The government's target for privatisation in its Fy 22-23 budget is exceedingly modest- Rs 65,000 crore. This has disappointed many. They see this as timidity on the part of the government after the repeal of the farm laws. Well, it's not timidity, it is plain good sense. Privatisation on a large scale is hard to bring off and, if bungled, can prove politically costly.
For most of the two decades or so that disinvestment or privatisation has been attempted, the government has failed to meet targets. It has come close in some years through the ruse of getting one public sector undertaking to acquire stakes in another. This is not because of opposition from vested interests, whether amongst politicians or in the bureaucracy. The process of privatising a PSU is inherently time-consuming if you wish to get it right- in terms of getting multiple bidders, setting a proper reserve price, strengthening the PSU before offering it for sale and, most importantly, getting the valuation right.
If the government sells an important PSU or a public sector bank on the cheap and to the wrong buyer, hell will break loose. Job losses consequent to privatisation are certainly an issue. The first thing a private buyer will do is to cut the work force and cut benefits. This benefits shareholders but it leaves a large number of workers jobless. The private buyer benefits but there are costs to the government of the day. The government antagonises PSU employees and PSB employees. Central government employees, state government employees, railways' employees all feel a certain kinship towards public sector employees. So, there is significant chunk of the electorate that the government runs the risk of alienating. The benefits, whether in terms of revenues from privatisation or improved efficiency, are relatively negligible.
It makes sense to get rid of basket cases such as enterprises with long-running losses. But handing over a well-run PSU to a private entity- such as BHEL, Concor or BEML- is a different cup of tea altogether. In deciding to go slow on privatisation, the present government realises the political (and, perhaps, economic) costs outweigh the claimed benefits. The political leadership has chosen to listen to its instincts, instead of being guided- or misguided- by "experts".
More in my BS column, A change of course on privatisation.
FINGER ON THE PULSE
T T RAM MOHAN
A change of course on privatisation
The modest targets reflect a welcome embrace of pragmatism in the govt’s economic policy
India’s Budget for FY 22-23 has signalled that the government will proceed cautiously on privatisation. Would-be reformers will denounce the change of course as a huge setback to reforms. It is, in fact, a move that acknowledges the realities of India’s political economy.
The Budget sets a modest target for privatisation of Rs 65,000 crore. This is way below the target of Rs 1.75 trillion for FY 21-22. Receipts for FY 21-22 are expected to be Rs 78,000 crore, much of which will be accounted for by disinvestment in LIC. It will not come from privatisation or the transfer of ownership and control, which the budget for FY 21-22 had emphasised and for which it was lustily cheered. There is no mention in this year’s Budget of the privatisation of two banks or one insurance company, which were talked about last year.
Privatisation enthusiasts will see this as a serious let-down after the successful privatisation of Air India this year. They overlook the fact that Air India’s privatisation was initiated in 2018 and took four years to conclude.
In privatising Air India, the government moved the airline’s land and building to a special purpose vehicle. It took the unusual step of taking over nearly 75 per cent of Air India’s debt of Rs 61,000 crore. Employees were guaranteed their jobs for one year and no more. The airline was sold to a respected business group, Tata. Replicating this level of attention to detail to numerous other public sector undertakings (PSUs) would not only be time-consuming, it may be virtually impossible to accomplish.
The government’s decision to de-emphasise privatisation reflects three realities. One, the Indian state lacks the capacity to execute privatisation on a large scale. Two, botching the sale of public assets can prove costly in both political and economic terms. Three, it is not helpful to turn privatisation into a benchmark of overall economic performance.
Executing privatisation correctly is a challenge that not even advanced economies have managed well enough. Privatisation is intended to bring about more efficient utilisation of assets. It is also intended to fetch the government appropriate revenues. For these twin objectives to be met, the government must get the valuation right.
That is not easy. The timing of the sale must be right— in a depressed market, the chances of the asset being under-valued are higher. Often, the firm needs to undergo a certain amount of restructuring before it is offered for sale so that it attracts the right suitors. There must be multiple bidders. Ensuring these and other conditions for an efficient auction are satisfied is not a simple matter —and few governments the world over have got it right.
The worst thing a government can do is to rush the process by setting stiff targets. When that happens, privatisation is likely to be botched and controversy is inevitable.
It has been nearly two decades since Hindustan Zinc Limited was sold. The sale has come back to haunt its authors, with the Supreme Court asking the Central Bureau of Investigation to conduct an enquiry into the transaction. HZL was not a very significant PSU and yet its strategic sale is mired in controversy. Think of the furore that would erupt when large, well-run PSUs are perceived to have been sold cheaply or to the wrong buyer.
If the sale of large, profitable PSUs can prove contentious, the sale of public sector banks (PSBs) presents challenges of a different order altogether. We need to clear as to who the potential buyers might be. The larger private banks in India have created formidable branch networks and are unlikely to have any appetite for the legacy issues that go with a PSB. Foreign banks have been conserving capital for their home markets since the global crisis. They are also not keen to come into India by setting up a wholly-owned subsidiary, as the Reserve Bank of India (RBI) wants, given the onerous governance conditions stipulated by the RBI.
Selling to a dispersed group of foreign institutional investors risks creating a governance vacuum at a PSB. Citing the case of Axis Bank is not helpful at all. Public sector entities had a significant stake in the erstwhile UTI Bank when a large stake was sold to FIIs and they continue to hold a significant stake in Axis Bank. It is not as if Axis Bank was handed over on a platter to institutional investors.
The economic and political consequences of a privatised bank going the way of Yes Bank are terrifying to contemplate. A bank failure that imperils the savings of millions of ordinary depositors would be labelled “the scam of the century”. It would set in motion the depressing sequence of events that one associates with scams— disruptions in Parliament, a paralysis of the administrative machinery and negative media coverage.
According to reports in the media, the government has decided to hasten slowly (make haste slowly?) on bank privatisation. It is said to be thinking of keeping a 26 per cent controlling stake for itself. It will consult the RBI on “fit and proper” criteria for potential buyers. This is not a lack of reformist ardour; it is desirable prudence.
It also does not help the government to let privatisation become a benchmark for economic performance. In the weeks preceding the Budget, the media runs stories about how the privatisation target is likely to be missed. After the Budget, this theme is again played up. Failure on privatisation tends to overshadow all other reforms and initiatives of the government. Pundits and investors are quick to pronounce judgement, “This government too lacks the appetite for big bang reforms”. Setting a modest target for privatisation is sensible. It would be even better not to set any target at all and to use disinvestment and privatisation receipts as a balancing item in the budget.
The government showed courage in not heeding calls for massive fiscal spending in the wake of the pandemic and focusing instead on liquidity support. It showed courage again in deciding to repeal the farm laws in the face of determined opposition from a disaffected group of farmers. Likewise, its retreat on privatisation is a welcome embrace of pragmatism in economic policy.
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