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Sale of PSUs can boomerang if not well thought out

The centre’s strong pitch for privatisation is an attempt to give a fillip to the economy. While many PSUs are loss-making, unless there is a clear plan and fast implementation, it could be another failed venture.

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By Shivanand Pandit

The government has made a strong pitch for privatisation of PSUs and monetisation of underemployed resources. At a recent webinar, Prime Minister Narendra Modi emphasised that a Rs 25-trillion opportunity is available for the private sector in the nation’s jumbo Rs 111-lakh crore National Infrastructure Pipeline projects over the next five years.

The webinar, organised by the Department of Investment Promotion and Asset Management (DIPAM), was attended by Finance Minister Nirmala Sitharaman, Vice-chairman of NITI Aayog Rajiv Kumar and senior officers from 14 ministries. Policymakers from independent wealth and pension funds, national and international investors, investment bankers, consultants and specialists also joined in. The main agenda of the webinar was to design an effectual execution plan for privatisation and asset monetisation as stated in Budget 2021.

Modi said the government had spotted 100 assets for monetisation that could raise as much as Rs 2.5-lakh crore for the exchequer. While making a pitch for the private sector to help in the development of the economy, he said that wealth creators are also significant for the nation. He declared that the government was marching forward with the chant of “monetise and modernise”, while emphasising that the government had no business being in business. He said the sum accumulated from monetisation and divestment would be expended to finance development plans in water, sanitation, education and healthcare sectors.

He also said the private segment brought in investment, global best practices, upper-quality administrators, modifications in supervision and asset monetisation. Modi said that excluding four strategic zones transport and telecommunications; space, atomic energy and defence; coal, power, petroleum and other minerals; banking, insurance, financial services where the government will maintain a small presence, it is dedicated to privatising all PSUs.

He said that numerous PSUs were a burden on the government’s revenue and their losses have to be supported from the exchequer. He cited Air India’s losses of Rs 27,255 crore and BSNL/ MTNL losses of Rs 62,725 crore from 2016 to 2020 to support his statement.

He also said that funding such losses would result in fewer schools, roads and hospitals and cut the privileges of citizens who have the first right on government resources.

India has a mixed economy. Both private and public sectors are there in sectors such as transport, banking, healthcare, education, manufacturing, etc. Privatisation modifies the association between the state and the private sector and this helps the economy as a whole. Therefore, privatisation refers to any route that decreases the state’s share in directly possessing and running such entities.

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Take China, for example. With a state-monitored economy and private players, it has achieved a quicker evolution rate. Due to a breakdown of state-regulated economies worldwide, the enthusiasm for privatisation has mounted, leading to rising output, enhanced quality and decreased unit costs.

Budget 2021 emphasised the need for privatisation because the difference between the government’s income and expenditure increased from Rs 7.96 lakh crore to Rs 18.48 lakh crore and is projected to be plugged at Rs 15.06 lakh crore. To link the gap, the government will borrow Rs 12 lakh crore this year, i.e., approximately Rs 3,287 crore a day.

This level of borrowing and deficit will hit cost competitiveness and economic evolution, even though the economy is moving on a path of retrieval. The government should cut its borrowings and shorten debt levels to become a low-cost, high-growth economy.

Privatisation offers the monetisation of assets, limits destruction of public wealth, liberates assets and assures positive growth.

Currently, geopolitics is not attractive for global finance and international interest rates are floating between zero and one percent. Portfolio movements to developing economies are a clear indication that businesses are hunting for returns.

Furthermore, a McKinsey study says that approximately 20 percent of $4 trillion of exports is anticipated to swing supply base in five years. Hence, the government must look at a paradigm change in policy, be it farm laws, productivity-linked schemes, opening up of the FDI, new codes for labour laws and privatisation. These will help take care of India’s requirements.

After a long wait, the government has announced that privatisation of public sector establishments is in the national interest and decided to carry out the plan whole-heartedly. Although it is a welcome break from the past, to achieve the goal of nurturing over Rs 2.5 trillion from the monetisation and sale of state-owned businesses and assets, the government will have to get many crucial things right.

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Firstly, the process should be efficient and short.  The current process is very long because after NITI Aayog advises the plan of action relating to around 300 public enterprises, it will be scrutinised by a committee of secretaries and ministers before the DIPAM places it before the Cabinet Committee on Economic Affairs (CCEA) for an “in-principle” sanction. As an alternative to avoid the long route, either NITI Aayog or DIPAM should directly take it to CCEA.

Unfortunately, the government does not possess a supervisory set-up and professional skills to carry out the process and most civil servants will be reluctant to take up the assignment for worry of procedural defects. Moreover, outsourcing the job will bring conflict of interest concerns. If the government proceeds with the present supervisory mechanism, the gulf between the nation’s disinvestment ambitions and actual progress will become wider. Therefore, it is desirable to have a special purpose department equipped with political protection, managerial power, professional aptitude and incentives for performance.

Also, in order to make privatisation fruitful and in the public interest, stakeholder representation or mapping is important. Therefore, it should bring within its fold all parts of society that will be influenced by the reforms.

More importantly, the government must keep its promise of using the proceeds from the sale of PSUs for welfare schemes. It is better to have some judicial oversight of this promise so that violations can be prevented in future. Don’t forget that the National Investment Fund, established in 2005 with comparable intent, shut down in 2009.

There are also worries that privatisation will lead to job losses. Therefore, there should be political involvement and policy resolution to avoid this. The government should promote entrepreneurship as this will tackle job reservation problems and help people gain a higher socio-economic status.

Since the 1990s, the track record of governments in accomplishing privatisation goals has been bad. History has shown that a major chunk of the proceeds has come from buybacks or PSU transfers or public bids where government establishments like LIC were the buyers. These have not helped to diminish the stake of the government in these entities. Such interchange of money from one pocket to another should be avoided if the government sincerely wants to move on the track of privatisation.

Also, past efforts at privatisation via strategic sales have shown that one of the major hurdles is unending litigation, sometimes by labour unions and sometimes due to the valuation of government assets and the prices at which they were sold. Valuation disputes have also got officials in charge of privatisation tied up in legal battles, even well past their retirements. This has made civil servants risk-averse and reluctant to sign on any sale at any price.

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Therefore, after placing the proposals in place, the government should design an execution plan for the privatisation. If the government puts its full power behind this and does not permit unions, the bureaucracy or the opposition to disrupt its plan, it will be a game-changing event for the Indian economy.

Otherwise, it will be akin to disposing of the family silver. And mere dismantling of PSUs which have played a crucial role in nation-building will be detrimental for the country.

—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa

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