Contentious issues centred around the extent of permissible FDI and the possible emergence of monopolistic and competition-restricting situations after the sale of certain CPSUs have to be addressed before embarking on such major policy shift.

The recent buzz around privatisation in India is a welcome development and its scope must be fully explored. There is not only a huge fiscal deficit objective to be met, but also more public funds are required for effecting a noticeable economic recovery. Post-pandemic, the State has to be in the vanguard of assisting the poor and the unorganised, whose proportion at the lower rung of society has swelled. Vacating the driver’s seat in most enterprises owned by the governments is a way to attain these goals partly.
With over two thousand such companies, the diverse array of central and state government owned undertakings, have undoubtedly become less relevant over time in terms of their role and output. Many are unable to stand up to emerging open market competition. The entities have locked up huge portions of scarce public capital and managerial resources which need to be urgently freed up for society at large. It is widely acknowledged that professional management of businesses will have far better outcomes than government-managers who often lack adequate domain knowledge and have to operate under the shibboleth of regulations and multiple accountability.
It’s worth pointing out that even in many developed countries that have endeavoured to go along this path, the outcome has been less than promising, with the process either interrupted mid-course, or abandoned altogether. In the Vajpayee-Shourie era, India too had experimented with moving a handful of Central public enterprises into private hands; however, for the last 17 years, we have eschewed going further down that route and have instead made do with only monetisation of a portion of the government held equity. Going forward, while there are certainly red flags to be wary of, none of these should be permitted to come in the way of evolving a well-crafted strategy of privatisation, and reaping the subsequent benefits.
In order to identify which of the 348 CPSES (besides the scores of departmentally run entities connected with railways and defence) should go under the hammer, the recent government pronouncements on the subject may be recalled. First, we had Prime Minister Modi’s comments in the Lok Sabha made a few weeks ago that IAS officers cannot be expected to efficiently run all kinds of businesses; later, at another forum, he expounded the virtues of the private sector. In her 2021-22 Budget speech, Nirmala Sitharaman, the Finance Minister, lamented the hitherto poor track record of realisations from disinvestment, and set out an ambitious financial target of realising Rs 1.75 trillion from the sale of government-holdings in public undertakings.
When considering this context, the Finance Minister put forward a case to altogether privatise government undertakings, rather than merely selling a portion of the family silver to meet the annual budgetary deficits. As she indicated then, as well as later on in the Parliament and outside, the Central government intends to let go of all its enterprises except strategic ones, and there too, the existing ones would be grouped together into three or four bigger entities in each segment. Since then, the government think-tank Niti Aayog and the Union Finance Ministry’s Department of Investment & Public Assets Management (DIPAM) have gone to work tentatively building a pipeline of a hundred government entities to be sold.
With such explicit intentions of drastically pruning government owned businesses—a move that totally reverses the Industrial Policy of 1956, which had envisaged putting the Government at the commanding heights of the economy—it is time a more nuanced, well thought out strategy of privatisation cum monetisation of government-run businesses is evolved. Ad-hocism in policy or kneejerk reactions by those in authority only to meet passing financial crunches and other exigencies can no longer remain the basis for a fundamental and ideological transformation of business shifting from public to private hands.
Contentious issues centred around the extent of permissible foreign direct investment (FDI) and the possible emergence of monopolistic and competition-restricting situations after the sale of certain CPSUs have to be addressed upfront and transparently before embarking on such major policy shift. Equally relevant is to decide in advance which of the existing preferences, particularly in government procurement, will be continued for the new companies once their PSU status is withdrawn. This is important since it affects thousands of MSMEs working as ancillaries or vendors to these enterprises. These small and medium scale units are critical to support the functioning of the “mother plants” and also provide significant employment given they tend to be more labour intensive.
