The Hindu Business Line : And the Oscar for disinvestment goes to...

ARUN SHOURIE is no longer a worried Minister. With oil IPOs on fire, he is happy that the privatisation programme is going strong and if there were an Oscar for his branch of work, you could bet who the winner would be.

And Sudhir Naib's book titled Disinvestment in India: Policies, Procedures and Practices, published by Sage (www.indiasage.com) could not have come at a more appropriate hour. Given the quick pace of developments in the disinvestment arena, there is bound to be an asymmetry between what can be encompassed in a book on the subject versus what a market ticker can show.

But Naib's work is useful for gaining a `theoretically informed perspective' on issues such as: "Whether the failure of Indian public enterprises has been exaggerated? Can public enterprises be reformed from within or are they intrinsically inefficient? And, is a change in ownership the only solution?"

With the world moving towards downsizing governments by dismantling the public sector, reforms in state owned enterprises (SOE) have taken many forms, ranging from privatisation to hard budget constraints, introducing competition to toning up financial sector.

"Different countries have adopted different reform paths," notes the intro. Thus, while India and China liberalised and deregulated the economies significantly before privatisation, Argentina and Chile liberalised, deregulated, and privatised concurrently. Latin America privatised control, not merely ownership.

East Africa chose to divest a minority stake, with government retaining control. Buyers have also been different — employees, managers, local industry groups, foreign firms, strategic investors, or dispersed public. A dominant technique has been privatisation that became popular in the 1980s, but Naib traces its origin to Adam Smith's writings and Hayek's seminal book, The Road to Serfdom.

India's disinvestment saga has its roots not in some leisurely choice but an economic compulsion.

Rewind to early 1990s, and that was when everything seemed to go wrong: Fiscal deficit at 8.4 per cent, inflation accelerating to 14 per cent, public debt to GDP at 63 per cent, Gulf War, imbalances on internal and external account.

"Erosion of confidence in the government's ability to manage the economy led to a drying up of the market for external commercial loans. The net outflow of NRI deposits also significantly added to the balance of payment crisis." Blame fell on the public sector for failing to generate investible resources.

For those who believe in the invincibility of markets, Stiglitz is an enemy because he listed eight principal sources of market failures — "each of which has been used to justify the possibility of government activity in the market place."

A recent example would be the state control over sand and liquor trade in Tamil Nadu. But there are non-market failures too, arising from internalities and distributional inequities. Internalities or private goals are the standards that public agencies develop to evaluate performance.

Often, measure of output is hard to define in pubic agencies, and that leads to "measuring outputs by their inputs". Reforms, however, are a bitter medicine.

Whether a country is ready for such reforms can be assessed through the filter of three conditions laid down by World Bank: Political desirability ("Leaders with higher discount rates may find SOE reform less attractive than those with lower discount rates — Ramamurti, 1999)"; political feasibility ("The likelihood of opposition is more if there is surplus manpower"); and governmental credibility ("Investors must believe that the government will not renationalise privatised firms"). Perhaps, our leaders too will have to believe they can manage within available means.

Contrary to popular misconception that treats privatisation and disinvestment as synonymous, "disinvestment, which is a form of ownership transfer, comes under the umbrella of privatisation".

Disengaging the state can involve both divestiture and non-divestiture. In the former, ownership is transferred; but in the latter, there is management transfer and marketisation. "Divestiture option may be preceded by non-divestiture techniques," notes Naib, as a strategy to increase the potential sale value.

Yet, when a government is in great hurry to bridge its deficit, even as a bear market casts its long shadow on the bourses, it would be for historians to record how Shourie could have got more if only...

Economics@thehindu.co.in

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And the Oscar for disinvestment goes to...