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The Privatisation Conundrum

- Soma Saha

In a country with a tradition of socialist planning, the privatisation programme has been the most controversial part of the reforms process. Disinvestment has generated arguments from opponents and proponents alike. While opponents say it is nothing but selling off the family silver supporters say that the Government has no business being in business and should get out of it. The strongest votaries of disinvestment are, of course, in the stock market where public sector stocks are ruling the roost. Why then the opposition? Simply because successive governments have treated disinvestment merely as a tool to raise resources rather than as one designed to restructure the massive public sector.

How did it start?

Beginning 1950s, the public sector helped build strong economic foundations and a diversified industrial base and in the first four decades of independence, there was rapid expansion of public sector into almost every area of economic activity. Many of them would however have rendered a better account had there been maximum autonomy, freed from bureaucratic controls, and made accountable. Their net profit to turnover has been pitifully low in spite of the outstanding performance of a select group of undertakings, like the oil majors.

Disinvestment of a percentage of shares owned by the Government in public undertakings or PSUs emerged as a policy option in the wake of economic liberalisation and structural reforms launched in 1991. It was not conceived as privatisation, but limited sale of equity with the objective of resource building to reduce budgetary gaps and boosting the performance of public enterprises in general. Hence a comprehensive policy on public sector was set out in the Industrial Policy Statement of July 24, 1991. Disinvestment was conceived in the context not only of the acute financial stringency of the Government of India, which had to continually provide budgetary support to loss-making units, but also of the failure of public sector as a whole to provide returns on the total 240 undertakings. The steps undertaken included a review of public sector investments to focus on strategic and essential infrastructure enterprises and new procedures to tackle chronically sick and loss-making units.

The Chandrasekar Government in the interim Budget of 1991-92 first enunciated disinvestment as a policy. It was a quick-fix idea to raise money for the then severely cash-strapped government. The Narasimha Rao Government carried this forward and sold small lots of shares in 47 companies, which in itself is a record for the number of companies disinvested in a single year. A sum of Rs 3,038 crore was generated against a target of Rs 2,500 crore making 1991-92 one of only three years in the last 13 when actual disinvestments receipts exceeded the target. The process limped along from year to year with different governments setting fancy targets for revenues from disinvestment, only to fail. The first big break came in 1996-97 when VSNL placed GDRs (global depository receipts) in the international market followed by MTNL the next year. Disinvestment acquired a direction when the last BJP-led Government formulated a policy in 1998-99 deciding that government holding in PSUs will be brought down to 26 per cent.
The Department of Disinvestment (upgraded into a Ministry later) was set up in December 1999 and the concept of strategic sales made its advent. Disinvestment had morphed into privatisation. The Balco sell-off was really the turning point for the privatisation programme. In a path-breaking judgment that cleared the way for Balco's privatisation, the Supreme Court said that courts cannot and should not interfere with Executive decisions so long as they are based on reason and are not arbitrary. This ensured that political parties do not go to court against every disinvestment decision of the government. The programme gathered steam then on with some remarkable sell-offs such as CMC, VSNL, IBP, Indian Petrochemicals Corporation (IPCL), Modern Foods and Maruti Udyog. However, with the failed privatisation of Hindustan Petroleum and Bharat Petroleum, the Government ran into legal problems. The Supreme Court said that since they were created under an Act of Parliament, its approval was necessary for their privatisation.

There are a few contentious issues but the biggest is the usage of the money raised from the sell-offs. None of the half-dozen governments in the last 13 years was able to resist the temptation of using the proceeds from disinvestment to fill the fiscal deficit. Almost Rs 31,000 crore was raised in this time and was used to fill the bottomless pit of government finances. And this was despite sage pronouncements by every single government about a Fund to be set up from the proceeds to be used for labour and social welfare! This remains one of the glaring failures of the privatisation programme. The programme has not been without goofups. Erstwhile government owned Centaur Airport Hotel in Mumbai was sold to A L Batra of Radisson (Delhi) for Rs 830 million against the reserve price of Rs 780 million but A L Batra later sold it to Tulip Star at a much higher price. The second issue is privatisation-created monopolies such as IPCL. The company was sold to the Reliance group despite the fact that Reliance even then had more than a 60 per cent share of the market. The government ignored the Disinvestment Commission's advice against this and today Reliance, inclusive of IPCL, accounts for more than 90 per cent of the capacity and market share in petrochemicals. The government's argument that monopolies don't work in a globalised economy does not hold much water.

Finally, the less-fortunate ones among PSUs such as Scooters India, National Industrial Development Corporation, Hindustan Insecticides, Hindustan Cables and many more are loss-making and there is no clear strategy for these PSUs. Presently government is selling its stakes in three PSUs- Dredging Corporation, the Gas Authority of India, and ONGC- hoping to raise 145 billion rupees of which seven-tenths coming from the sale of 10% of ONGC, which would reduce the government's shareholding to just under 75%.

The Disinvestment minister Mr Shourie, has thrown himself into the sales effort. Late last month he uncovered a concerted attempt by a handful of firms to "manipulate the market down", by heavy selling of shares in the final 45 minutes of trading over successive days. Whether or not he was right, Mr Shourie's well-publicised intervention and threats to name, shame and punish the alleged manipulators did mark a turning point in enthusiasm for the offers. With the Indian economy booming, availability of abundant liquidity and India's 'shining' prospects at home and abroad appearing positive, it is the time to make hay of the government's prize assets till the sunshines.

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