December 5, 2009: The government has reiterated that proceeds from disinvestment in public sectors enterprises would be used to fund capital expenditure in select social sector schemes and revive ailing state-owned entities and not to reduce fiscal deficit.

Giving out the details of how the government proposed to use funds garnered through disinvestment, finance minister Pranab Mukherjee said on Friday: “I can assure the members, the intention is not to utilise the disinvestment proceeds to reduce the fiscal deficit but to utilise them for expenditure on the social sector schemes.”

The clarification follows government’s decision last month that divestment proceeds will not be parked in the National Investment Fund (NIF) for three years ending March 2012. The proceeds will instead be used for meeting capital funding needs of social sector schemes. The July budget has pegged the fiscal deficit at 6.8% of the GDP.

NIF was set made operational in 2007 and all divestment proceeds were to be parked there. Returns from the accumulated corpus is to be used for meeting needs of select social sector schemes.

Since April 2009 Rs 4259.90 crore has been realised from the disinvestment proceeds of National Hydro Power Corporation Limited (NHPC) and Oil India Limited (OIL) and credited to the Consolidated Fund of India.

“The funds would be transferred to the National Investment Fund (NIF) and allocated for capital expenditure in the identified social sector schemes as decided by the Planning Commission/Department of Expenditure,” Mukherjee said during Question Hour.

The government will also use a quarter of the stake sale funds for to revive ailing state-run firms. Experts have, however, argued that if the divestment proceeds were not available for such capital expenditure then the government would have borrowed the same and that would have increased the fiscal deficit. In that sense, the divestment proceeds do help bring down the deficit.

The finance minister also said that going back to the 9% growth was a challenge for the economy. “We expect strong growth in the second half of the current year...Our road ahead is full of challenges. The chief amongst them is to take the economy back to 9% per annum growth path,” he said speaking at a FICCI conference on Friday.

Indian economy grew by 7.9% in the second quarter of this fiscal, up from was 6.1% in the previous quarter, largely due to a pick up in manufacturing and large government expenditure.