In last ten years India’s governments in their urge to time the stake sale in PSU companies missed opportunities and ended up with abysmal receipts from divestment. Stock market returns on BSE PSU index over last 10 years( till June’16) have been a paltry 4% per annum versus 11% p.a. for the Sensex suggesting that attempts to maximize stake sale proceeds haven’t yielded desired effect over long term. Had the government sold off its stakes in these public sector companies in 2006 and invested the proceeds passively in the BSE Sensex it would have been better off by a massive Rs 750,000 crore in 2016. Of course, it is not just the implementation process but the focus and intent too that have been lacking. However if divestment is pursued with vigor in next two years it can still throw up the much required capital that the government will need for banks’ recapitalization and for improvement in education, health and infrastructure facilities.
Government’s business to run businesses?
It is remarkable that even twenty five years after liberalization India’s government is so circumspect in getting out of the business of running businesses ranging from mining, power and shipping, to airline and telecom. In fact this is one area where the current government has not even attempted to break from the past and hence this largely seems like a continuum from earlier regimes.
Question of positioning
To a large extent, poor record on divestment is rooted in both – formulation as well as implementation. Firstly, governments in the past have failed to build political consensus- perhaps due to lack of focus- on need and potential benefits of divestment. Secondly, divestment has largely been seen just as a way to bridge the country’s fiscal deficit whereas common sense and basic economic principles suggest it should be positioned as rebalancing of government resources which can be used for better applications, or as a way to improve long term sustainability of some of these PSU companies and thus as a way to save jobs. In fact as various sectors were thrown open for private sector participation as a part of liberalization programs over last twenty five years, the governments should have followed a calibrated approach to completely exit those sectors except some sectors that require government participation. PSUs like Heavy Engineering Corporation, Hindustan Steelworks Construction Limited, Hindustan Machine Tools, Indian Tourism Development Corporation etc never stood a chance once private sector had been allowed in their respective sectors. Eventually these companies devoured tax payers’ money and caused acute problems for their employees and their families.
Then, there is one steam of thought that considers PSUs as family jewels and hence is inimical to selling them even partially. The truth is that many of these so called jewels run the risk of dramatic erosion in their value in near future. In fact this euphemism itself looks too far from reality. Except in sectors where private sector is not allowed or has been allowed only recently, most PSUs lag behind their private sector peers on parameters of efficiencies, execution, financials, scale and long term prospects. Sadly, by not selling them in a timely fashion we are effectively waiting for these jewels’ worth to deplete further.
Close the door before the horses bolt
On the political front this process of consensus building should not be as difficult as it has been made out to be so far. Essentially, in the name of social good the extremely poor classes have been deprived of government resources that are deployed less productively in public sector undertakings. At the same time, middle class– which, employees of these companies typically belong to – who ostensibly are the ones gaining from continued government support to PSUs, can be the biggest losers in the end owing to risks of job losses if these companies are not reinforced to compete in the market place. For this, non-government ownership is often what the doctor ordered for. It is no secret that operational inefficiencies, slow decision making, and interference from government give PSUs a massive disadvantage. Many PSUs have turned defunct and many more are on the path to oblivion. On the other hand there are some examples where impressive improvement in performance has been seen after privatization without much job losses.
There is no reason to expect a trend reversal in next ten years especially given that competition in all sectors has aggravated. This is the primary reason why it makes financial sense for the government to monetize its equity in PSUs on a mission mode.
The government can start the process on a clean slate by drawing up i) a proper policy delineating the need, motives and potential benefits from divestment in various sectors, ii) a roadmap for divestment – list of companies in which stakes will be reduced to 51%, 26% and nil – over 1 year, 2 years, and 3 years, and iii) a clear plan regarding the proposed usage of receipts from this divestment.
The stakes are big – literally: 4% of GDP can be raised
Regarding the utilization of divestment proceeds, while education and health are two important focus areas which need enhanced budgetary support, in current circumstances the proceeds may also be used to recapitalize the PSU banks. Even though it can be argued that this will practically keep government involved in some form of business, it is not illogical for the government to have at least some presence in banking via some PSU banks so that it can perform its duties of a welfare state in banking sector. Also, it would be naive to deny that PSU banks need to be revived urgently for pick up in broader economy.
The stakes are big for India- literally. Total market value of government’s stake in the fifty seven companies in PSU index is about Rs 950,000 crore. If the government brings down its stakes to 26% in these companies ( except for SBI, and the three large oil marketing companies where one assumes that the government holding is kept at 51%) it can raise about Rs 475,000 crore, equivalent to about 4% of India’s GDP in F2015. This sum can be sufficient to run 2x the current budget on primary education and healthcare- for next five year, after recapitalizing the PSU banking system.