by the Centre was 1.70% of the GDP during the previous seven fiscals of FY15 to FY21. States have spent double that amount — 3.34% of the GDP.

Second is, states have low tax base, which was further curtailed when the GST was adopted in 2017 as they gave up their rights to several indirect taxes, while the Centre has appropriated more power to collect tax.

The Economic Survey of 2021 shows, the annual average tax collection of the Centre during FY15-FY21 was 10.7% of the GDP, while that of states was a mere 6.3% — nearly half.

Third is, states have demonstrated far better fiscal responsibility than the Centre.

The Economic Survey of 2021 and the last budget speech of Sitharaman shows, the annual average fiscal deficit of the Centre was 4.64% of the GDP during FY15-FY21, which is nearly double the states’ annual average deficit of 2.86%.

The Centre is not only denying states their legitimate share in disinvestment proceeds (capital receipts), it is also shortchanging them in many other ways. For example, it has been consistently violating the 14th FC and 15th FC awards on tax revenue devolution; resorting to higher cess and surcharge to corner more tax for itself since these are not part of the divisible pool and hence, not shared with states and many other ways, but that is for another day.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.