Does it really reflect the recognition that government has no business to be in business?
While presenting the Government of India’s budget for 2021-22 on February 1, 2021, Finance Minister Nirmala Sitharaman signalled the Government’s intent to privatize its enterprises like never before. This is what she said: “In spite of COVID-19, we have kept working towards strategic disinvestment. A number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Limited among others would be completed in 2021-22. Other than IDBI Bank, we propose to take up the privatization of two Public Sector Banks and one General Insurance company in the year 2021-22…. In 2021-22 we would also bring the IPO of LIC…. In the Atma Nirbhar Package, I had announced that we will come out with a policy of strategic disinvestment of public sector enterprises. I am happy to inform the House that the Government has approved the said policy. The policy provides a clear roadmap for disinvestment in all nonstrategic and strategic sectors. We have kept four areas that are strategic where bare minimum CPSEs will be maintained and rest privatized. In the remaining sectors, all CPSEs will be privatized…. To fast forward the disinvestment policy, I am asking NITI to work on the next list of Central Public Sector companies that would be taken up for strategic disinvestment. To similarly incentivise States to take to disinvestment of their Public Sector Companies, we will work out an incentive package of Central Funds for States. Idle assets will not contribute to AtmaNirbhar Bharat. The non-core assets largely consist of surplus land with government Ministries/Departments and Public Sector Enterprises. Monetizing of land can either be by way of direct sale or concession or by similar means…. In order to ensure timely completion of closure of sick or loss making CPSEs, we will introduce a revised mechanism that will ensure timely closure of such units.”
An annexure to the Finance Minister’s budget speech lists the objectives of the Government’s privatization policy and other details. The objectives include: (a) minimising presence of Central Public Enterprises (CPEs) and creating new investment space for private sector; and (b) post privatization, economic growth of CPEs will be through infusion of private capital, technology and best management practices. The four strategic sectors that the Finance Minister referred to in her budget speech are: atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. In these sectors, there will be bare minimum presence of the public enterprises. The remaining CPEs in the strategic sectors will be privatised or merged or subsidiarized with other CPEs or closed. CPEs in non-strategic sectors will be privatised or closed.
Prime Minister Narendra Modi, while replying in the Lok Sabha to the discussion on the motion of thanks to the President's address, is reported to have stressed on the private sector's vital role in the economy and asserted that the culture of abusing it for votes is no longer acceptable. If the public sector is important, the role of the private sector is also vital. Noting that wealth creators are a necessity for the country as only then wealth can be redistributed to help the poor, he wondered what can be achieved by handing over the nation to babus. Just because somebody is an IAS officer, he is running fertiliser and chemical factories to airlines, what this will achieve. "If our babus belong to the country so do our youngsters," the Prime Minister said. He cited the examples of telecom and pharma sectors to note as to how the robust presence of private firms in these fields has helped people, with even the poor using smart phones, and mobile calls costing virtually nothing due to competitiveness. If India is able to serve humanity during the COVID-19 pandemic, it is also due to the role of the private sector, he said.
The Prime Minister is also reported to have said at a webinar on privatization organized by the Government of India’s Department of Investment and Public Asset Management that the Government has no business to be in business.
I welcome this development. The Government of India has at least 250 enterprises, with many of them not qualifying to be in the public sector – they do not have huge positive externalities associated with them. They, therefore, need to be privatized.
But why is the Prime Minister saying all that he has said recently about the IAS officials and about the private sector at this time? Has he suddenly discovered the virtues of the private sector, or is there something else to explain it?
My guess is that it is the current situation of India’s worsening public finances that is at the root of his decision to go in for the privatization of a large number of public enterprises. And I believe that the current state of India's public finances has played a major role in the Government of India’s decision to initiate and then go ahead with the three major reforms in the agricultural sector as well.
It’s true that privatization is not the only way to raise resources. Our tax-GDP ratio is very low. It needs to be raised by at least five percentage points -- it's doable. Further, there is scope for saving substantial amount of public money by improving the efficiency and effectiveness of public expenditures that we currently incur.
There are other options as well. The Government of India can borrow more, both in domestic and international markets. Or it can borrow from the Reserve Bank of India. And in case our current account deficit goes up, we can utilize our impressive foreign exchange reserves to finance it. Of course, these options have the risk of displeasing the international credit rating institutions, as a consequence of which India’s credit rating might worsen.
The Prime Minister is aware of all this, but he seems to believe that, under the current circumstances, privatization of public enterprises is the best option.
The privatization route will allow the Government of India to deal with the issue of recapitalization of public sector banks relatively easily. With most of the public sector banks privatized and with only a few of them remaining in the public sector, and with the finances of the Government of India in a much better shape, it will not have to resort to invoking something like the bail-in provision in the Financial Resolution and Deposit Insurance (FRDI) Bill (that was expected to be tabled in the Parliament in the 2018 winter session). In a discussion on the FRDI Bill that I participated in, some participants shared reports of people withdrawing their fixed deposits from their banks. I argued that the Government must drop the Bill and finance the haircut involved in cleaning the public sector banks’ NPAs out of its budget. But in case the Government decides to go ahead with the FRDI Bill, it must create a mechanism that allows the depositors to insure 100% of their bank deposits.
Former RBI governor Y V Reddy, in an address at Shivaji University at Kolhapur on June 9, 2018 is reported to have said that “the FRDI Bill has caused nationwide concern, and rightly so…the proposal has itself created a panic and some withdrawal of deposits has taken place. To an extent, some permanent damage has been done to the trust in safety of bank deposits.” Fortunately, the Bill was not tabled in the Parliament.
But privatization is not an easy ball game. There are some political economy issues associated with privatization of public enterprises, which will need to be addressed. It’s not just many politicians and many senior government officials who oppose privatization of public enterprises, other people, including employees in the concerned administrative ministries/departments and concerned labour unions, also do so.
In addition, there is the issue of building the requisite technical capacity for managing the Government of India’s huge privatization programme. It will need expertise to deal with issues such as: how to build a strong constituency for privatization?; what should be the composition, powers and responsibilities of the nodal agency that the Government may appoint for privatization?; how to do the sequencing of privatization?; how to design the strategy for privatization of a given public enterprise?; how to do the physical, financial and organisational restructuring of a given public enterprise before it is privatized?; how to estimate the value of a given public enterprise before its privatization?; how to market a given public enterprise?; and so on.
To conclude, the privatization route can deliver the intended outcomes. But the journey along this route is going to be very challenging. Much will depend on how the Government of India meets the challenges it faces.
- Anand P Gupta, Former Professor of Economics, Indian Institute of Management, Ahmedabad