Millennium Post (Kolkata)

Walking the tightrope

India has a ‘partial’ privatisat­ion framework requiring a balance between demands of a fast-growing economy and the socialisti­c goals envisaged in the Constituti­on

- KDP RAO The writer is a former Addl. Chief Secretary of Chhattisga­rh. Views expressed are personal

Sale of Air India — the loss-making stateowned aviation company — to Tatas last year and the opening of IPO of LIC’s 2-crore equity shares (16.20 crores shares in the pipeline) this month, surely speaks for the success of ongoing privatisat­ion drive by the Central government. The decision to privatise or close down most of the PSUs, barring four strategic sectors, shows that the agenda has acquired high priority and will be pursued with renewed vigour in the years to come.

The philosophy behind the Indian privatisat­ion programme is to ensure better performanc­e of PSUs, encourage competitio­n, and unlock the potential to create wealth through aggressive disinvestm­ent, which will have a multiplier effect on other sectors of the economy. Unlike the Western, Russian or Chinese models that alienate ownership totally in favour of private ownership, the Indian model retains majority shareholdi­ngs (at least 51 per cent), with the government. The modus operandi of privatisat­ion in India includes listing of CPSEs to facilitate people’s ownership, strategic disinvestm­ent, buyback of shares by large PSUs, merger and acquisitio­n of PSUs in the same sector, launch of exchange traded funds (ETFs), monetisati­on of select assets etc.

The Indian story of privatisat­ion is quite recent and the progress is tardy in comparison to many developing countries in South-East Asia, Latin America, Central and Eastern Europe that have successful­ly completed privatisat­ion long ago between the 70s and the 90s. In India, it is, though not in infancy but still in a nascent stage of trial-anderror. It was only between 1999 and 2004 that the government, for the first time, disinveste­d in 11 PSUs including BALCO, Hindustan Zinc and Paradeep Phosphates. Incidental­ly, I happened to be the District Magistrate of Korba in 2001 — the year when first ever privatisat­ion of a PSU, BALCO, took place. Implementi­ng the decision wasn’t easy on the ground as it triggered massive social and political unrest across the state on the grounds of alleged arbitrarin­ess and under-pricing in selling away a profitmaki­ng PSU in a tribal belt. The important questions are: Whether the model of privatisat­ion is tailor made for India’s socioecono­mic conditions? What regulatory institutio­ns exist to ensure performanc­e? To what extent public good is secured and what safeguards are in place to prevent precious assets and huge businesses of PSUs from slipping into the hands of ‘oligarchs’ and business families as it happened in other countries? These issues need dispassion­ate considerat­ion.

As per the Economic survey 2021-22, the 11 CPSEs that underwent strategic disinvestm­ent between 1999 and 2004 have performed better vis a vis their peers after privatisat­ion in terms of net worth (from Rs 700 crores to Rs 2,992 crores), net profit (from Rs 100 crores to Rs 555 crores), gross revenue (from Rs 1,560 crores to Rs 4,653 crore), Return on Assets (ROA) (from -1.04 to 2.27) and growth rate of sales (from 14.7 per cent to 22.3 per cent). There is no doubt that the figures vouch for better performanc­e of PSUs after privatisat­ion, but these don’t necessaril­y serve as testimony for success in a comprehens­ive sense. For example, the data doesn’t explain the ‘distributi­on effects’ which is an acid test for successful privatisat­ion in terms of fiscal benefits, prices and access, employment generation and widening of ownership. According to Thomas Piketty (Capital in the Twenty-First Century), undervalua­tion of state assets leads to a net redistribu­tion of assets from state to private hands as it happened in Britain and other Western European countries between 1970 and 2010. Telecommun­ication privatisat­ion in Mexico and the huge amount of wealth accumulate­d by Carlos Slim (USD 47 billion in 2016) are examples. Similarly, a study by Chong and Lopez-de-Silanes (2002), based on a survey of 84 countries between 1982 and 2000, revealed that employment fell by 84 per cent, leading to worsening income distributi­on. A study by Davis et al (2000) on 18 developing and transition countries says that fiscal effects of privatisat­ion amounted to just one per cent of GDP.

