Divestment to address India's economic woes: Moody's

The government's plan to sell stakes in state-owned enterprises will strengthen its financial position and help address India's many economic woes, says the economic research arm of consultancy Moody's.

"Divestment is an answer to many of India's existing economic concerns. The government's recent plan to sell stakes in numerous state-owned enterprises is a step in the right direction," said Sherman Chan, an economist with Moody's Economy.com in a report released Thursday.

"As the authorities are severely cash-strapped with large fiscal deficits and public debt in recent years, proceeds from divestment can help to soothe the current fiscal stress," she added.

According to Moody's Economy.com, although divestment is not a long-term source of funding, it can provide much-needed relief to the government, which has increased expenditure in a bid to sustain economic momentum.

However, to minimise public concern, Moody's Economy.com suggested that the government maintain majority ownership in firms that are strategically important to the economy.

"Despite only selling small stakes, the firms can still realise some benefits of being listed on the stock market," it said, adding this would also improve corporate governance.

"The biggest gain is perhaps an improvement in corporate governance. As firms will need to be accountable to shareholders, regular reporting requirements and transparency in business decisions are both likely to strengthen," Chan said.

This enables early detection of business risks, helping prevent corporate disasters, which have wide ramifications including a rise in unemployment.

Also according to Moody's Economy.com, the stronger disclosure requirements and exposure to market forces will boost efficiency and encourage innovation.

"Management will more closely monitor their own performance as the public can easily assess their output," Chan said.

"In some cases, pressures from the market also encourage innovation, as firms need to remain competitive against rivals. Business restructure may be an inevitable result of the part privatisation of state-owned enterprises."

Last updated on Jul 16^th, 2009 at 12:54 pm IST--IANS