Privatising state undertakings to raise funds

As Prime Ministers Jawaharlal Nehru and Indira Gandhi sought to put the state in the commanding heights of the economy, about 250 Central public sector undertakings (PSUs) came up in India.

The official policy was one of developing a mixed economy with room for public and private sector enterprises. Direct competition between the two sectors was, however, not much in evidence. Sensitive sectors such as defence and communications remained a state monopoly.  Under competent professional managers some of them did well. But many others invited charges of inefficiency.

Prime Minister PV Narasimha Rao, who initiated the process of globalisation of the economy in 1991, also began divestment of public sector units. Its primary objective was to generate funds for new developmental projects. At that time the government made it clear that it would retain majority control of the units.

The labour unions of the public sector units, many of them under the control of Left parties, opposed the programme on ideological grounds. Their resistance compelled the government to go slow.

The first Bharatiya Janata Party-led government, headed by Atal Behari Vajpayee, went farther than the Congress was willing to go.  In what was dubbed as “strategic disinvestment”, it handed over four major government undertakings to the private sector — the Bharat Aluminium Company and Hindustan Zinc to the Sterlite Industries, the Indian Petrocheicals Corporation to the Reliance group and Videsh Sanchar Nigam Limited to the Tatas.

The Congress-led government headed by Manmohan Singh, which was initially sustained in office by the Left parties, moved slowly in view of their opposition to weakening of the public sector.

Prime Minister Narendra Modi accelerated the pace of disinvestment and raised substantial funds for his programmes. The firms divested in his first term included the highly profitable Oil and Natural Gas Corporation. Official figures reveal there was a selling spree in the last three years, fetching Rs 462 billion in 2016-17, Rs 1,001 billion in 2017-18 and Rs 850 billion in 2018-19.

In this year’s budget, the government set a disinvestment target of Rs 1,000 billion to cover the fiscal gap. It now plans to raise an additional Rs 520 billion through disinvestment of 24 state undertakings to make up the revenue loss resulting from stimulus packages to corporates in distress.

The Niti Ayog, which advises the government on economic matters, has reportedly identified the firms to be divested. The new plans include lowering the government’s stake in companies below 51 per cent.

Official spokesmen are now preparing the ground for the move by arguing it is not necessary to hold majority shares to ensure managerial control. They point out that few captains of industry hold a majority of the shares in their companies. In some companies the promoters’ stakes are only 10 to 15 per cent.

It is a specious argument. Conditions in private companies and public corporations are not identical.

Those who control the affairs of a private company with only minority shares are its promoters who have a deep interest as well as a high personal stake in its well-being. Bureaucrats and political busybodies who often oversee the working of PSUs have no stake in their future.

If the early governments had an ideological bias in favour of the public sector the Modi government has a contrary bias. This is evident from the way it has allowed some profitable state undertakings to go to seed and failed to come up with stimulus packages for sick PSUs.

One company this government has earmarked for strategic disinvestment is Air India, the national flag-carrier with a long history. Founded by businessman and aviator JRD Tata, it was nationalised after Independence and merged with the domestic carrier Indian Airlines. Initially Tata himself headed the state undertaking. The government still owns Air India only because it has not been able to fund a genuine buyer. The government has plans to offer attractive terms to potential buyers.

Another company whose fate is hanging in the balance is telecom operator Bharat Sanchar Nigam Limited (BSNL), which made a profit of more than Rs 100 billion only a few years ago. It fell into bad days as the government did not let it move forward as new technology altered the telecom scenario. It is now unable to pay its large working force salaries on time.

Some Modi critics have alleged that BSNL was denied support to make it easy for the private companies, particularly Mukesh Ambani’s Reliance Jio, to take over the market. The government has also started a process of privatisation in the Railways. Some 150 trains and 50 railway stations are to be run by private operators.