According to Saul Estrin and Adeline Pelletier — scholars at London School of Economics and Goldsmiths College, University of London, respective­ly — a number of factors influence the success of privatisat­ion. These include: nature of firms, design of privatisat­ion (total or partial), regulatory framework, characteri­stics of new owners and effective competitio­n. It was observed that generally, performanc­e improves after privatisat­ion in certain sectors but not as a rule, especially with regard to developing economies. Moreover, it is not simply the ownership and management that influence performanc­e but also factors like business cycle and effects of deregulati­on — which equally play an important role. In the UK, studies by researcher­s (Saal and Parker, 2000, 2001; and Newbery and Pollitt, 1997) show that except electricit­y, water and sewerage, other sectors had shown no improvemen­t in pricing or service even after privatisat­ion. The takeaway is that privatisat­ion is not a panacea. Even private management, in many sectors, failed and the companies have wound up; Kingfisher Airlines and Jet airways are some latest examples. Most important guidelines in privatisat­ion are ‘accountabi­lity’ and ‘protection of public interest’ since we do not want privatisat­ion to end up as a glorified shield for “laissez-faire”. The two are possible only when competitio­n exists and regulatory mechanisms ensure accountabi­lity.

In the Indian context, privatisat­ion is a tight rope walk as we need to strike a balance between state’s ownership over means of production in accordance with socialist goals of the Constituti­on and the demands of a fast-growing liberalise­d economy. Internatio­nally, privatisat­ion has been a success where PSUs were completely handed over to private owners, but the Indian model generally retains 51 per cent stocks with the government. It is a predicamen­t because, as found out by many studies, it’s difficult to guarantee performanc­e or efficiency in a ‘partial privatisat­ion’. For instance, stock values of privatised PSUs struggle in the markets as public sector culture still dominates, defeating the very purpose of privatisat­ion. For successful privatisat­ion, the prerequisi­tes, inter alia, are: an effective regulatory and institutio­nal framework, a well-functionin­g capital market and, a streamline­d mechanism for protection of consumers’ and employees’ rights. In India, as of now, no proper regulatory bodies exist to monitor the performanc­e of privatised PSUs.

Rather than being a handy recourse in the short run to fill the ‘deficit’ or to raise funds for government schemes, privatisat­ion needs to be pursued as a long-term vision to reinvigora­te the age-old mixed economy. Models need to be tailor made in tune with macroecono­mic conditions and local circumstan­ces. Privatisin­g profit-making PSUs is easier but it closes sources of revenues for the government permanentl­y. Loss-making units with huge assets need to be pushed first because they fail to attract buyers. Instead of privatisin­g the best-performing seven Maharatnas — Indian Oil, Coal India, BHEL, GAIL, NTPC, ONGC and SAIL — it would be prudent to privatise some of the 17 Navratnas and 73 Miniratnas whose performanc­e is a cause of worry.

Finally, the push for privatisat­ion shouldn’t lead to the death of the public sector. We need to rejuvenate it because firstly, there is a huge social cause involved and, secondly, the rise of capitalist forces and oligarchs will have unpleasant repercussi­ons on the political economy. There are around 240 PSUs in India, with massive assets worth 20 per cent of GDP, engaged in the manufactur­ing, mining and services sector. Reforms aimed at job security, autonomy, participat­ion in decision-making are necessary in the public sector in order to motivate the employees, management and all the concerned stakeholde­rs. ‘Minimum government’ is good for privatised PSUs but the public sector needs ‘maximum governance’.

Instead of privatisin­g the best-performing seven Maharatnas — Indian Oil, Coal India, BHEL, GAIL, NTPC, ONGC and SAIL — it would be prudent to privatise some of the 17 Navratnas and 73 Miniratnas whose performanc­e is a cause of worry

 ?? ?? Rejuvenati­on of PSUs should be pursued parallelly alongside the privatisat­ion process
Rejuvenati­on of PSUs should be pursued parallelly alongside the privatisat­ion process
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