Privatisation in India

The story: After a lull since 2010, privatisation is being pursued with vigour in India. In the backdrop of an economic contraction, it is prudent to

Privatisation in India

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• The story: After a lull since 2010, privatisation is being pursued with vigour in India. In the backdrop of an economic contraction, it is prudent to revisit the aggressive privatisation of public enterprises.
• How advisable: India is going through its worst economic crisis, and witnessed the highest-ever contraction in the economy took place in 2020. Unemployment has risen, and incomes for growing numbers are falling. Banks’ non-performing assets (NPAs) may be increasing, and fiscal deficit is also rising. It would now be prudent to think through the pros and cons of the aggressive privatisation of public enterprises.
• Three types of PSEs: There are three categories of public sector enterprises, all different.

1. PSEs that are actually sick - Their technology, plants and machinery are obsolete.Their managerial and human resources have been lost. Such enterprises are beyond redemption. They should be closed, and assets sold. But this has been difficult with successive governments, as labour in these enterprises have had a political constituency which has prevented their closure. The Government should take efforts to close these in a time-bound manner. After selling machinery as scrap, there would be valuable land left. Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
2. PSEs that are sick but can be revived - Wherever possible, in such PSEs, private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises. Examples: Air India and the India Tourism Development Corporation (ITDC) hotels. Air India should ideally be made debt free, and a new management should have freedom permitted under the law in personnel management to get investor interest. As valuation rises, the Government could reduce its stake further and get more money. If well handled, significant revenues would flow to the Government.
3. PSEs that are making money - With profitable public enterprises, the government can continue to reduce its shareholding but not suddenly. It can offload its shares and even reduce its stake to less than 51% while remaining the promoter and being in control. In parallel, managements may be given longer and stabler tenures, greater flexibility and more confidence to take well-considered commercial risks. They can also be asked to invest patient capital in strategic areas where risk is high and where risk averse private investment may not be easily forthcoming. The best country to learn from is China, that did exactly this. It nurtured the good state-owned enterprises as well as their private ones.

• Summary: Large Indian firms that can buy out sick PSEs are few in number, due to limited financial and managerial resources. These successful large corporates need to be encouraged to invest and grow, a strategy much better than using the scarce resources for taking over government enterprises with no real value addition to the economy in the near term. 

 

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