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Opinion | February 2013

Disinvestment Saga of Public Enterprises

A journey starting with 5 state run enterprises with a Rs 29 crore investment on the eve of First Five Year Plan to a whopping 220 in numbers leading to a total investment of around Rs 6 lakh crore by the end of 11th Five Year Plan. Purnendu  Chaubey and Pradeep Pandey delineate future expectations.
The growth of the Indian economy is a unique depiction of change and continuity after independence. The 'Nehruvian socialism', believed that 'the resources of the state are limited' and therefore 'should concentrate on the state owning and controlling new key industries, public utilities and the like.' The Industrial Policy Resolution, 1948 and 1956 laid emphasis on constituting  the so called temples of modern India ie public enterprises by the Central Government for industrial development in the core sectors.  As a result of  the initiatives taken during the successive Five Year Plans, the role of PSUs in terms of contribution to the Indian economy has increased manifold. The public sector presence is predominant in public utilities and infrastructure.  Railways post and telegraph, ports, airports, oil & gas, mining, manufacturing and power are dominated by PSUs. The number of operating PSUs as on 31 Dec 2011, was 220 with a total investment of around Rs 5.8 Lakh crore, compared to 5 PSUs having a total investment of Rs 29 crore on the eve of the first Five year plan. Power sector, the fourth most important sector, engaged in power generation, transmission distribution, and power trading accounts for 4.4% of the total income of PSUs. 

Public sector's  growth was marred when its  short comings started manifesting in a way that led to lower capacity utilization, low efficiency, cost overruns, lack of innovativeness, and a delay in taking strategic decisions. In order to do away with the recurring loss the government in its Industrial Policy of 1991 envisaged a disinvestment of part of  the government holdings in the share capital of a select few sick PSU's with the hope that this would provide market discipline and ultimately improve the performance of such PSU's apart from releasing  a huge amount of capital which could be used towards accelerating economic growth of the country. The Government initiated a systemic shift to a more open economy with a greater reliance upon market forces and a larger role of the private sector including foreign investment. Market Economy characterized by 'privatization', 'globalization' and 'liberalization' is a by-product of neo-liberal economic thinking which favors 'free-market solutions' and preaches the ideology of 'market expansion and state compression'. The impact of adopting a market economy framework in India is increasingly being reflected in all sectors of the economy. The bandwagon of public sector units is no exception to market induced reforms. 

As a result disinvestment gained credence involving the sale of equity and bond capital invested by the government in PSUs. It also implied the sale of the government's loan capital in PSUs through securitization. However, it is the government not the PSUs who would receive money from disinvestment.

Disinvestment was seen by the government as a means to raise funds for meeting certain general and specific needs. Initially following were the proposed way in which disinvestment proceeds were to be used. 

  • Re-structuring assistance to PSU's  
  • Creating  a safety net for workers.  
  • Reducing debt burden.  
  • To miss additional budgetary support for plans, primarily the social and infrastructural sectors.  
Later on, primary purpose of the government's disinvestment initiative shifted to utilize the funds that become available post disinvestment are :
  • Financing the increasing fiscal deficit
  • Financing large-scale infrastructure deĀ­veĀ­lopment
  • Retiring government debt and Reducing financial burden on the government
  • Funding expansion plans
  • Expanding share of ownership
  • Initiating competition
  • Remove politics from non-essential services
  • Spending on social programs such as health and education   
Moolah Factor

The advocates of privatization argue that disinvestment proceeds can be directed towards retiring the public debt. The experience of other counties provides us enough evidence to prove that the rulers are capable of simultaneously retiring debt and making fresh borrowings. In India, political parties have failed to chart a common minimum programme for economic reforms. Hence, they may do both; spend the privatization loot and keep on borrowing as well, especially in an election year. 

Privatization of Public Sector Undertakings started giving the desired results. It results in the efficient use of resources whereby scarce resources like land, capital and machinery are put to more better use. The economy as a whole is benefited by  an increase efficiency of the units and the fiscal mess is reduced by the lessening of liabilities. Inefficient PSU's were largely responsible for the macro-economic crisis faced by India during 1980's although they were set up for the purpose of providing employment and generating a revenue surplus. But they could not meet expectations. Hence steps for disinvestment had to be taken.

However experience shows that the privatization proceeds are being used merely  to bridge the budget deficit. It is like 'selling family silver pay for the butler'. The net effect of using the disinvestment proceeds finance budget deficit would be to 'transfer public wealth to the public items where it will no longer be wealth but only a stream of expenditure. Further the opportunity cost of private capital used to buy the stakes in public sector will be the loss of the productive assets that would be created in private sector. Thus the loss is not merely current assets but also Potential future assets. 

Privatizataion receipts are one time and temporary; the government may find itself locked into high levels of spending which may be difficult to sustain in the future. The reckless spending can lead to a ‘inflationary spiral' in the economy. 

