PSU Disinvestment: Indian economy's dead end?
The Centre’s conviction to pursue disinvestment of PSUs has led to workers’ unions protesting; with economic experts indicating that this might be a step to finding short term fixes by sacrificing long term financial security
As the Central government prepares to sell profit-making public sector undertakings (PSUs) to meet an ambitious disinvestment target of Rs 1,05,000 crore through what it has called "strategic disinvestment", numerous experts, including top officials of these PSUs feel the decision may affect the country's ongoing slowdown even more, with some even going as far as calling the decision "suicidal for the nation".
Adding to the anxiety of PSU officials, Finance Minister Nirmala Sitharaman recently announced that India's major Maharatna companies like Bharat Petroleum Corporation Ltd (BPCL); Shipping Corporation of India (SCI); Container Corporation of India; Tehri Hydro Power Development Corporation (THDCIL) and North Eastern Electric Power Corporation Ltd (NEEPCO) will be up for bidding.
Both THDCIL and NEEPCO will go to National Thermal Power Corporation Limited (NTPC), which will acquire the government's holding of 74.23 per cent and 100 per cent, respectively. In CONCOR's case, the Centre plans to sell 30.8 per cent while retaining 24 per cent. However, in the case of BPCL, the government has decided to carve out Numaligarh Refinery and ensure that the refinery will be retained by the government.
But the decision has created ample uneasiness among the top officials. In a press conference held on Monday, Federation of Oil PSU Officers (FOPO) and Confederation of Maharatna Companies (COMCO), claiming to represent over 70,000 officers of the top state-owned firms, said the government was killing the goose that lays golden eggs by privatising the highly profitable Bharat Petroleum Corp Ltd (BPCL).
"Our comprehensive evaluation of the assets of BPCL reveals true worth of BPCL to be Rs 9 lakh crore. Today's market cap of BPCL is Rs 1.06 lakh crore. Typically, management control fetches 30-40 per cent premium over the market cap. Even after considering a premium of over 100 per cent, there is likely to be a destruction of wealth to the tune of 4.46 lakh crore rupees," said Mukul Kumar, Convenor, FOPO and COMCO.
To clarify, Kumar emphasised that he was not opposed to competition from the private sector but that state assets should not be handed to them on a silver platter. "BPCL and other companies too have worked hard to reach here, we are not opposing privatisation but the fact that these private players will get everything on a platter without any hard work," he said.
The Union opposition
Since the finance minister's decision, unions from BPCL, CONCOR, SCI with ONGC have repeatedly registered their protest, demanding that the government take back its decision.
Speaking against the government's decision, S P Pathak, General Secretary of Petroleum Workers Union told Millennium Post, "I feel a company like BPCL works as a backbone for India and we are against privatisation because we feel that more than making things better, it will weaken the working conditions of the company as a whole." He added that the employees fail to understand how a profit-making company like BPCL could be sold to a "random private firm". "This move is not good either for the company, nor the employees," he said, adding that more than 12,000 employees are expected to be affected as a result of this decision.
In fact, Pathak said that when media reports were citing BPCL as a potential contender for disinvestment, they had immediately rushed to the Regional Labour Commissioner (RLC), who had fended them off saying that they should not trust everything the media is publishing. A week later, the finance ministry held its press conference, announcing BPCL's disinvestment. "Before the decision came out, we were told that nothing of this sort is going to happen. We attended two RLCs meeting and the management told us that the government has not made any announcement and asked how we could question them on the basis of few media reports," Pathak smirks.
Echoing the same sentiment, Binay Kumar Chaudhary, President of CONCOR Employees' Union said, "We have returned Rs 8,000 crore back to the government and we give Rs 4,500 crore annually to the Railways. Presently, we have a capital of about Rs 49,000 crore. This is the reason why the government is so keen to sell this company." He said that in the field of logistics, CONCOR is the only company that does 75 per cent business, while 25 per cent is done by other companies. "The 755 businesses we have belong to small business players. Now, they want to make the company private altogether. All this is just a way to give profit to a certain set of people," he added.
