Disinvestment - Going Private

Public sector undertakings (PSUs), including profitable ones, are up for sale to generate revenue. Is this visionary prudence or short-term juggling?

The PSU in India’s Growth Story

Soon after independence, to transform India’s agro-based economy to an industry-led one, PSUs were born. Nehru christened them the ‘temples of modern India.' 

By 2006, according to the Indian Comptroller & Auditor General (CAG), India had over 400 PSUs-in banking, coal, engineering, power, oil, steel, textiles, and so on. Today, as per the Ministry of Labour & Employment, over 1.1 million people have permanent employment in PSUs.

While, the popular view is that ‘government has no business being in business,’ a newly independent India, facing acute food shortages and lacking private capital to develop heavy industry and infrastructure, had limited options. It opted for the socialist model, inspired by the USSR, and sought to follow the path of state enterprise for employment generation, social welfare, and overall economic growth.  

With time, most PSUs became slothful devourers of public wealth, run by bureaucrats and bogged down by recalcitrant trade unions. In 1991, out of 236 PSUs, only 123 were profitable, with the top 20 PSUs generating 80 % of the profit. However, closure or sale of PSUs was a politically sensitive subject in a polity that was still heavily tilted towards the socialist system. 

A looming balance of payments crisis in the early 1990s forced India to shed its socialist moorings. Disinvestment began with the Narasimha Rao government and in 1991-92, 31 selected PSUs were disinvested for ₹3,038 crores. A Disinvestment Commission was set up to advise, supervise, monitor and publicise gradual disinvestment of Indian PSUs. 

Why Disinvestment failed to meet targets

Several reasons made the disinvestment offers unattractive: unfavourable market conditions, offer prices that lacked value, unwillingness to relinquish control, large debts, a large workforce and stiff opposition from political parties and trade unions.

The disinvestment process in the past centered around the sale of minority stakes without relinquishing control, or by asking profit-making PSUs to buy the stocks and release funds.

In 2019-20, the disinvestment fell far below the target- only ₹17,364.26 crores against projected ₹1.05 lakh crore which was later revised downwards to ₹65,000 crores.

 Giving New Impetus to Disinvestment 

The government has clearly shown its intention to generate maximum revenue for its infrastructure development and social projects through the disinvestment route. For 2020-21, it has announced strategic disinvestment to make PSUs more attractive to investors. Strategic disinvestment implies the substantial sale of government shareholding along with the transfer of management control. 

The target set is an ambitious ₹2.1 lakh crore. This includes ₹90,000 crore that is planned to be raised from the sale of government stakes in IDBI Bank and Life Insurance Corporation (LIC) through the initial public offering (IPO) route. Many big-ticket strategic disinvestments are in the offing- Air India (AI), BPCL, Shipping Corporation of India Container Corporation of India (SCICC), Tehri Hydro Power Development Corporation (THDCIL), and North Eastern Electric Power Corporation Ltd (NEEPCO).

In a departure from the past, the government has decided to sell 100 percent of AI and AI Express and 50 percent in SATS Airport Services. The debts of AI have come down from ₹60,074 crore to ₹23,286 crore and will be transferred to the Special Purpose Vehicle (SPV). Thus, AI, once India’s pride, and now a heavy drain on the state treasury, might find a new lease of life under private control. 

Counterpoint Against Disinvestment

Post the announcement of the 100 percent disinvestment in Air India, the Shiv Sena has raised concerns regarding employees.  The Left parties, long-term backers of PSU trade unions, have also opposed disinvestment, as it invariably leads to retrenchments. They advocate an alternate set of policies for self-reliant economic development. In fact, the sale of BPCL is being likened to ‘selling family silver.’

The government has assured that in strategic disinvestment, the interests of workers will be safeguarded. The controlling company will be permitted to trim the workforce only after voluntary retirement scheme (VRS) or a golden handshake is provided.

The sale of profit-making BPCL and offloading of stocks of LIC have also drawn accusations of crony capitalism and catering to short-term political objectives.

Assessment

  • PSUs had a place in India’s growth story, but to press on with them would be counterproductive.  While in the short term, there may be a social cost for a few, in a longer-term perspective, the economy will benefit enhancing employment opportunities for all.

  • Today the government has little justification for running chains of petrol pumps, building ships, or even running container operations. PSUs are bleeding money and the consumer suffers the deficiency in services. This trend has to be arrested.

  • However, shedding profit-making PSUs like BPCL in a ‘fire sale’ may not be advisable. Similarly, with LIC, which is not only a respected monolithic PSU, but where millions of poor and middle-class Indians have reposed their trust by investing their life's savings. A well-considered, bipartisan decision would be a reasonable proposition.

  • The government must put to rest the fears of cronyism. For one, the process of disinvestment has to be transparent, and secondly, the price has to be right — an independent third-party evaluator must assess all assets being put up for sale.

 

 

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