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NTC National Thermal Corporation Gandhar Power Plant in Gujarat
NTC National Thermal Corporation Gandhar Power Plant in Gujarat

A new owner and a road to profit: perks of PSU sale

As part of the stimulus package, the Centre announced a public sector enterprise policy built on the principle of defining strategic sectors that will have at the most four PSUs. Mint explores the issue

As part of the stimulus package, the Centre announced a public sector enterprise policy built on the principle of defining strategic sectors that will have at the most four public sector undertakings (PSUs). This indicates a push towards privatization. Mint explores the issue.

What is the policy put forth by the Centre?

Union finance minister Nirmala Sitharaman has indicated that the public sector enterprise policy will be based on the principal of having at least one PSU or a maximum of four in strategic sectors. The government will also allow for private sector participation in these sectors with the objective of fostering greater competition. The government expects the move to result in improved efficiency of these sectors. The process of definition of the strategic sectors is likely to be provided by the Centre in the weeks ahead. The government has also stated that it will exit all PSUs that are in other sectors.

Will the privatization drive be successful?

India’s attempt at dismantling the PSUs over the years has seen little success, with the last big-ticket privatization taking place between 1999 and 2004. Since then, most governments have tried to disinvest and privatize. But this has led only to incremental progress, with no big-ticket privatization taking place since then. A good example is Air India, the national carrier that the Centre has repeatedly tried to privatize. However, it has met with limited success. Stiff opposition from unions, concerns of allegations of graft and criticism of the sale of “family silver" act as major hurdles to the drive for privatization.

 A rocky ride
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A rocky ride

What’s the upshot of selling these public sector firms?

Most PSUs are making losses and are funded by the largesse of taxpayers. The public resources spent on them could be better utilized elsewhere, especially for development. Selling them can also yield non-tax revenue, which could be used to augment public infrastructure. Moreover, their turnaround by the private sector can generate tax revenue for the government.

But why not disinvest, rather than privatize?

The Centre has had some success with disinvestment over the years. Of late, most of the disinvestments are funded by the Life Insurance Corporation of India. The problem in disinvestment is that it does not ensure a change in management of the enterprise. To make PSUs efficient, there is a need to bring in private management that runs it with the aim of maximizing profit. Thus, privatization is important and disinvestment a second-best alternative that yields revenues for the Centre, but does not improve the condition of the enterprise.

Have any privatized PSUs performed well?

A good example of privatization and its effect on the enterprise is Hindustan Zinc. The Atal Bihari Vajpayee-led BJP government sold 45% of Hindustan Zinc for 769 crore in 2002. The 30% stake the government retained was valued at over 20,000 crore. The company became the world’s second-largest zinc-lead miner and one of the top 10 silver producers. Management change and privatization can thus raise shareholder wealth through improved efficiency.

Karan Bhasin is a Delhi-based policy researcher.

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