By Priyanka Venkat
There comes a time that forces one to admit past failures, accept well-deserved criticism and take the necessary action to remedy a deteriorating situation. This realisation seems to have finally dawned upon the government, as seen in its recent plan of disinvestment in Public Sector Units. Gone are the days when the public sector served as the fulcrum to the country’s economy. Now is the time to move ahead and acknowledge the shortcomings of the ailing sector and the consequent burden it imposes. This requires the government to give up the notion of control and embrace the more important idea of efficiency if we are to cut our losses in the sector and head towards growth. Strategic divestment could be the perfect step towards this.
So, what is strategic divestment? It differs from the normal sort of divestment which is just the government selling a portion of its stake in a PSU. Strategic divestment refers to the government not only selling a substantial portion of its stake but also giving up the management control of the PSU to a private enterprise. This means that it will give up more than 51% of its stake to the private sector.
The government expects to raise Rs. 80,000 crore in 2018-19
The NITI Aayog has prepared around four reports that provide a list of loss-making PSUs that need to be privatised. So far, it has recommended the strategic divestment of 40 PSUs and is currently working on its fifth report. The recommended PSUs include the aviation behemoth, Air India. As mentioned in the budget, the government plans to raise Rs. 80,000 crore through PSU disinvestment in 2018-19. This is less than the Rs. 1 lakh crore the government will have raised this year by 31st March, through disinvestment. In fiscal 2017-18, the acquisition of Oil and Natural Gas Corporation and Hindustan Petroleum Corporation helped towards achieving a disinvestment of Rs. 1 lakh crore.
The finance minister while announcing the budget, spoke about merging and then listing three state-owned insurance companies: United Insurance Co. Ltd, National Insurance Co. Ltd and the Oriental Insurance Co. Ltd. Through the merger, one massive organization will be created which when listed, will significantly help towards the divestment target of Rs. 80,000 crore.
Disvestment in Air India set into motion
The government hopes to divest its stake in Air India and sell the entity in 2018-19. The main reason backing this decision is the enormous pile of debt of Rs. 52,000 crore that the government can no longer cope with. Out of the total debt, about Rs. 22,000 crore is related to aircraft acquisition loan, with the remaining debt being taken to meet operational expenses. The inability to compete with private entities in the sector has led to a drastic fall in the market share of Air India—from 19.4% in 2013, to a mere 13.3% in May 2017. The massive debt combined with the recurring losses, high costs, and falling market share has compounded the problem forcing the government to relinquish its hold on the entity.
In June 2017, the Cabinet Committee on Economic Affairs gave its approval for the strategic disinvestment in Air India. The details of the strategic disinvestment were supervised by finance minister Arun Jaitley. CAPA, an aviation think tank, proposed that the government should leave Air India completely if it expects the airline to make a comeback. It said- “Any level of equity retention will deter investors due to concerns about the prospect of continued government interference post-privatisation.”
The case for privatising sick state-owned firms
Before the 1990s, PSUs reigned over the economy and many of them held monopolies in various industries. However, once India transitioned to a market economy, many of these enterprises could no longer compete with better, more efficient private ones and ran into losses and took on large amounts of debt. Poor management and complacency have resulted in these enterprises having a myriad of problems such as high costs, operational issues, and ever-increasing debt.
As per an audit report by the Comptroller and Auditor General of India, in 2014-15, 157 Central Public Sector Enterprises(CPSEs) had accumulated losses worth $16.5 billion. The report further said that out of these 157 enterprises, 64 companies had a negative net worth of Rs. 74,100 crore on 31st March 2015.
An important reason behind the lacklustre performance of PSUs is poor governance characterized by excessive government control. Public sector enterprises are not granted the same freedom as private ones, primarily because they often serve as puppets on strings of the government. They often adopt conservative approaches to business, being wary of taking risks and find themselves having to fund government initiatives that might not be economical and profitable for them. This makes privatization of such enterprises all the more crucial. Classic divestment of a portion of the government’s stake in the enterprises isn’t enough if the government still ends up maintaining control. If these enterprises are to become profitable, they need better corporate structure, more efficient organisational practices and distance from government influence so that they can make decisions in their own interest- all benefits that privatisation can provide.
In terms of additional benefits, the proceeds from disinvestment could give the government the necessary leeway to spend on important sectors and boost capital expenditure. While the government claims that the flow of revenue in 2018-19 is likely to see a substantial boost with GST revenue coming in, an increase in the flow of GST revenue is premised on the fixing of structural issues in implementation to improve compliance. Compliance issues still remain and there isn’t a clear plan put forth by the government on reform of the tax. This combined with uncertain oil prices, makes the divestment proceeds all the more significant.
Understandably, it is difficult to completely overhaul the approach of control that the government has maintained over these enterprises for decades. Regardless, it is imperative that the government gets comfortable with the idea of letting go of sick units to the private sector, in order to create a culture where enterprises derive legitimacy from their performance, rather than their existence.
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