Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Opinion | Strategic disinvestment does not deserve the criticism it gets

It is not the equivalent of selling off the family silver and pressure groups should not stall such significant economic reforms

State-owned Air India is on the block. Some time ago, the government of India took a progressive decision on the strategic sale of some public sector undertakings such as Bharat Petroleum and Container Corp. of India. Following that announcement, voices of dissent seemed to echo all around. Congress leader Priyanka Gandhi, for example, tweeted, “The BJP had promised to build the country, but they are working to make India’s best organisations hollow and sell them. Sad." Various employee unions and even the Swadeshi Jagran Manch have jumped onto the bandwagon of politicians opposing the move. They are all repudiating the wisdom of the decision, particularly of profit-making enterprises being put on the block. Whether this is politics or rent seeking, or both, is not difficult to decipher.

True wisdom lies in the use of resources, including the so-called “family silver", to meet emergent needs, as also for better returns. It is well documented that if Margaret Thatcher, the then prime minister of the UK, had not inter alia taken the bold step of privatizing her country’s public sector undertakings in the 1980s, its economy would probably not have bounced back. The move received global approbation, except from naysayers. Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.

The Indian economy is passing through a bad patch. This fiscal year’s second quarter growth in gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent. Private sector investment is sagging. Gross capital formation has dipped. Aggregate demand has contracted. Public sector expenditure is the single engine that’s driving economic growth.

There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk. Direct tax collections registered a growth of only a little more than 6%. The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc. The political executive seems determined to honour its commitment to low inflation and macroeconomic stability. India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.

Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same. The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation? Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created. Stake sales can achieve it. For a validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.

Let us go back in time and take a peep into the performance of public sector enterprises that went under the hammer under the A.B. Vajpayee regime from 1998 to 2004. The economic efficiency of employed resources went up significantly. Stepped-up competition enhanced the performance of other operators in related industries as well. From Balco to CMC, former state-run businesses have delivered higher sales and bigger profits under new owners. The value of these firms has grown manifold. The sale of loss-making enterprises such as Modern Food Industries and Paradeep Phosphates saved the government resources that were deployed elsewhere.

I would argue that the strategic disinvestment of state-run enterprises should be welcomed from twin angles. One, the need for India to invest in fresh asset creation, by way of roads, ports and airports that would result in a cascade effect for the economy’s growth and, two, the optimization of wealth generation from the country’s assets. This, incidentally, will benefit individual shareholders, including employees with shares, who have invested in the equity of listed public-sector companies such as Bharat Petroleum. As there are other state-owned petroleum companies undertaking exactly the same activities, such as refining and marketing crude oil, the sale of one company does not tamper with the energy security of the country.

It is also true that not all companies in the private sector do well. However, in those cases, the losses are not funded by innocent tax payers.

The government, however, must ensure that it is not taken for a ride, as in the case of Indian Railway Catering and Tourism Corp. by pinstripe-clad investment bankers. It may be worth reading the documented story of the disinvestment of a 10% stake in Oil and Natural Gas Corporation Ltd (ONGC) in 2004, when alacrity and coordination between the government and the Securities and Exchange Board of India (Sebi) helped fight against the motives of smart investment bankers and realize the true value of the enterprise. Further, unlike during Pranab Mukherjee’s tenure as finance minister under the Manmohan Singh government, when 1 trillion raised from 4G auctions was used to fund Centre’s revenue deficit, the proceeds must be utilized strictly for new asset creation.

In a democracy, voices of dissent must always be heard and respectfully taken into consideration, but disinvestment decisions must be taken on merit. The cabinet’s decisions are well justified, and pressure groups should not be allowed to hijack the country’s reform agenda.

G.N. Bajpai is a former chairman of Sebi and LIC, an author and columnist

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