February 3, 2023

Lukmaan IAS

A Blog for IAS Examination

TOPIC : A DISCOURSE OF PRIVATIZATION

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THE CONTEXT: The government has set its sights on an aggressive plan to sell its equity holdings in State-owned enterprises from which it hopes to rake in Rs 1.75 trillion. In order to so, the govt has significantly widened the scope of its privatization plan by unveiling a new policy for strategic disinvestment of public sector enterprises that will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors.

THE PRESENT PRIVATISATION POLICY OF THE GOVERNMENT

Fulfilling the governments’ commitment under the AtmaNirbhar Package of coming up with a policy of strategic disinvestment of public sector enterprises, with following feature

  • Strategic Sector : Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiarized with other CPSEs or closed.
  • Strategic sector :an industries considered strategic if it has large innovative spill overs and if it provides a substantial infrastructure for other forum in the same or related industry
  • Following 4 sectors to come under it :
      • Atomic energy, Space and Defence
      • Transport and Telecommunications
      • Power, Petroleum, Coal and other minerals
      • Banking, Insurance and financial services
  • Non- Strategic Sector : In this sector, CPSEs will be privatised, otherwise shall be closed.

Non-strategic sector

  • will include hotel and tourist services transportation vehicle and equipment industrial and consumer goods trading and marketing and transport and logistics

The policy of government on the 18 strategic sectors Other sectors

18 strategic sectors under 3 different classificatory types are

  • mining and exploration
  • processing and generation and
  • the service sector

Policy regarding PSU by the govt

  • Govt will completely exit non-strategic sector
  • in strategic sector govt will keep maximum of 1-4 PSU and subsequently opt for strategic disinvestment

PRIVATISATION OF PSU SINCE 2014 INCLUDING BANKS

With the increase of supply of PSU stocks and the constrained investor appetite had started affecting the prices. The trade-off between the political objective to privatize and revenue maximization was witnessed the most in this period. Resultantly, the government resort to Strategic Sales.

However, in departure from past govt is also disinvesting profit making venture with a rationale that disinvestment of profit-making enterprises by public offering of shares is desirable as it leads to dispersed shareholding and avoids concentration of economic power.

However, in case of bank , an amalgamation policy was followed which reduced the number of national bank from 28 to 12 by merging various bank .

  • But even after this there was no meaningful resolution of NPA crisis.
    • In fact, post the covid crisis this problem will increase as small banks are facing the problem of balancing credit growth and risk.
    • With the spectre of insolvencies looming at the start of pandemic-led lockdown, there was a flight of deposits from small banks to bigger ones.
  • In view of this , the govt has focused on to take PSBs out of government control

Overall approach

Since 2014, Modi government’s strategic disinvestment approach was to sell minority stakes in public companies to raise revenue, while retaining management control. During the 2014-2019 period, the government raised Rs. 2,79,622 crore from the disinvestment of public sector enterprises (PSEs), compared to Rs 1,07,833 crore collected during 2004-14. However, this has changed now. Recently, five companies were up for 100 per cent disinvestment, including three large profitable companies such as Bharat Petroleum Corporation Ltd. (BPCL), the Container Corporation of India and the Shipping Corporation.

THE EVOLUTION OF PSU SINCE 1956 TO 1999

Historical antecedents: Industrial Policy in India

  • National Economic Planning Committee set up by the All India Congress Committee in 1937 : suggested vigorous efforts for India’s industrial development through a mixed economy with a dominant role for the public sector.
  • Peoples Plan’ prepared by Mr M N Roy: all-in-all role to public sector and financing of the industrial plan through internal resources
  • Bombay Plan (Tata-Birla plan) recommended government support for industrialization, including a direct role in the production of capital goods. It had called for a substantial role of the private sector in the industrial development
  • Defence of India Rules (interim rule ): The plan suggested by the interim government for industrial development categorized industries into four divisions of which two were exclusively reserved for public sector and these related to core and heavy industrial sectors. Of the remaining two, public and private sectors were allowed access to intermediate industries forming the third sector while the consumer goods industry was reserved for the private sector

[ Trivia : first Industrial Policy Statement of 1948 was a restatement of the 1945 categorization as adopted by the interim government.]

