The cabinet clearance of government divestment from some state-owned companies, announced following a cabinet meeting on Thursday, is a good start to what will hopefully be a winter in which UPA-II will finally start flying reformist colours. Any fears that had begun to grow when the government did little that was concrete to reduce its holdings in the public sector were misplaced; there were, in fact, repeated indications from both the prime minister and the finance minister that this government was serious about disinvestment. Given the fiscal squeeze facing the government and its ambitious spending programme, there was never any chance that UPA-II would not follow through on this basic element of any reform agenda.

The way it has gone about it is interesting: it has simply brought public-sector corporations that are both profitable and listed under the umbrella of regulations applicable to other listed companies — that at least 10 per cent of their holding be floated in the stockmarket. Automatically, that means that 12 big public-sector units in which public ownership exceeds 90 per cent will have to have government holding diluted. The commitment to list all profitable state-owned companies — presumably those of the appropriate size — has also been reiterated.

Further, the low-impact manner in which the disinvestment has been framed and will be implemented — as simply those companies being subject to what is considered normal for other comparable companies in their position — reflects a clever balance that should be carried forward into other aspects of reform. Reform such as disinvestment continues to be a political process as much as an economic one, and the manner in which the political arguments are made will be as essential to its success as the quality of the economic thinking behind the moves made. The other political twist is that the money has not been earmarked for the National Investment Fund, the method that has for some time now been used to ensure that proceeds from the sale of government capital get put back into capital formation, and aren’t wasted on current expenditure — such as deficit financing. Instead, the idea is that it will go on “capital expenditure in social sector schemes”. An interesting tightrope walk is between meeting the government’s political commitments and the reformist policy golden rule, of not running down capital assets to finance a deficit. If this reform is to work properly, the government must come out and demarcate a clear boundary between what is capital expenditure in, for example, the Sarva Shiksha Abhiyan or the NREGA, and what is not. The additional scrutiny on the sustainability of those schemes is a welcome byproduct.