Bharat’s other ratnas

The government has two options: outright privatisation of loss-making PSUs, or their closure.

Written by Ajay Chhibber | Published:November 12, 2014 12:04 am

Supplies to the plant are being arranged through alternate lines.

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.
express@expressindia.com

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  1. C
    Chavali
    Nov 12, 2014 at 5:25 pm
    It has become fashion with concerted effort and orchestrated campaign by certain vested interests about privatization. It is projected as a panacea. BSNL and Telecom sector was scuttled by vested interests in bureaucracy and politicians in power. A compeion is unleashed without giving it a chance. Now everything is drained and it became an orphan and thrown out. Likewise, Air India too. The operation parameters can be comparable with private airlines. The occupancy is good. There is indiscipline and unionism of employees. Perhaps this also cultivated with vested interests behind and management failed to establish dialogue and sort it out. Why Air India is in loss? There is a colossal purchase of aircraft with inflated price and maintenance contracts for selfish few and burden of overheads. The haphazard merger plan of domestic and foreign airlines killed its ideny in both sectors. Let us not sell our family silver for today's party. Why and how ICICI had become financially viable? It is not some extraordinary managerial capacity. It is under valuation and jack up of prices in stock market and a w lot of game plan crafty executed. Again why there is a panic of ICICI bank scrips a few years back. Let us not become pawn in hands of a few.
    Reply
    1. D
      devdutt pradhan
      Nov 12, 2014 at 9:46 am
      There are 7 maharatnas,17 Navratnas & 72 Miniratnas currently as against 9 & 16 mentioned in the first paragraph.:dpe.nic/publications...
      Reply
      1. H
        H K
        Nov 12, 2014 at 2:39 pm
        Chanakya says Jaha raja vepari to praja Bhikhari, govt, should only do governing.
        Reply
        1. A
          ashok
          Nov 12, 2014 at 8:14 am
          The only group that really would like the PSUs to continue to be owned / managed by the government are the employees. Control over some prized PSUs, especially the banks, insurance and possibly the oil sector also creates humongous opportunities for rent seeking. That is just about the balance sheet of the public sector. Barring the Left and some politicians like Ms. Banerjee, there is little intellectual / ideological conviction about this relic from an era that has ped. The government should start swinging its sword / axe, getting rid of the loss making ventures to begin with.
          Reply
          1. M
            Mahender Goriganti
            Nov 12, 2014 at 9:48 am
            In fact all PSUs should be wound down or sold out what we can get. Government should limit to governing, law and order, defense and planing. Disinvestment is a national security issue is baloney, ( British raj mind set) as the government can always through laws can take over bu law or order. No private organisation or individual can misbehave as they exit at the mercy of the government, /A government exist at the mercy of mes that vote.
            Reply
            1. S
              SP
              Nov 12, 2014 at 10:21 am
              Generally we should follow the model used in Telecom Sector. All said and done it has served majority of people and made a difference. It is important that there is a strong regulator and a public sector player who does not hesitate to compete. We also should open the sectors for foreign partition. But with any change that has good intent, there are people waiting to make quick gains using unscrupulous means. It has to be steered and done in a phased manner with attention for details. Having a holding company for PSU investments is a good option.
              Reply
              1. T
                T.V. SIVAKUMARAN
                Nov 12, 2014 at 12:46 pm
                Mrs. Thatcher succeeded in turning Britain from lethargy by acting tough on the Labour and Communist controlled Trade Unions. Modi Government will face much harder tasks in fighting the unions which have a vested interest in status quo. His success in changing the growth scene in India will depend on his success in reining in the unions starting from the Miners' union, followed by the Railway Unions, the telecom unions and so on. Will he show enough guts?
                Reply
                1. C
                  common
                  Nov 12, 2014 at 1:53 pm
                  If selling all the public sector may turn out to be bersome, why not professionalise them? It is not that true that all private sector industries perform well. Where is Modi group of industries or even Birlas mired with criminal behavior as alleged by the government. Mere professionalization and allowing them to compete freely with the miinister concerned not attaching his family with any of them may cure the ills. Why bother about Marxists who do not even move out of their parents house due to responsibility towards the new electricity bills, water bills or the new nuisance property charges. They are fringe players to create maximum nuisance to any one who wants to work hard. Why not export them to North Korea.
                  Reply
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