Many of the countries have clearly earmarked privation proceeds for definite and specific programmes. For example, in Peru, the budgetary share was used to fund specific social welfare schemes and off budget part was used to recapitalize the public pension system". However in India, Central Government has neither undertaken such an exercise nor shown its willingness to undertake it. Further, the government can use it to retire the public debt or use it to build its financial assets. 

Also the process of utilizing the proceeds of disinvestment has ignored the creation of safety net for the workers. Further the use of the proceeds to raise additional budgetary support for plans, primarily the social and infrastructure sector is very vague. Further the spending on social and infrastructure sector can give results only in the long run with various non-monetary and non-quantifiable benefits. Hence, it is difficult to estimate the cost benefit analysis utilizing disinvestment proceeds.  
Lion's Share
According to global consultant Dun & Bradstreet, public sector companies have  amaximum share in total income. Total income of the sample power companies in the power sector stood at Rs 123,970 crore as of March 31, 2012. However, in the past three years, the share of private companies in terms of aggregate total income has improved from 23.5 per cent in FY10 to 26.5 per cent in FY12. This is due to increasing installed generation capacities of private companies, which led to increase in power generation by private companies resulting in increasing their share in total income. In FY12, total income of public sector companies grew by over 14 per cent year-on-year basis to Rs 91,100 crore, whereas that of private companies grew more than 27 per cent y-o-y to Rs 32,800 cr, D&B stated in a study report.
In addition to this the public enterprises have also shown a strong inclination in the capital market as the accumulated market capitalisation of PSUs rose by over 13 per cent in 2012. As per the BSE PSU Index, m-cap of public sector units stood at Rs 16.02 lakh crore on December 26, 2012 compared to Rs 14.14 lakh crore on January, 2 this year. Overall, the year proved to be good for a majority of PSUs, particularly blue-chip companies such as Coal India Ltd (CIL), recording a high growth in the calendar year 2012. CIL recorded a healthy growth of 18.7 per cent jump in net profit at Rs 3,078.08 crore in the second quarter of this fiscal and reported a 7.8 per cent rise in profit after tax at Rs 4,469 crore in the first quarter, sustained by higher sales realisations.
Higher Dividend Payer
With healthy liquidity flow public companies paying higher dividend to their shareholders  when compared to private companies. The public sector companies have always been generous in rewarding their shareholders by raising their amount of dividend even during tough times when a majority of private companies were cutting dividend. However, in FY12 the trend reversed and private companies registered an increase in dividend payout andpublic companies registered a decline. In FY12, dividend payout ratio of private companies was  
607 bps higher at 30 per cent compared with the previous year, whereas public companies cut it down by 245 bps at about 42 per cent. However, dividend payout of public companies is still more than that of the private companies. Public sector companies are a good source of income for the exchequer in terms of direct taxes and dividend. The effective tax rate for public companies increased from 21.5 per cent in FY10 to 24.6 per cent in FY12. The amount of direct tax collected from PSUs in FY12 increased by about 15 per cent when compared to the previous year.
Way Ahead
It can be appreciated that privatization is not a panacea for all economic ills. In majority of Less Developed Countries, it has become an economic compulsion as well as a policy intervention by international financial institutions, which accept privatization as the new philosophy for regeneration and structural adjustment. Hence, from the above discussion, it is clear that disinvestment is not the solution for the ills of public sector units in India. Instead of outright sales of public sector units, the Government should appoint a partner who has commendable track record for managing similar business. The Government should shift its policy prescription from 'strategic sales' to 'strategic alliance'. In the initial years of disinvestment, Political parties of the country have been debating the sale of PSU's mainly due to the controversy about the valuation of assets and their acquisition by companies with doubtful credentials. There is opposition against the sale of profit giving establishments. It is also argued that disinvestment would lead to massive unemployment which is already so high in the country. Experts are of the opinion that disinvestment is unavoidable for the success of second generation reforms. Health of the stock market is essential with the progress of economic reforms. To make the disinvestment process a success it is essential that profit making companies be distinguished from that of the loss incurring companies. There must be transparency in the deals made in disinvestment. Method and basis of valuation of assets must be revealed to the public when a public undertaking is sold off. This would eliminate suspicions of any malpractice and would also fetch a competitive price for assets. Further, legitimate demands and expectation of labor force should not be overlooked and care must be taken that either they are not thrown out of employment or alternate jobs are provided to them. 

Hence social implications of labor structuring should be properly studied. Scheme of voluntary retirement may be adopted so that persons willing to take retirement may lead a better life. This will  then garner support for Privatization. The proceeds of disinvestment should be spent for social uplift. These should not be utilized to meet the fiscal deficit because the aim of disinvestment as proclaimed by the government is to reduce public debt and provide funds for social sector. 
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