One small item in the papers seems to have gone unnoticed- not surprisingly, because it is about successful PSUs. Three PSUs- Bharat Electronics, Hindustan Aeronautics and Power Finance Corporation- have been granted 'navratna' status. Originally, this status was granted to nine high performing PSUs but, with more PSUs doing well, the list has been expanded. Navratnas tend to enjoy greater operational autonomy than others.
BEL's stock has been going up and up along with its profit. In the period 1996-97 to 2005-06, profit after tax has risen from Rs 511 mn to Rs 5830 mn. BEL is into electronics and it caters to defence as well as non-defence applications. Its line of business requires substantial investment in R &D, which, in turn, requires highly trained people.
Who would have thought that a PSU could be successful in such a line?- they are not supposed to attract bright people, aren't they, with the kind of salaries they offer. They are supposed to lack the drive and innovation to succeed in such a business. Yet, BEL has done it. PFC had a highly successful IPO a few months ago. HAL made a profit of R 7.7 bn. in 2005-06.
The sharp improvement in performance of these PSUs is part of a larger story of broad improvement in the performance of the Indian public sector. And yet, when the reform process started, most people didn't believe this would happen. They urged the government to cut its losses by privatising its PSUs, whether in industry or in banking. India did not go down this route traversed by other developing countries. It opted for disinvestment- the sale of minority equity stakes to retail and institutional shareholders.
Listing on the exchanges subjected PSUs to market discipline and provided a measure of insulation of undue political interference. The opening up of the Indian economy subjected PSUs to competition. Greater autonomy gave them a chance to compete. The result? The government has seen a huge rise in the market value of its investment in PSUs- more than enough to wipe out its fiscal deficit.
This is a story that I have chronicled in my book, Privatisation in India:challenging economic orthodoxy (Routledge). In the early years of reform, when I said that disinvestment was preferable to privatisation (the transfer of control to private parties), it was not popular among academics and the financial press. The popular view was that the government would only keep losing money.
But disinvestment was indeed the route the political class took if only because it was less contentious. Things have worked out for the PSUs and the political class. I must say I feel vindicated.
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3 comments:
A small question?
Although the effect of market discipline on firm performance is studies extensively and found positive in most of the cases, why is it so that Indian Government (especially during Arun Shourie tenure) thought of privatizing many companies at one go.
Indian privatization program started late (Early 2000) when many studies had revealed how some of the countries like Austria, Canada, Germany, Singapore , UK , etc. have significantly benefited by first dis-investing (a small portion by public issue) and then transferring the remaining shareholding after the firm is subject to one or two years of market discipline. Is this process (public issue -pricing, underwriting, listing, etc.) so difficult or are there other threats that this process is subject to which caused the ministry to go for privatization of many companies at one go?
One PSU which has aggressively improved its game globally is Russia's Gazprom. It has of course benefitted from the formidable backing of state power, but so do western oil companies
- Tumbaru
All in all, the meat of the survey is pretty predictable, and for those who have been following Orange County equity investment environment - it should not be suprising. But more importantly, the survey does confirm that United States still needs to go a long way in developing its judicial system toward protection of rights as well as dealing with the tedious bureaucracy of doing business.
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