There is a lot of talk these days about the government’s impending plans for divestment of shares in profit-making public sector undertakings (PSUs). In fact, an important reason why stock-market indices collapsed after the presentation of the Union Budget on July 8 was the apparent absence of a roadmap for divestment.
A few days earlier, expectations had been raised when the Economic Survey suggested that the government raise a sum of “at least” Rs 25,000 crore each year by selling between 5% and 10% of its shares in selected PSUs.
At one level, the government is clearly keen on divestment—–Finance Minister Pranab Mukherjee has said so in Parliament on more than one occasion. At another level, before divestment becomes acceptable to large sections of the political class, the government will first have to get its act together and change the architecture of the National Investment Fund into which the proceeds of divestment have to go.
 |
| Paranjoy Guha Thakurta |
After Prime Minister Manmohan Singh made a speech at a function organized by the Standing Conference on Public Enterprises in September 2004, in which he remarked that the proceeds of divestment should be used for providing basic social goods, a note was sent by his office to the Ministry of Finance to set up the National Investment Fund (NIF). After a decision by the Cabinet Committee on Economic Affairs, the NIF was formally set up in January 2005.
The government has decided that money obtained from divestment would move from the Consolidated Fund of India to the corpus of the Fund which, in turn, would be invested in three PSU mutual funds and only the interest earned on the investments would be used, three-quarters of it on the social sector and the balance on the PSUs themselves. Currently, the corpus of the NIF has Rs 1,814 crore. Not surprisingly, there has been quite a bit of criticism over the way in which the NIF has been structured, since it leaves relatively little money for spending.
Why is divestment of shares in PSUs so controversial in India? Why did privatization get such a bad name during the Bharatiya Janata Party-led National Democratic Alliance government? To obtain answers to these questions, one has to appreciate the fact that many in India have a rather ambivalent attitude towards the public sector. The government in general, and PSUs in particular, symbolize much of the sloth and inefficiency that is frequently associated with the working of the public sector. At another level, it is also true that India would not be where it is at present had it not been for PSUs that laid a firm foundation to the country’s economy. PSUs like Bharat Heavy Electricals Limited or National Thermal Power Corporation are often compared to the best-run organizations of their kind anywhere in the world.
Although the Congress and the BJP agree with each other on many economic policy issues, the two largest political parties in India are divided on the necessity of—and efficacy of—privatization of PSUs. It is a fact that many PSUs came up in the first place because private promoters had run enterprises they managed to the ground. A PSU like National Textile Corporation comprises almost entirely of mills that were once privately owned and which became sick. It is no one’s case that the public sector in India should be in the business of baking bread (Modern Bakeries), manufacturing bicycles (Cycle Corporation), assembling watches (Hindustan Machine Tools) or even, running hotels (India Tourism Development Corporation). Nor is there any disagreement about the need to improve the working of most PSUs. What unfortunately happened in India is that shares in some profitable PSUs were sold cheap, the proceeds used to bridge the government’s deficit and worse, public monopolies were replaced by family-dominated ones. This is why privatization became a dirty word.
It is often contended that privatization would enable the government to unlock resources that can be used for poverty alleviation, creating jobs, providing a safety net for the underprivileged and other such laudable objectives. Since 1992, the Indian government has earned tens of thousands of crores through divestment and privatization. This amount could have been used to build millions of houses and schools and there would still have been money left over to retire surplus employees of PSUs.
That may have made privatization politically acceptable. To use an analogy used by James Callaghan, who as leader of the opposition in the United Kingdom, opposed Margaret Thatcher’s policies of privatization: the government should not sell the family silver to pay the butler. If indeed the family heirloom has to be sold, the funds should be used for the daughter’s education or to build an extension to the house and not for settling grocery bills.
On the issue of valuation of shares of PSUs, the NDA government’s big goof-up was when Centaur Hotel near Mumbai’s Santa Cruz airport was picked up by one group (Batra Hospitality) and re-sold to another (Sahara) within four months at a price that was 35% higher than the original purchase price—Rs 147 crore against Rs 115 crore.
The entry of private players in sectors dominated by the public sector can and does help consumers by infusing competition—witness the airlines and telecommunications sector. But, in one industry segment, the reverse took place when Reliance Industries took over the management of Indian Petrochemicals Corporation in May 2002, thereby creating a private monopoly.
The Finance Minister will have to tread very carefully as he changes the rules governing investment of the proceeds of divestment.
The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.
Subscribe to this comment's feed
| < Prev | Next > |
|---|
