There is surprisingly little debate on India’s other ratnas — the 240 odd public sector undertakings, including nine maharatnas,16 navratnas and mini ratnas. The 2014-15 budget looks for record receipts of Rs 58,000 crore from disinvestment, and Finance Minister Arun Jaitley recently spoke about the need to privatise some PSUs. So, what should the government do with the public sector ratnas that account for about 20 per cent of the GDP and 15 per cent of stock market capitalisation through 50 listed firms?
After pursuing state-led capitalism for four decades after Independence, India introduced a new industrial policy in the 1990s that emphasised delicensing, greater independence for profitable PSUs and restructuring of loss-making firms through the Bureau of Industrial Financing and Restructuring. Between 1992 and ’98, privatisation was not pursued aggressively, though one of India’s most successful privatisation initiatives — the sale of Maruti to Suzuki — was completed during this period.
The NDA government followed an aggressive privatisation policy but faced political and bureaucratic hurdles. The objective of disinvestment under it was not just to raise revenue but also improve efficiency. Some 20 companies were either privatised or 50 per cent of their stock divested. The UPA 1 government, dependent on the communists, did not try to privatise PSUs, while UPA 2 brought back disinvestment with the intent to raise revenue. The latter also encouraged restructuring of state-owned enterprises by creating the Bureau for Restructuring of Public Enterprises. A National Investment Fund was also created to collect disinvestment receipts, with the idea that it would be strategically deployed rather than used as part of budget receipts. Following fiscal pressures after the 2009 crisis, the criterion was gradually relaxed until the fund, for all practical purposes, became part of the budget.
There are surprisingly few good studies on the performance of PSUs. The following trends can be gleaned from those available. First, the number of profit-making PSUs has declined and the number of loss-making ones has increased in the last 15 years. But PSU profits as a whole have increased. In the data for 2012-13, about 150 PSUs show profits and 80 PSUs record losses.
Second, the return-on-assets in PSUs is better than in the corporate sector and in FDI-based companies, though the value of assets, especially land, needs careful scrutiny. Returns are also kept artificially high in some PSUs.
Third, PSUs in the service sectors, such as Air India and BSNL, have done poorly relative to those in mining and industry. This is not surprising, given the lack of service orientation in service-sector PSUs. The presence of PSUs in the telecom sector has not had a negative effect on the industry because of a more effective regulatory environment, which has not hindered private sector companies. But in aviation, the DGCA has not worked as effectively in creating a level playing field.
Earlier, studies showed that disinvestment had a positive effect on PSU performance, ostensibly because new owners injected greater commercial drive, which helped improve productivity. More recent studies show that when PSUs with and without MoUs are considered, much of the performance improvement is due to MoU-based commercialisation with little extra improvement in performance. So a policy of selling a minority stake (up to 49 per cent) as a disinvestment measure is unlikely to have any positive effect on efficiency.
This gives the government two options: outright (or majority stake) privatisation of loss-making PSUs, or their closure. It should focus on greater commercialisation of profitable PSUs, mainly the nine maharatnas and some navratnas. But there should be greater contestability in restricted sectors, including coal and defence, by allowing private sector participation. Air India, BSNL, MTNL and many of the mini ratnas — both loss-making and even profit-making ones — could clearly be set up for outright privatisation.
The opposition to such an approach will come from trade unions, vested interests and even consumers afraid of higher prices. But considering the long-term benefits to the economy and, eventually, better services and products to the consumer, this approach is worth exploring.
A bolder roadmap for gradually getting the government out of the business of business, as promised by the prime minister, must be prepared with a hard look at the real economic benefits from some of the profit-making state-owned enterprises as well. The question to be asked is, are these firms locking up scarce capital to provide employment for a few, or can they become strategic world-class companies?
The writer is former director-general, Independent Evaluation Office.