Industrial Policy Statement – 1948

Industries were divided into four broad categories

  • Exclusive State: Monopoly included the manufacture of arms and ammunition, production and control of atomic energy and the ownership and management of railway transport
  • State Monopoly for New Units
  • State Regulated category
  • Unregulated private enterprises

Industrial Policy Resolution – 1956

  • It was shaped by the Mahalanobis Model of growth, which suggested that emphasis on heavy industries would lead the economy towards a long term higher growth path. The Resolution widened the scope of the public sector. The objective was to accelerate:
  • Bombay Plan prepared by leading Indian industrialists in 1944-45 had recommended government support for industrialization, including a direct role in the production of capital goods.
  • economic growth and boost the process of industrialization as a means to achieving a socialistic pattern of society.
  • The Industrial Policy Resolution – 1956 classified industries into three categories
  • The first category comprised 17 industries exclusively under the domain of the Government. These included inter alia, railways, air transport, arms and ammunition, iron and steel and atomic energy.
  • The second category comprised 12 industries , which were envisaged to be progressively State owned but private sector was expected to supplement the efforts of the State.
  • The third category contained all the remaining industries and it was expected that private sector would initiate development of these industries but they would remain open for the State as well industries but they would remain open for the State as well

Despite the demarcation of industries into separate categories, the Resolution was flexible enough to allow the required adjustments and modifications in the national interest.

Industrial Policy Measures in the 1960s and 1970s

  • Industrial Licensing Policy Inquiry Committee (Dutt Committee), constituted in 1967, recommended that larger industrial houses should be given licenses only for setting up industry in core and heavy investment sectors, thereby necessitating reorientation of industrial licensing policy.
  • The new Industrial Licensing Policy of 1970 classified industries into four categories.
  • First category, termed as ‘Core Sector’, consisted of basic, critical and strategic industries.
  • Second category termed as ‘Heavy Investment Sector’, comprised projects involving investment of more than Rs.50 million.
  • The third category, the ‘Middle Sector’ consisted of projects with investment in the range of Rs.10 million to Rs.50 million.
  • The fourth category was ‘De- licensed Sector’, in which investment was less than Rs.10 million and was exempted from licensing requirements.

The industrial licensing policy of 1970 confined the role of large business houses and foreign companies to the core, heavy and export oriented sectors.

Industrial Policy Statement – 1980

The industrial Policy Statement of 1980 placed accent on promotion of competition in the domestic market, technological up-gradation and modernization of industries

A number of measures were initiated towards technological and managerial modernization to improve productivity, quality and to reduce cost of production. The public sector was freed from a number of constraints and was provided with greater autonomy. There was some progress in the process of deregulation during the 1980s. In 1988, all industries, excepting 26 industries specified in the negative list, were exempted from licensing. The exemption was, however, subject to investment and locational limitations. The automotive industry, cement, cotton spinning, food processing and polyester filament yarn industries witnessed modernization and expanded scales of production during the 1980s.

PRIVATISATION FROM 1991 TO 2014 AND PROS AND CONS

Phases of Disinvestment Policy in India

Phase 1 91 to 99

Disinvestment was mainly through Sale of Minority Shareholding in CPSEs. Mostly, the auction method was adopted for the sale of minority shareholding, though Global Depository Receipts issues have been resorted to as well in the last two years of that phase. There were no Strategic Sales in this period. Ideological focus was on gradual privatization.

Further the focus was also on modernization of PSUs, in order to increase their ‘efficiency’ while protecting the interests of employees. But, the main aim was to mitigate fiscal deficits of the government. It never focused on revenue maximization.

However with Rangarajan Committee a shift from public offerings to strategic / trade sales was witnessed in the field of core and non-core.

Phase 2 99 to 03

The ambit of disinvestment was widened the most during the second phase. Targets higher than ever before were set, a Department of Disinvestment was constituted on 10th December, 1999 and later a full-fledged ministry was set up, an aggressive disinvestment policy was pursued and the government exited several PSUs completely.

Consequently, with higher supply of  PSUs’ shares in still-developing market, prices of equity sold were low, subsequently destroying the value of PSUs, resulting in  government failure to achieve the disinvestment targets.

Phase 3 03 to 009

The government adopted the National Common Minimum Programme (NCMP) and following are the aspects of the programme that related to the public sector5:

  • Government was to retain the existing “Navratna” companies.
  • The programme stated that profit making PSUs will not be privatized and in line with this disinvestment through strategic sale of profit making CPSEs was called off.
  • Public Sector companies and nationalized banks were encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors.

There were no targets fixed and the total receipts. Disinvestment was majorly done through the Offer for Sale or Sale route . It was in this phase that the National Investment Fund (NIF) was constituted. All the proceeds from disinvestment of central PSUs were transferred into this fund and 75% of the annual collections of the fund had to be invested in social sectors. The management of it was assigned to public sector mutual funds.

Phase 5 09-14

The disinvestment process restarted with full vigor but the government didn’t resort to the Strategic Sale route. In most years, the sale of minority shares was done through offer for sale.

How not to disinvest?

