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Will Mukherjee’s Budget deliver on disinvestment promise?

Will Mukherjee’s Budget deliver on disinvestment promise?
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First Published: Tue, Feb 23 2010. 01 15 AM IST

Strategic sale: A 13 February 2002 photo of Tata group chairman Ratan Tata (right) holding a replica of a cheque for Rs1,439.25 crore with then communications and technology minister Pramod Mahajan (c
Strategic sale: A 13 February 2002 photo of Tata group chairman Ratan Tata (right) holding a replica of a cheque for Rs1,439.25 crore with then communications and technology minister Pramod Mahajan (c
Updated: Tue, Feb 23 2010. 10 43 AM IST
Mumbai/New Delhi: When Videsh Sanchar Nigam Ltd (VSNL) was sold to the Tatas, the telecom company’s then chairman and managing director S.K. Gupta used a metaphor that partly explains why disinvestment hasn’t always had a smooth ride in India.
Strategic sale: A 13 February 2002 photo of Tata group chairman Ratan Tata (right) holding a replica of a cheque for Rs1,439.25 crore with then communications and technology minister Pramod Mahajan (centre) and VSNL’s managing director S.K. Gupta in Mumbai. Sebastian D’Souza / AFP
“It is like an arranged marriage of a daughter,” Gupta said on 13 February 2002 at Bombay House, the Tata headquarters. “The daughter should continue to deserve all the love and affection.”
Gupta was alluding to the fears of millions of public sector employees about job cuts accompanying privatization, especially when he pleaded for patience from the Tatas for “acclimatization”.
Ratan Tata, chairman of Tata Sons Ltd, was impassive, merely saying that the “professional organization” would be leveraged fully in the coming years. A large replica of a cheque for around Rs1,439 crore was handed to then communications minister Pramod Mahajan to symbolize the money the Tatas had paid.
These concerns that Gupta referred to translated into the stout resistance to asset sales by the Communists, which effectively put disinvestment into cold storage during the United Progressive Alliance’s (UPA) first term from 2004 to 2009. Now that the Congress-led government doesn’t need Communist backing, privatization is back on the agenda.
Disinvestment first caught the public’s attention when Yashwant Sinha, finance minister in the short-lived Chandrashekar government, proposed in the interim budget of 1991 to disinvest 20% of hand-picked public sector firms.
A few months later, Sinha’s successor as finance minister, Manmohan Singh, started the process and surpassed budget estimates by raising Rs3,037.74 crore in fiscal 1992. However, since then, disinvestment receipts have generally fallen short of budget targets. Since 1991, aggregate proceeds from disinvestment (excluding the recent NTPC Ltd issue) have been Rs57,682.93 crore, less than a single year’s service tax collection.
D.K. Srivastava, director of the Madras School of Economics, who was a member of the 12th Finance Commission (2002-04), said money from asset sales couldn’t be relied upon as it wasn’t “a steady stream”.
Disinvestment has perhaps generated more controversy than any other policy decision since 1991.
Pradip Baijal, who became secretary in the disinvestment ministry in 1999, was in charge at the time of the VSNL sale. He recalls the current Prime Minister cautioning him about the pitfalls.
“Manmohan Singh told me that you can get into trouble,” Baijal recalled. “People could question your motives.”
Eight years have passed since VSNL was privatized. The Tatas transformed the organization into a multinational enterprise even as its monopoly over international long-distance telephony was ended ahead of the promised deadline. Much else has changed at VSNL, including its name; the company is now called Tata Communications Ltd.
“VSNL had a strong position in the international long-distance voice and Internet segments of the telecom business,” said Srinivasa Addepalli, senior vice-president, corporate strategy, at Tata Communications.
It also came with a robust infrastructure as well as a sound technical team that managed the international and Internet networks, apart from generating cash. “The company had a strong balance sheet that enabled it to expand into new business areas and markets,” Addepalli said. The Tatas used that cash astutely, putting some of it into Tata Teleservices Ltd and making a few big-ticket acquisitions such as Tyco Global Network and Teleglobe that transformed the Indian firm into a global operator of undersea cable networks and satellite links.