Based upon a priori advice of the apex court sought by the President, the entire privatisation strategy must have the backing of an overarching statute passed by the Union Parliament (which with one stroke would also permit the handing over of statutory corporations like Air India, Coal India, PSU banks, etc). The government of the day, preferably through a newly set up Ministry of Privatisation (after upgrading DIPAM) would have to follow the regulations, processes and procedures laid in the new Act. They can determine a specific roadmap after reckoning with the prevailing international and domestic situation including market-related assessments about value-realisations.
While supplementary public funding for effecting a V-shaped recovery is required, in the current Indian context so is ensuring fair redistribution. Extending only trickledown benefits to those at the bottom is no longer adequate since the ongoing pandemic has disproportionately hurt the poor and lower middle class over others. Based on the World Bank’s Povcal/Net data base, the Pew Research assessed just last week that Covid-19 might have pushed as many as 7.5 crore Indians into the ranks of poor, i.e. those earning less than two dollars a day. By taking the aggregate up to 13.4 crore people, this reverses the gains made in the last nine years. Similarly, the crisis caused the middle class (those earning between $10-$20) to contract by 3.2 crores or about 6.6%. Given this reality, both equity and long-term efficiency considerations warrant positive State discrimination by way of higher income transfers, targeted and well delivered food subsidies, and vastly improved health care and basic education.
With rising inequality as a backdrop, the consequent employment-rationalisation, a concomitant of privatisation, remains a cause for concern. Imposing conditions on new buyers to refrain from retrenching the bloated work-forces, as done in the case of Air India a few years ago, is a case in point. The move impacted participants’ interest and severely brought down the potential value of the assets put on the table. The endeavour was also made at a time when the Indian economy was not in the pink of health, and capital markets not buoyant enough to enable potential participants to raise the required finances. The Union Government must therefore choose the right time to enter the market, and offer a few investment-options at a time, rather than attempt to off-load all its identified firms at one go.
More recently, we saw not only worker unions but even the provincial government of Andhra Pradesh joining in to oppose the Central government move to divest its holdings in Rashtriya Ispat Nigam Ltd (RINL), a steel CPSU. Last week’s two-day strike by a million workers of PSU banks against the proposed privatisation of two sick banks is further indicative of the opposition likely to arise as more concrete measures for privatisation are initiated. The Finance Minister has tried to allay these fears of job losses by categorically stating “my privatisation is not something which is going to end up selling for closure. No, I am selling for the business to continue.” In light of past experiences and the 2019 buyout of government owned IDBI bank by LIC, such assurances have been termed “shallow” by labour leaders. As we now move ahead, the government would do well to take worker-representation of each candidate PSU on board with a realistic rehabilitation plan, and earmark a noticeable part of the sale proceeds for the affected workforce.
In order to get a fair value for the entities being offered, the Central government must reckon with the prevailing appetite for investment. The capacity utilisation factor in most Indian manufacturing segments hovers in the low sixties—a position which does not enthuse most private entrepreneurs to put money into expansion or diversification. Persistent low aggregate demand has restrained private investment from getting anywhere near the high twenties, seen between 2004-05 and 2010-11, when emerging animal spirits had taken the GDP growth close to double digits. This, despite India having globally comparable corporate tax rates of 23% for existing ventures and 15% for new ones since 2018-19.
Given this low prevailing appetite to invest, lingering high NPAs in most Indian banks, a virtual absence of domestic long-term finance for capital intensive industries and infrastructure, and the subsisting apprehensions about unbridled FDI and monopolies, our privatisation process will not always be smooth sailing and straightforward, and must be proceeded with caution and compassion. While simultaneously developing a comprehensive outlook, we must also assiduously market the privatisation initiative to those who continue to have deep rooted apprehensions about the market’s ability to do much good. More importantly, with any such radical transformation, we must exercise utmost care since it is the taxpayer’s money in question and the process should in no way be permitted to fall prey to crony capitalism.

Dr Ajay Dua, a development economist and a public policy expert, is a former Union Secretary, Commerce & Industry.
Part 2 of the article focusing on the methodology for identifying candidate-PSUs for privatisation, along with specific process and procedures, will appear in the next edition of The Sunday Guardian.