PLUSES & MINUSES. Too much adhocism in disinvestment

Every other day, the government announces disinvestment in PSUs and State-owned banks, and some issues are put out in the market. But there does not appear to be any designed strategy to carry out the disinvestments.

In his Sir Purshotamdas Thakurdas Memorial Lecture in 2010, Vijay Kelkar had said: “..disinvestment and privatisation policy has now assumed strategic importance in our country” as he expounded a framework for disinvestment strategy. Given the prevailing hullabaloo over disinvestment and privatisation, it would be wise to put his ideas to practice.

The privatisation of some entities is also on the cards. State governments have started to follow suit; they are also in the queue to privatise State-level enterprises this fiscal.

What is the rationale for such moves? Does the government need funds to meet the fiscal deficit target? Or does it want to professionalise the management of PSUs?

Probably it’s time to fetch the best price for its holdings. Is there some coherence between the disinvestment policies of the Centre and the State governments? We can only speculate and be amused by the conflicting signals emanating from the government apparatus. In the absence of a long-term, intelligibly crafted, comprehensive disinvestment strategy, this is not surprising.

In the early 1980s, when India was in the grip of a nationalisation spree under Indira Gandhi, a contrasting thought process was emerging in the UK under the Thatcher regime, which soon showcased to the world benefits of disinvestment and privatisation.

During this first wave of large-scale privatisation, the UK saw about 670 PSUs worth $5.3 billion being privatised.

The method was fairly successful, having increased the shareholding population from 4 per cent to 25 per cent and resulting in a 60 per cent reduction in public sector employment. This also promoted economic democracy and a retail investor revolution.

Other European and South American countries soon followed.

Since its first attempts, privatisation has spread to more than 100 countries that collectively have privatised tens of thousands of firms, and raised almost $1.5 trillion.

Privatisation has produced substantial fiscal benefits: in many countries, privatisation revenues accounted for around 10 per cent of government budgets in some years, saving almost as much by eliminating the need for further subsidies to State-owned enterprises.

The objective in these countries was not merely to raise money, but was also driven by ideology — increasing firms’ efficiency and profitability to benefit the economy as a whole. The philosophy was not anti-State but anti-corruption and pro-efficiency. This is an important lesson for India.

International experience also teaches us that the benefits of privatisation depend on market institutions being in place.

The countries that manage to ensure property rights protection and rule of law, impose hard budget constraints, increase competition and improve corporate governance reap the largest benefits.

Domestic experience

The earliest record of disinvestment in India is available for the financial year 1991-92, coinciding with the initiation of economic reforms.

Every year since, the government has set a financial target of receipts through disinvestment, except during the five years under UPA-I, when the Left parties were part of the government. Of the 18 years when the targets were set, only four have been achieved. Many have rued this fact.

There have been accountability concerns over disinvestments undertaken in the past, with the CAG and CBI pulling up the NDA-I government for not valuing the assets correctly.

There have also been allegations of misuse of public funds. The UPA-II regime has often been charged with using public money collected by the LIC to bail out public offerings made by government companies.

Concerns relating to government capacity have always remained. While the NDA-I regime had a dedicated disinvestment ministry, it was reduced to a government department within the ministry of finance during the UPA years, and continues to remain so.

This must stop. India deserves better. We must start by asking some first principles questions on disinvestment and privatisation.

Are we clear about the objectives of disinvestment? Is setting a yearly financial target really the correct way of going about it?

Have we looked at the international experience in this regard? Is there a mechanism to ensure expertise, transparency, competition and accountability? How do we intend to preserve the interests of workers?

Ever since the start of disinvestment, labour unions have vehemently opposed it. Have we ever thought of making such unions partners in the disinvestment process?

Unfortunately, the answer to all these questions would be a resounding ‘no’. The country had a disinvestment policy which made all the right noises, but became nugatory soon thereafter, similar to several other policies.

A Public Sector Disinvestment Commission was also constituted in the mid-1990s. It published manuals and handbooks on disinvestment but was quietly wound up in 2004.

But neither a policy nor reports published by a commission can achieve anything substantial without an overarching, long-term strategy on disinvestment.

Such strategy must clearly spell out projected end use of funds, expected impact, and indicators against which success will be evaluated. It must provide guidance on timing, pricing and the target stakeholders of disinvestment.

The strategy must put in place mechanisms to ensure that the process is transparent, does not lead to oligopolies, is not influenced by cronies, and enables accountability to be fixed, without fail.

It must also safeguard the interests of workers, and ensure that their expectations are not disrupted. Simultaneously, the strategy must spell out the expertise, capacity and training required within the government departments to understand nuances in disinvestment.

Stakeholder engagement is a must in the development of such a strategy, which must be intelligibly crafted in a publicly available document.

The document should be part of a comprehensive government agenda of institutional, legal and policy reforms to reap the benefits of disinvestment. It’s time India developed a long-term strategy on disinvestment, and nothing less.

The writer is the secretary-general of CUTS International. Senior policy analyst Amol Kulkarni co-authored the article

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