“VSNL has successfully transformed itself from a single-market, single-business company to becoming a leading global provider of communications services,” Addepalli said. “Tata Communications has invested over Rs10,000 crore over the last seven-eight years in building infrastructure and services capabilities, in India as well as globally. Tata Communications has also more than doubled its organization size during this period.”
The VSNL strategic sale came during the height of India’s disinvestment experience, which Baijal demarcated into three phases: The first was between 1991 and 1998 when small holdings of public sector companies were sold; the second lasted from 1998 to 2006 and featured the strategic sale of firms such as VSNL, Indian Petrochemicals Corp. Ltd and Bharat Aluminium Co. Ltd (Balco). In the third phase since then, the government has been back to selling small chunks.
In 2009, disinvestment moved to what could possibly be classified as the fourth phase. The UPA government explicitly linked disinvestment to investments in social sector areas such as education and health. Opposition to disinvestment seemed to fade as the receipts were directly linked to benefiting the poor. That has increased the magnitude of receipts finance minister Pranab Mukherjee can anticipate through disinvestment in the coming Budget from estimated receipts of Rs1,120 crore in the current year.
This new phase has also been marked by economists with experience in government putting forth a clear intellectual and ethical case for disinvestment.
In January 2010, Vijay Kelkar, chairman of the 13th Finance Commission, said: “When the state chooses to own Re1 of something, this comes at the cost of owning Re1 of something else.”
Kelkar pointed out the state’s assets need not remain static for all time. In his speech, he cited analysts who had valued the Central public sector companies at between $400 billion and $500 billion (Rs18.5-23 trillion), or close to 50% of the size of the economy.
Kelkar’s views were echoed by Shubhashis Gangopadhyay, who was economic adviser to the Union finance minister in 2008. “If we can logically and consistently argue that we need education and health for every citizen, since it is their birthright, then it is the responsibility of the government to find the resources,” he said, providing an ethical context for disinvestment.
The essence of the argument by Gangopadhyay and Kelkar is that a huge amount of government capital is locked up in industries where private competitors are thriving. It no longer makes sense for the government to keep its capital in areas where the private sector has managed well. Instead, this needs to be deployed in areas where private participation has not yet produced adequate results or is unlikely to do so for a long time.
Merely by listing public sector companies on stock exchanges, there could be productivity gains through indirect channels such as enhanced transparency and accountability, economists such as Kelkar have argued. A linked argument is that the current structure of government ownership has yielded meagre returns on capital.
“They give you a return which is around 2%. If these PSUs (public sector units) were in education and health, then a return of around 2% is understandable,” Gangopadhyay said. “Most of these PSUs are in areas where private sector units operate, and they don’t earn 2% on their capital. So clearly, there is a waste.”
For the moment, it would appear there has been grudging acceptance of disinvestment as an inevitable development by all sections. However, the UPA government has clearly indicated it would retain the public sector nature of its companies by keeping majority ownership. The stand appears conservative when juxtaposed with the suggestion by the chairman of the Prime Minister’s economic advisory council, C. Rangarajan, in April 1993.
Rangarajan, as head of a committee on disinvestment in 1993, suggested the government sell 74% or all of a public sector unit if it was not operating in an area explicitly reserved for the public sector.
The jury is out on where the fourth phase of disinvestment will go. Baijal said “it will evolve into privatization” of the kind India saw almost a decade ago. Srivastava, on the other hand, said disinvestment would be marked by an incremental approach, even in the absence of political opposition.
For the moment, disinvestment appears set to live up, at least partially, to the promise it showed in 1991 as a source of revenue. For VSNL and Balco, growth may be stymied in the future if the government continues to hold a sizeable equity stake. Unless the government decides either to retain or allow their stake to get reduced, the new promoters may find it tough to continue with their ambitious expansion plans, because there is only so much you can raise as debt.
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First Published: Tue, Feb 23 2010. 01 15 AM IST