New Delhi: A finance ministry working paper has advocated the privatization of non-strategic profit-making public sector units (PSUs) and raising the foreign investment limit in industries such as retail, health insurance and news channels, among others.
The paper, titled Policy for India’s Services Sector and posted on the ministry website, has been written by senior economic adviser H.A.C. Prasad and additional economic adviser R. Sathish.
Graphic: Naveen Kumar Saini/Mint
Also See Working Paper
The working paper has listed 27 PSUs in the services sector that could be considered for disinvestment. The authors have said disinvestment could be initiated immediately in the case of Shipping Corp. of India Ltd, Rites Ltd, Engineers India Ltd, Engineering Projects India Ltd, India Trade Promotion Organisation (ITPO), State Trading Corp. of India Ltd, and MMTC Ltd.
In the case of National Building Construction Corp. Ltd and the loss-making National Film Development Corporation, they advocated the complete sale of the companies. “In the case of ITPO, exporters and even Exim Bank of India could have a stake,” they said.
In February 2005, the Congress led United Progressive Alliance called off disinvestment through strategic sales in profit-making central PSUs. The paper, however, strongly advocates revisiting this policy.
“There are certain sectors where the government need not be there and which can be more efficient without the involvement of the government even if they are making profits,” said Prasad. “That’s why we have recommended offloading shares of some PSUs or their privatization.”
Realizing the political difficulty involved in raising the foreign direct investment (FDI) cap in insurance, the paper advocated the opening up of at least the health insurance segment on a priority basis as “it will also help the export of super-specialty hospital services”.
At present, 26% FDI is allowed in the insurance sector through the automatic route. A Bill to amend the Insurance Act to raise the FDI cap to 49% is pending before Parliament.
The paper also advocated the opening up of multi-brand retail. “Since farmers also benefit due to modern retail trade, there is a need for opening this sector which can also provide greater market access for India’s exports,” it said. At present, India allows 51% FDI in single-brand retail and 100% in wholesale trading.
The authors also pushed for more liberalized norms for foreign investment in rural banking. While the government allows 74% foreign investment in banking, there are licensing requirements involved. There is also a limit of 10% on voting rights in banking companies.
“While many concerns have to be addressed here, particularly in the light of the recent global financial crisis, at least some segments of this sector could be opened up to foreign investment in areas like rural banking with the help of mobile technology,” the paper said.
The authors also recommended a rise in foreign investment in news and current affairs television channels to at least 49% from 26% at present. It called for a relaxation in issues such as the uplinking policy and the method of calculating the foreign equity holding. The paper also sought permission for FDI in animation studios as there is huge growth opportunity in this sector.
The paper also recommended 26% FDI in railways, which can help in their modernization. It also advocated disinvestment of the Indian Railway Catering and Tourism Corp.
The authors of the paper called for the complete overhaul of the Central Government Health Scheme (CGHS) network and similar state government systems “with outsourcing to the private sector in a big way”. “The space used for the CGHS clinics could then be put to other profitable uses,” the authors said.
The authors said some policies such as opening up the retail trade, freeing the insurance sector, FDI in railways and the disinvestment of those PSUs may need time to decide. “Nevertheless, it is worth making efforts to push these reforms as well,” they said.
The services sector has been the main driver of growth post- liberalization. Even in 2008-09, when GDP (gross domestic product) growth was relatively slower at 6.7% due to the global recession, the growth in services was 9.7% with its share in GDP at 57.3%.
Welcoming the ideas in the working paper, N.R. Bhanumurthy, professsor at New Delhi-based think tank National Institute of Public Finance and Policy, said: “While the earlier attempt of the government to divest public sector companies that were making losses was to improve efficiency, the idea is to create resources for the infrastructure and social sectors this time on. And to do this through profit making PSUs is a good idea as public resources are scarce and divestment of shares of profit making firms will help raise them.”