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Right reasons for disinvesting

Right reasons for disinvesting
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First Published: Mon, Feb 08 2010. 12 39 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Feb 08 2010. 12 39 AM IST
The government is keen to sell small stakes in the companies it owns and use the money to cover the yawning gap in its finances. Selling capital assets to fund a revenue deficit may be smart accounting but is myopic national policy.
Economist and policymaker Vijay Kelkar brought the privatization debate down to first principles in an insightful speech on 29 January in Mumbai. There are two sets of reasons why the government needs to get out of business: One set deals with economic efficiency and the other with strengthening our democracy.
Illustration: Jayachandran / Mint
Kelkar quite rightly pointed out: “The motivation for disinvestments or privatization should not be narrowly seen as being only about maximizing the proceeds from the sale of assets.” There is enough empirical proof to show that enterprises under private management are more efficient that those owned by the government, because they do not work under what the Hungarian economist Janos Kornai described as the soft budget constraint.
The private sector will also be more eager to bring capital into regulated industries once the government steps out, because there are currently too many instances of the government being both player and umpire in such sectors that tend towards natural monopoly and oligopoly. That lowers political risk and hence the cost of doing business. The current efforts to bail out Air India with taxpayer money is one clear example of the umpire aiding one player in a blatant case of anti-competitive behaviour.
The question then is how public sector assets should be sold, through a strategic sale or open market sales to the public. A strategic investor is more likely to pay a higher price for management control and be ready to transfer technology and management skills. But sales to the public will be more politically palatable and, more importantly, will help spread wealth. This fits in with this newspaper’s belief that capitalism should spread among the people rather than be concentrated in a few families, a situation that can solidify into crony capitalism.
Privatization can help the Indian economy, especially if the government uses the money to build new capital assets such as rural roads or new-age public goods such as a clean environment. The public sector came up at a time when private enterprise did not have the ability to build large projects and the capital markets were not deep enough to fund a steel plant or a power project. That is no longer the case.
Privatization has to be designed well to avoid the sort of grab for resources that Russia saw in the 1990s. But that does not in any way destroy the economic and political rationale for privatization.
Strategic sale or public issue: how should the government proceed with disinvestment? Tell us at views@livemint.com
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First Published: Mon, Feb 08 2010. 12 39 AM IST