Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Government Budgeting; changes in industrial policy and their effects on industrial growth.

Key Phrases: Privatisation, DIPAM, Lay-offs, Concentration of public assets, challenge of valuation, PSU reforms.

Why in News?

• The consortia that submitted expressions of interest (EoI) for privatisation of Bharat Petroleum Corporation Limited (BPCL), did not express further enthusiasm regarding the privatisation. Union finance ministry has resorted to a “wait and watch mode”. In this light, let us look into the debate of privatisation from other lens.

Highlights:

• There is a growing consensus that privatisation is the panacea. Policymakers often cite the private sector’s ability to grow faster.
  • To back this there are examples like VSNL and Hindustan Zinc.
• There are two main motivations behind privatisation:

1. To improve the overall efficiency of their functioning.
   • As PSUs, they are managed by the government on a daily basis. But in doing so, there are chances of political considerations overshadowing economic and corporate interests.
   • This is especially true when the PSU transacts with the government - for example when it sells its products and services to the government, the pricing may be influenced by factors other than market factors.
   • By disinvesting (or reducing the government stake), an attempt is made to make such a PSU more efficient as it would not be accountable to people and entities other than the government.
2. The government’s need to plug its perennial deficits.
   • In times of extreme monetary stress, governments have thought of selling off their stake in PSUs to raise funds and meet the gap between its expenses and revenues.
   • With the proceeds of these sales, the government can reduce its debt liabilities and raise money for investments - such as building infrastructure or increased spending on providing welfare to the poor and needy.
   • India’s fiscal deficit (for the Centre) in FY22 is expected to be 6.9% of the GDP, or in layman’s terms about ₹15.9 lakh crore.
   • When considering the debts of States as well, this jumps to about 12.8% of the GDP (as of FY21). Every year, the shortfall grows wider.

Does privatization really deliver?

Concerns:

• Studies indicate that the gap in growth (and service) between public sector undertakings (PSUs) with autonomy and private firms is not significant.
  • One study highlighted that the famed British privatisation initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance; even now, private British trains can be significantly delayed by “leaves on the line”.
  • Evidence on performance after privatisation is even more mixed in developing countries.
• Growth post-privatisation is often due to multiple factors (for example, better funding under a private promoter versus a starved government budget, a better business cycle).
  • Sometimes, the difference in a PSU’s performance (and ability to generate tax revenue) is simply government apathy.
• Privatisation as a revenue source has also offered paltry returns.
  • As a state, we have sought to hock our generational wealth in PSUs for the past two decades, with limited success.
  • The Disinvestment Commission, under the Ministry of Industries, was set up in 1996 to provide inputs on which firms to privatise. However, this Commission was dissolved in 1999.
  • A separate Department of Disinvestment was set up under the Ministry of Finance and later upgraded to a full-fledged Ministry in 2001. It was downgraded back to a department in 2004.
• Beyond the institutional set-up, privatisation as a policy has also singularly failed to raise significant funds – actual receipts from disinvestment have always fallen significantly short of targets.
  • For example, As per PRS India, in FY11, ₹22,275 crore was raised against a target of ₹40,000 crore; by FY20, ₹50,304 crore was raised against a target of ₹1.05 lakh crore.
  • In total, between FY11 and FY21, about ₹5 lakh crore was raised (that is, about 33% of just FY22’s projected fiscal deficit) – some of this, notably through stake sale to other PSUs.

  

• Going forward, outright privatisation (as opposed to stake sale) may not necessarily make sense.
  • Air India aside, a recently held auction of about 21 oil and gas blocks had only three firms participating, of which two were PSUs; 18 blocks ended up with just a single bid.
  • An additional push to privatise 12 rail route clusters attracted interest in just three routes, with only two bidders (again, one of which was a PSU).
  • Meanwhile, in a market on the edge, with interest rate hikes coming, this may also not be the right time.
• There is also the challenge of valuation – for example, about 65% of about 300 national highway projects have been recording significant toll collection growth (>15%, since they have been in operation); any valuations of such assets will need to ensure they capture potential growth in toll revenue, as NHAI’s highway expansion bears fruit and the economy recovers.
• Beyond revenue raising, there are serious social consequences with privatisation.
  • PSUs have been significant generators of employment in the past, with multiplier effects – there were about 348 CPSUs in existence in 2018, with a total investment of ₹16.4 trillion and about 10.3 lakh employees in Central Public Sector Enterprises (in 2019).
  • A push for privatisation is a push for mass layoffs, in a period of low job creation.
• Greater concentration of public assets in select private hands is also a medium-term concern.
  • In India, about 70% of all profits generated in the corporate sector in FY20 were with just 20 firms (compared, to 15% in FY93).
• Across sectors, a whiff of oligopoly is emerging – cigarettes continue to be dominated by a single player (with ~77% market share in FY21), paints has one entity with ~40% in FY21, while telecom has just three players left.
  • Such concentration, mixed with privatisation of public assets, is likely to lead to higher usage fees (already being seeing in telecom) and inflation, coupled with a loss of strategic control.

Way Forward:

Given social and institutional constraints, India’s ability to privatise firms will continue to be slow in the future (for example, BPCL’s long-awaited journey).

• Clearly, this is a lever that is unlikely to raise significant revenue. Perhaps it is time to consider other options.
• The Maruti model for selling stake is instructive – the government had a joint venture with the Suzuki Corporation, but ceded control, despite Suzuki having only 26% shareholding, in return for a push by Suzuki for greater exports from India and manufacture of global models in India.
  • Exits from Maruti were conducted in small tranches, ensuring a better valuation for the government.
  • Empirical evidence highlights that stake sales are considered a preferred route (about 67% of all PSU sales in about 108 countries between 1977 and 2000 were conducted via this route), as it gives time to ensure price discovery, allowing improved performance to raise valuations over time.
• Apart from it, another avenue of selective PSU reform could be considered.
  • In China, for the past few decades, growth has been led by corporatised PSUs, all of them held under a holding company (SASAC), which promotes better governance, appoints leadership and executes mergers and acquisitions. Such PSUs that have scaled up are market leaders.
  • In Singapore, the Ministry of Finance focuses on policymaking, while Temasek (the holding firm) is focused on corporatising and expanding its PSUs (for example, Singtel, PSA, Singapore Power, Singapore Airlines) towards a global scale.
• A PSU with greater autonomy, with the government retaining control via a holding firm, can also be subject to the right incentives. Surely, Indian PSUs could aspire to be as large and efficient as the Chinese ones.

Conclusion:

• The time has come to take a relook at privatisation. Simply pursuing this path, while utilising such proceeds for loan write-offs or populist giveaways in the election cycle will not do. A hunt for immediate revenue should not overshadow the long-term interest of the ordinary Indian.

Source: The Hindu , Indian Express

Mains Question:

Q. Critically analyse the disinvestment exercise, giving suggestions to improve the efficiency of CPSEs.