The Telegraph
Since 1st March, 1999
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- Disinvestment converts one kind of state-owned asset into another

The author is an economist at the Indian Statistical Institute, Calcutta

To d or not to d, that is the question. If you are wondering what this means, you are not reading the news. The rest of us know that the letter d is best used to spell the word disinvest.

Indeed, the disinvestment debate is hardly new. It started in the early Nineties, with the sale of minority shares in the public sector units. During that decade, a sum of nearly Rs 19,000 crore was realized, providing a much needed, though inadequate, fillip for a government afflicted by the modern disease of fiscal deficit. The deficit, which increases every year, was a little over Rs 1,16,000 crore, that is, nearly 6 per cent of the gross domestic product in 2000-01. As with any individual who lives beyond his means, the recurrence of financial imbalances drives the government too into financial crisis, with growing indebtedness to the public, the Reserve Bank and foreigners. Each year adds to the burden of interest payments on loans. But the revenues in the Indian case are too low to pay out these interests.

To resuscitate the system further and to rescue itself from bankruptcy, the government took the bolder decision in 2000-01 of carrying out strategic sales of the PSUs, namely, sale of shares to private parties along with a handing over of managerial control. This denationalization process, as opposed to the less drastic measure of equity sales without direct operational rights, is expected to be a stronger antidote for the burgeoning gap between the governmentís revenues and expenditures.

The reason, to begin with, is that the market values of the PSUs going under the hammer are likely to register an increase, since private parties will prefer paying for controlling rights to being sleeping partners. The higher market values in turn have two healthy effects on the governmentís circumstances. First, they turn into a ready source of finance for the much-awaited development programmes, in particular infrastructure building. In the absence of these funds, a government plagued by budget deficits would be able to undertake the necessary expenditures only if it had recourse to further borrowing.

Disinvestment on the other hand merely amounts to a conversion of one kind of state-owned asset into another and involves no increase in liabilities. Just the way an individual might sell off US 64 shares to finance the purchase of (say) Reserve Bank of India bonds. A second advantage of the move follows from a calculation of potential gains and losses. Had the government engaged in new borrowings to finance its development programmes (instead of asset conversion), it would have committed itself to a stream of future interest obligations. As opposed to this, divesting itself of its proprietary rights in the PSUs leads to a corresponding stream of foregone profit incomes. Disinvestment then leads simultaneously to interest savings and profit sacrifice. If the former exceeds the latter, the contemplated exercise will be a shot in the arm of a government living in penury.

Why should it be assumed that the incomes given up fall short of the saving on interest costs' The answer lies in the long established factual evidence concerning inefficiently-run PSUs. Normally, a state-owned firm is not guided by rational profit motives. It is ill-suited to monitor managers and workers alike, who shirk their responsibilities. Salaries and bonuses are unrelated to individual performances. Consequently, production costs are too high relative to the value of the produce. Returns earned by the enterprises are low therefore in most cases (even negative in some), raising the chances that the arithmetic in question leads to the right algebraic sign.

The same profit and loss argument points towards an additional bonus that strategic sales might generate. With the private sector taking over the management, operational efficiency is likely to improve. Private enterprise thrives on market competition and is guided by a relentless search for profits by entrepreneurs. It cannot afford to ignore inefficient conduct and is merciless in the punishment it metes out for slothful behaviour. Strict enforcement of accountability improves work culture, thus leading an economy out of its indolence.

The arguments presented so far capture the philosophy underlying the onerous task entrusted to Arun Shourie. Onerous, not only because of the stiff opposition he is facing, but also because it is no mean undertaking to extract the right price for the PSUs being sold off. The single-minded devotion with which he is pursuing his objective therefore calls for our admiration. Having said this, I want to play devilís advocate nonetheless, so that we tread the ground before us with circumspection. Our earlier infatuation with nationalization has turned sour and finally ended in disaster. In our efforts at de-infatuation therefore, it is worth employing an element of restraint. For nothing in reality might be as sharply defined as the heroes and villains from Bollywood.

The first issue I want to raise is one that has been discussed ad nauseum. Is it advisable to sell off the profit making PSUs, such as Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited' To analyse this question, I shall not raise the bogey of private monopolies and their evil designs. Instead, I will use the simple arithmetic that was outlined above. How does the profit stream from these organizations compare with the interest savings to be generated through divestment' If the capitalized value of the difference between the expected profit and interest streams is substantially large and positive, it is possible that the government can still afford to finance some of its development projects through the loan channel. Since the future is uncertain, one can calculate the net returns only with a degree of equivocation, that is, probabilistically. But the uncertainty is no more than the one associated with the sale of inefficient PSUs. Both involve the unknown in that they are concerned with the future.

We tend to believe firmly in the negative rating of PSUs that have a proven record of trashy performance. With the successful ventures too, our confidence should be no less, especially so because we are entering a soft interest regime, when interest costs on government loans will nose-dive with certainty. Why then should the better firms be disposed of' Is it because the worthless enterprises found few buyers' If these are retained and the healthy ones sold away, is the government not ending up with a dead weight of inefficient enterprises alone, absolutely antithetical to its professed goals'

The second of my issues relates to the role of a government in a society that has ridden itself free of the corrupt and inefficient juggernaut of public enterprises. Key protagonists of the liberalization programme have a cold cliché to offer in this respect. The government should concern itself only with infrastructure development and governance. Infrastructure is an area that fails to attract private enterprises, since it is difficult to charge a price for the services it provides. The government, on the other hand, is not concerned with profits and is therefore best suited to deliver in this area. Similarly, the activity of governance is not linked to market phenomena and the state alone is eminently suited to carry it out.

To take this viewpoint seriously, one must believe that the same government that failed the test of efficiency in the PSUs will, for some obscure reason, succeed when it comes to infrastructure development. It will be above reproach in governing too. In the absence of a profit motive, the government is able to perform. It fails though in its presence.

What then is its objective when everyone else in the world is a rational maximiser' It is presumably made up of human agents, not robots. Are we to believe that they are a group of philanthropists, who contest for positions of power merely to bask in the warm glow of hosannas sung by a grateful population'

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