There’s need for an informed debate on disinvestment

There’s need for an informed debate on disinvestment
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First Published: Wed, Jul 01 2009. 12 13 AM IST
Updated: Wed, Jul 01 2009. 12 13 AM IST
State policy reserved a very large number of industries for the public sector until 1991. The reforms of 1991, and subsequent years, have reduced this number to around five today. The most sensitive item in this list, nuclear power, is also likely to be opened up to the private sector. Public sector reservations have been dismantled the world over, even in China and Russia.
China opted for large-scale privatization in the 1990s. When it could not privatize a public sector industry, it allowed the entity to die and replaced it with a new private sector incarnation. The changeover did lead to massive labour problems, but these were masked by the enviable growth of 10% each year that China has enjoyed for around two decades now.
China did not have mature stock markets or a private sector then. This led to very poor recoveries from privatization. China earned returns of the same order as we earned in India by selling 5% of equity even in a very small public sector entity, thanks to our fully developed stock markets and an efficient private sector and entrepreneurial class.
Russia was no different. It also lacked developed stock markets or an efficient private sector when it allowed a large number of public industries to be taken over by their employees or political favourites, through distribution of free or very low-priced vouchers to the public and employees/favourites. It was expected that these industries would become efficient after the change, and their employees and the public would make huge profits, leading to political support for disinvestment and privatization.
Since the new owners did not possess an entrepreneurial background, most of them failed, leading to public disillusionment and charges of favouritism. I remember the days when even a tea shop used to be government-owned in Russia, but the dismantling of the entire public sector apparatus meant that the government earned less from privatization that what India did from disinvestment in the past two decades. What Russia gained eventually by guillotining the public sector was a new order that was more efficient under private management, enabling Russia to join the league of countries with very high growth rates.
In India, the “argumentative Indian” has only allowed a very gradual change and we are even now struggling to find the right answers. Privatization or disinvestment are not administrative or economic issues anywhere; they are more political issues in all countries. Hence, public opinion and parties in power determine the process of change.
Nothing has happened in the last five years. Even before that, the process was full of roadblocks but whatever was achieved during the last two decades was remarkable, as the returns would show. Of course, privatization led to higher incomes for the exchequer in comparison with disinvestment of minority public sector stakes in the market.
When I was secretary, disinvestment, during 2000-2003, I found that the entire political debate for and against privatization and disinvestment was confusing, emotional and presented by different interest groups on the basis of infirm data.
I collated the data and presented it in a book, Disinvestment in India: I Lose and You Gain (“I” indicates the politicians, bureaucrats and technocrats and “you” indicates the taxpayer). I find that there is a lot of debate on disinvestment today and we must find the right answers, based on data and not rhetoric.
The issues today, to the best of my understanding, are:
• There are enormous expectations that the government should raise investment in education, health, agriculture, infrastructure and many other priority sectors, and more funds should flow to the rural poor.
• There is already a plus-10% (of gross domestic product) fiscal deficit, which can have an adverse impact on our economy and growth process and must be plugged.
• There are many electoral promises that need to be kept and these would cause huge expenditure.
• Should these resources be raised by higher taxation or by reallocation from other sectors to priority sectors? Are there any sectors that can permit a massive reallocation of resources or should we do sizeable disinvestment to raise funds?
• Earlier experience has clearly shown that the sale of shares in a non-privatized industry yield 5-20 times lower returns. Should the taxpayer’s shares be sold cheap to hold control of public industries, particularly in sectors where massive private investment has been allowed already, and the fiscal gap plugged by direct or indirect taxation on a helpless taxpayer? Or should these industries be privatized for higher earnings? The argument of promoting competition through public industries is no longer valid because competition issues can be dealt with by the newly set up Competition Commission and regulatory structures.
• Should we use proceeds from privatization—and it is possible to raise trillions of rupees —for future higher growth or should we waste the opportunity and put off a decision?
The stakes are too high and there must be informed debate before we make our choices.
Pradip Baijal was secretary with the disinvestment ministry during the term of the National Democratic Alliance government. Respond to this column at
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First Published: Wed, Jul 01 2009. 12 13 AM IST