Context: As part of the stimulus package, the Central government recently announced a public sector enterprise policy built on the principle of defining strategic sectors.
The policy put forth by the Centre
- The Union finance minister has indicated that the public sector enterprise policy will be based on the principle of having at least one PSU or a maximum of four in strategic sectors.
- The government will also allow for private sector participation in these sectors with the objective of fostering greater competition.
- The government expects this move to result in improved efficiency of these sectors.
- The process of definition of the strategic sectors is likely to be provided by the Central government in the weeks ahead.
- The government has also stated that it will exit all PSUs that are in other sectors.
Probable benefits of the move
- Most PSUs are currently making losses and are funded by the largesse of taxpayers.
- The public resources spent on these PSUs could be better utilized elsewhere, especially for development.
- Selling these PSUs can also yield non-tax revenue, which could be used to augment public infrastructure.
- Turnaround of the PSUs by the private sector can generate tax revenue for the government.
Need for Privatisation in India
- The move has been presented as a strategic move intended to rationalize the public sector.
- But the manner in which government entities are sold to quickly raise revenues, it seems like an emergency move.
- Before the COVID-19 crisis, the government required privatization money partly because its revenue (from GST among other things) was declining.
- And this gap could only partly be filled by alternative sources of tax revenues such as that on fuel.
- Today, the government needs this money in order to contain the fiscal deficit. So, the privatization program has suddenly been expanded.
- While the Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year, Rs 1.2 lakh crore is now expected from disinvestment in central public sector enterprises.
- The government approved the privatization of BPCL and the Shipping Corporation of India,
- It also sold stakes in the Container Corporation of India, THDC, and NEEPCO.
- Some estimate that the government’s disinvestment in BPCL, SCI, and CONCOR could fetch it Rs 78,400 crore.
- If Air India also finds a buyer, the government could raise over Rs 1,05,000 crore.
Comparing privatization and disinvestment
- The Centre has had some success with disinvestment over the past years. Of late, most of the disinvestments are funded by the Life Insurance Corporation of India.
- The problem in disinvestment is that it does not ensure a change in management of the enterprise.
- To make PSUs efficient, there is a need to bring in private management that runs it with the aim of maximizing profit.
- Therefore privatization is important and disinvestment a second-best alternative that yields revenues for the Centre, but does not improve the condition of the enterprise.
Status of PSUs
As of October, 2019, there were 10 Maharatnas PSUs, 14 Navratnas PSUs and 74 Miniratnas PSUs. Besides, there are nearly 300 CPSEs (central public sector enterprises).
India’s earlier experiences of privatization drive
- India’s attempt at dismantling the PSUs over the years has seen little success, with the last big-ticket privatization taking place between 1999 and 2004.
- After that most governments have tried to disinvest and privatize. But this has led only to incremental progress, with no big-ticket privatization taking place since then.
- A good example is Air India, the national carrier that the Central government has repeatedly tried to privatize. But it has met with limited success.
- Previous successful example
- A good example of privatization and its effect on the enterprise is Hindustan Zinc.
- The government then sold 45% of Hindustan Zinc for ₹769 crore in 2002.
- The 30% stake the government retained was valued at over ₹20,000 crore.
- The company later became the world’s second-largest zinc-lead miner and one of the top 10 silver producers.
- Management change and privatization can thus raise shareholder wealth through improved efficiency.
Hurdles in drive towards privatization
- Governments across the world resort to privatization to fill budgetary gaps.
- But revenue from privatization is a one-off benefit and generally, only profit-making units are sold at a good price.
- Further, privatization is a two-way street i.e. it requires a buyer and a seller.
- In the case of India, most industrialists are worried about running their current businesses.
- Policy uncertainty has been highlighted as a hurdle in doing business in India and the government has not alleviated their problems.
- Excessive political interference with the private sector makes owning an ex-government entity even riskier, especially if it is perceived as too big to fail.
- If a handful of Indian capitalists are allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
- This could foster crony capitalism and may even result in the making of oligarchs.
- Stiff opposition from unions, concerns of allegations of graft, and criticism of the sale of “family silver" act as major hurdles to the drive for privatization.
Image Source: Mint