While presenting the Union Budget for 2021-22, our Finance Minister, Nirmala Sitharaman said that the union government has set a disinvestment target of Rs 1.75 lakh crore for 2021-22, lower than Rs 2.1 lakh crore it hoped to garner from disinvestment in 2020-21, as adverse market conditions because of the pandemic affected government's disinvestment plans. She said that several strategic sales including IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, Pawan Hans, Air India, among others, would be completed during the year. Moreover, the government would also privatise two public sector banks and one general insurance company in the year. The policy, promised as part of the Atma Nirbhar Bharat package, states the government will exit all businesses in nonstrategic sectors, with only a ‘bare minimum’ presence in four broad sectors. These strategic sectors are — atomic energy, space and defence; transport and telecom; power, petroleum, coal and other minerals; and banking and financial services. In India’s brief but tortuous history of disinvestment since it began listing PSUs on the stock markets through minority stake sales in the 1990s, this is undoubtedly the boldest stance yet.
India’s History with Disinvestments
For the first four decades after Independence, India was pursuing a path of development in which the public sector was expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crores. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. Against an aggregate target of Rs. 54,300 crores to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half). Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crores. The reasons for such low proceeds from disinvestment against the actual target set were unfavourable market conditions, offers made by the government were unattractive to private investors, opposition in the valuation process, lack of political will and no clear cut policy on disinvestment.
In the period from 2001-02 - 2003-04, maximum number of disinvestments took place. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included Bharat Aluminium Co. Ltd, CMC Ltd, HTL Ltd, Maruti Suzuki India Ltd, among others. During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore.
From 2009 onwards, a stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers. The government has year over year since increased their disinvestment targets and is moving away from running businesses reaffirming Narendra Modi government’s philosophy that “It is not the government’s business to be in business”.
Why Governments shouldn’t run businesses?
‘Public sector is not for making profits’. This excuse is offered many times to explain away the losses which a number of public sector entities make. ‘Public sector should be an ideal employer’. This is invoked to justify giving away large share of value added, sometimes even exceeding the entire value added, as salaries and benefit to public sector employees. However, this violates one of the fundamental principles of a business - the value addition should be equal to or higher than the wages to be paid and the charge on the capital employed and if not satisfied in any public sector entity, should result into closer or sale off of such a business; something that is true for most public businesses in India.
Businesses are for-profit organizations and their primary aim is to maximize profits. They may have secondary missions, but they won’t last long if they don't make money for their owners. Public organizations, on the other hand, have no interest in profits. They generally provide “public goods and services,” in many forms, and usually for free. Moreover, the environment in which the two work are very different from each other. Private for-profit enterprises draw resources from markets: capital from capital markets; workers from labor markets; raw materials from commodities or product markets. They sell their products or services in a market in competition with other providers. Money from sales is reinvested, or taken as profit. Public organizations however, draw their resources from politics. Government collects taxes, and tax revenue is allocated through a political process to public organizations. These organizations spend the money to deliver public goods and services demanded through a political process. Elected or appointed government officials make these decisions, not markets. As a result, public organizations are suffused by politics and surrounded by influencers: stakeholder groups, other public organizations, the press, political parties, customers/voters/owners, and others. Politics does not play a similar role in the private sector, so public leadership is necessarily different. Narayana Murthy, founder of Infosys, at Indian Institute of Management, Calcutta’s 54th convocation emphasized on ‘minimum government, maximum governance’. Narayana remarked, ‘Jis desh ki sarkaar vyapari, uss desh ki janta bhikhari’ (when a country’s government conducts business, citizens become paupers).
Moving ahead with budget’s disinvestment plans
It is not clear why it took the Narendra Modi administration so long to articulate this plan or make headway on this front even without such a blueprint, as the PM had declared, back in 2014, that the government had no business being in business. Now that the policy is in place, tactful execution will be as critical as dealing with the usual pockets of resistance that would crop up. While stock markets are on a high, the financial capacity of potential bidders may not be optimal, thanks to the pandemic. Among its multiple challenges, the government will need to create confidence in the sale processes, ensure a semblance of fair valuations, sequence the sales so that the economy does not face shocks or create monopolies, and most of all, manage electoral pressures in jurisdictions where these units would be located. A single controversial transaction could scuttle the momentum behind such a plan and India can ill afford it.