Walking the tightrope

Sale of Air India — the loss-making state-owned 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-and-error. 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 profit-making 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'.

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