A model is followed in India , which neither qualifies as disinvestment nor privatisation. In such transaction—where one PSU is buying out another take place. This result in a transfer of resources already with the public sector to the government and did not lead to any change in the stake of the public sector or government in disinvested PSUs. It can be seen as merely money making exercise  merely money-making measures.(ONGC-LIC, HPCL-ONGC)

Further, government is not exiting completely in many of the PSU thus creating contrived confusion in the policy framework( Air India )

THE CRITICAL ANALYSIS OF PRIVATISATION POLICY BY THE PRESENT GOVERNMENT

Is privatization of bank panacea for success

  • Private players in the financial sector are prone to failure: this fact gave the world economic shock of astronomical proportion, which was overreaching created by private bank
  • Private banks fail all the time In the 20 years from 2001 to 2020, as many as 559 private banks with assets of $721 billion failed in the US
  • The principle followed by private banks is when they make profits, it goes to shareholders: When they make losses, it gets socialised and falls in the lap of the government to make good the deposits either through insurance or taxpayer bailout. (Yes Bank, Federal Deposit Insurance Corporation (FDIC), bailed out the above bank.)
  • Big private banks can fail any time: There is a myth that if a bank gets large enough, it will not fail. While one can agree that the larger the bank, the greater its ability to absorb losses, this does not mean it cannot fail. The axiom “Higher you go, harder the fall” applies best to private banks. Yes Bank, Citi Bank, Washington Mutual Bank are all such examples.

Looking at the larger interest

  • The move towards divesting ownership in strategic sectors will have long term consequences. A diluted public sector would possibly mean that India missing out on the opportunity to capitalise on the global distrust against Chinese supply lines in the wake of the current crisis.
  • Moreover the valuation of PSU is at the all time low. At the start of NDA-2 the valuation of PSU at the BSE was 22% which has reduced to 9.4% at oct 2020.
  • At present, because of the crisis presented by the pandemic, it is highly unlikely that more than 10 per cent of the shares of the LIC is subscribed, as the market may not be able to absorb more.

whether privatisation is the only option for PSUs

PSU models in different countries

PSUs exist virtually everywhere. In, Asia where PSUs have played an important role in shaping the economy. According to OECD report ,PSUs pull plenty of economic might —

  • in China they account for 30% of GDP,
  • in Vietnam 38%,
  • and they account for roughly a fourth of GDP in India and Thailand.
  • PSUs are also big employers in many of these countries — 15% in China, 5% in Malaysia.
  • PSUs play an important role in BRIICS economies.
    • According to a recent KPMG report, of the 2,000 largest companies globally, 260 are from BRIICS economies.
    • About 123 or 47% of the largest BRIICS enterprises are PSU. The market value of PSU amounts to 32% of GNIs (gross national income) among all BRIICS countries.

All the above example shows that privatization is not the only panacea for bringing efficiency, improving productivity , and building productive assets.

THE GLOBAL PRACTICES

Reshaping the PSU buy other countries

Three former planned economies have set up centralized holding entities — SASAC in China in 2003, SCIC in Vietnam in 2007 and Druk Holdings and Investments in Bhutan. In 2006, the Philippines pioneered the development of an PSU governance scorecard which has become an important tool for pushing PSU reforms. Since 2004, Malaysia has rolled out a comprehensive ‘transformation programme” to overhaul its PSUs.

An incorporated holding company Temasek to better manage its assets on a commercial basis was launched in Singapore . This allowed its Ministry of Finance to focus on policymaking. At inception, Temasek’s initial portfolio was of S$354 million, spanning 35 companies. Thereafter began the process of restructuring SOEs. Some were corporatized and privatized, others were allowed to go for big global expansions.

THE CHINA EXAMPLE: 

In 2003, a holding company, the State-Owned Assets Supervision & Administration Commission (SASAC) was created to manage the SoEs. The agency, which controls nearly 100 of the largest SOEs, lies “at the heart of China’s industrial deep state

WAY FORWARD: WHAT INDIA CAN LEARN?

Negative bids :

  • The government should permit negative bids: a bid where government pays someone to take the company off its hands. Negative bids were an important part of the massive privatization which took place in Germany after the end of socialism and helped to get productive assets rapidly into the hands of efficient managers in the private sector.

MOU models :

  • In  South Korea PSUs with high social obligation operates with private sectors wit the help Of MOUs.
  • But one of the most important thing, that is forgotten in the outright privatization of CPSUs is that it is unaccompanied by the necessary reforms in the overall regulatory framework in which they operate. Reforms of the regulatory frameworks and the markets are crucial for the performance of both PSUs and private companies, ensuring a rule-based competitive structure covering entry, exit, bankruptcy and competition among existing companies, as manifested by the the British privatization of 1980s and 90s.

CONCLUSION:

While experience of other countries is available to India by way of guidance, it would have to evolve its own techniques, best suited to its level of development. The historic, cultural, and institutional context influences the way in which and the pace at which privatization is implemented. Where market economy is not fully developed, ways would have to be found to safeguard the interests of consumers and investors, which would ensure a fuller play to the wealth-creating role of the entrepreneurs.

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