Meanwhile, opposition parties like Congress, Trinamool Congress (TMC) and Left parties have vigorously opposed disinvestment of PSUs. Congress member Udit Raj has been protesting against the government's decision and has also joined union members in their protest.
Smelling an opportunity
Both major shipping corporations CONCOR and SCI are up for bidding, which have made smaller business players in the market increasingly excited about their future prospects. Speaking to Millennium Post, a Delhi-based import-export businessman said the decision will bring them profit. "At the moment, we have to pay handling charges and Inland Container Depot (ICD) charges among other things but privatisation of these companies may bring down that amount," he said. He also said that the decision will be beneficial in the long run. "We are talking about huge profit-making companies here. If we specifically talk about CONCOR and SCI, both have numerous assets and I believe with the coming of private players, profit margins will be huge," he added. Both CONCOR and SCI play a vital role in the import-export business of the country. Union members believe the decision will affect the business.
Sayan Chakravarty, an economic expert from Presidency College, Kolkata said that the Centre's decision will not help the government close its fiscal gap. "Liquidation may mean additional income from the proceeds of a stake sale, especially for India where the government needs to spend higher amounts of infrastructure to boost economic growth. But at some point there would be nothing left to sell and cushion the fiscal deficit with, and then it may widen the fiscal gap," he added.
Understanding strategic disinvestment
To understand what disinvestment is and why has it sparked such a controversy in the market, it is imperative to go back to Atal Bihari Vajpayee's tenure, whose government gave up ownership of a few PSUs to private players in 2001-02. The decision had drawn huge criticism for its pricing and choice of buyers.
The Government of India, since liberalisation, has been trying to reduce its equity stakes in PSUs and to do that it has used three modes –
l Holding onto 51 percent in profit making PSUs and selling minority stakes through Initial public offering (IPO) or sale in the market to public investors.
l Selling loss making PSUs on a slump sale basis to other investors.
l Selling large block of its shares while giving up management control also called strategic disinvestment.
The NDA-II is now opting for the rarely used third option, where the government sells blocks of its shares to private investors and gives up management control in profit-making PSUs. Metaphorically, it simply means selling the family silver to meet its daily needs.
The Cabinet has done the approval, after which the financial bidding of these companies will take place. Before that happens, three companies will be appointed to look after three factors, which are finance, legal and strategic prospects. Now, the few companies that have applied are going to bid online and whoever bids the highest, the company will be sold to them.
Since, the Centre's decision stock prices of PSUs have shot up in a flat market. However, with just Rs 17,364 crore of the Rs 1.05 lakh crore disinvestment target realised so far, the Centre is in a hurry to expedite these strategic sale proposals in double-time.
Explaining why the government might have resorted to this option, P. Nagraj, professor at Asian College of Journalism, Chennai said, "The long term structural reasons leading to a demand contraction in the economy, I think are largely responsible for the crisis; but the problem got aggravated because of a completely illogical move like the demonetisation on the one hand and a chaotic implementation of Goods and Services Tax (GST) on the other." This created an economic crisis that led to a situation where tax collections were badly hit, as is happening today. "In a situation like this, the state can try to deal with the crisis firstly by raising more resources by taxing the rich and secondly by resorting to some amount of deficit financing," he said.
The professor added, "This, even if it helps the government tide over the immediate fiscal crisis, is an ill advised move from a medium or long term perspective. The government will lose a regular, long term source of income which will affect the fiscal health of the economy later," he added.
Chakravarty from Presidency College, on the other hand said the decision will help the prevailing monopoly by reducing the market power of consumers and taxpayers. "We cannot really say that PSUs are inefficient and it does not affect consumers and taxpayers. Comparatively, the tax cut offered by the government in corporate taxes is much more responsible for affecting consumers and taxpayers," he added. Meanwhile, the Prime Minister's Office (PMO) has made it clear that apart from THDC and NEEPCO, all the other companies up for privatisation this time around are to be sold to private players.