Playing for high stakes

Venky Vembu | Updated on November 28, 2019

Every drop matters: The disinvestment announcement came after months of measures that failed to address the severity of the growth slowdown   -  BLOOMBERG/PRASHANTH VISHWANATHAN

There’s a lot riding on the outcome of the Narendra Modi government’s decision to disinvest in five PSUs

Nothing, it is said, concentrates the mind so wonderfully as the prospect of a hanging in the morning. The validity of that aphorism, as originally channelled by the 18th-century English litterateur Samuel Johnson, was reinforced forcefully last week with the dramatic announcement of a proposal by the Narendra Modi government to make significant disinvestments in five public sector undertakings (PSUs). The proposal, under which the government has committed itself to ceding its majority stakes in — and management control of — handpicked, profitable PSUs, represents arguably the strongest suggestion of acuity in the policy pronouncements of the government in recent times. It came after months of well-meant but listless stop-go measures that failed to address the severity of the growth slowdown. GDP growth has slumped alarmigly, and the government faces the prospect of a shortfall in tax revenues, which will constrain its ability to revive the economy. Under these circumstances, its options had narrowed considerably, and it may have been forced to put its stakes in the five PSUs on the block sooner or later. The promise of disinvestment may have been made in an earlier time, but it’s a fair bet that it is the precipitous economic slide since then that lent urgency to the proceedings.

There is, of course, never a bad time to do the right thing. And the cynical reality of India’s political economy — as the lessons of 1991 teach us — is that it takes a crisis (and the real prospect of a hanging in the morning) for governments to become clear-headed and yield to the inevitability of meaningful reforms. Over the past decade and more, successive governments have never honestly walked the talk on disinvestment: Accounting sleights of hand, where a government’s stake in a PSU is picked up by another entity fronting for the government, were typically passed off as disinvestment. Such reforms as have been undertaken have come about sneakily, with policy feints intended to blindside the political opposition.

In the latest instance, the open announcement of the intended privatisation of Bharat Petroleum Corporation Limited (BPCL), one of the five PSUs identified for disinvestment, may appear to mark a departure from the ‘reforms by stealth’ playbook. But even here, the enabling provision — in the form of a repeal of legislation that had nationalised the erstwhile Burmah Shell (and other foreign oil companies) in 1976 — was facilitated by a legislative measure in 2015 that flew beneath the radar of parliamentarians and the press.

At about the same time in 2015 that the nation’s attention was diverted by the hanging of Yakub Memon (convicted in the 1993 Mumbai serial bombings case), the Repealing and Amending Bill, 2015 sailed through the Lok Sabha. It provided for the repeal of 295 pieces of legislation, some of which dated back to 1863; among them was the Burmah Shell (Acquisition of Undertakings in India) Act, 1976. With its repeal, the need for the government to secure parliamentary approval for the strategic sale of BPCL was obviated; it effectively greased the tracks for last week’s announcement. It was a masterclass in political strategy, which succeeded primarily because the Opposition and the media, given to outraging over every triviality, were too distracted to even recognise they had been snared.

Bold as the disinvestment proposal is, the government’s resolve will likely face sterner tests when the Opposition and the labour unions marshal their resources to oppose the measure, as they inevitably will. The government’s fidelity to its avowed commitment to get out of the ‘business of doing business’ will also be severely challenged. Additionally, the disinvestment process will be susceptible to broader criticism if it doesn’t abide by the highest standards of transparency in the valuation and pricing of the PSUs’ assets and the protocol for opening up the field to genuine competitive bidding. Up until now, that transparency threshold has not always been met, and any suspicion that the ground is being prepared for preferred industrial groups to take control of national assets on the cheap will tarnish the whole process and jeopardise future disinvestment efforts.

In one sense, this round of planned strategic disinvestment is something of a low-hanging fruit. That’s because profitable entities such as BPCL, Shipping Corporation of India and Container Corporation of India will readily find bidders willing to pay a fair price given the future earnings upside that these companies offer. On the other hand, hiving off loss-making and liabilities-laden entities, such as Air India, will prove rather more arduous, as the government’s earlier exertions in that direction will testify.

Even so, if the government can consummate a successful round of disinvestment within the short time-window it has given itself in this financial year, it will earn itself a fiscal reprieve in order to make the investments that are desperately needed to fire up the economy. Additionally, it can also generate street-cred and a fund of political goodwill with which it can unburden itself of the millstone of unproductive assets. Clearly, there’s a lot riding on the outcome of this round of disinvestment. If it was a sense of being under economic siege that nudged the government into going down this road, long may that sinking feeling persist.


Venky Vembu is Associate Editor, BusinessLine;


Published on November 28, 2019

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