The Telegraph
Since 1st March, 1999
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- Controversies over disinvestment continue to rage

Public debates about economic policies in India have been very controversial ever since the early Nineties after India embarked on the reform process. Every major change has been intensely contested by opposition parties, professional economists and trade unions. Even against this background, the discussions about the desirability of disinvestment of government holdings in public sector enterprises stand out because they have been particularly heated. This trend continues till the present day, with the left parties launching a vigorous campaign against the government's proposal to effect a partial disinvestment of its holdings in Bhel.

Of course, even die-hard supporters of the disinvestment process must admit that the public sector has played a vital role in building up the economy in post-independence India, in particular the heavy industrial base of the Indian economy. It is debatable whether private entrepreneurs would have shouldered the huge risks associated with setting up heavy industries in the immediate post-independence period when the economy was in a fledgling state ' the small size of the domestic market would have acted as a deterrent since the private sector would necessarily take uncoordinated decisions.

Conceptually, the public sector has a tremendous advantage because it can take coordinated decisions so that the steel industry would demand the products of the capital goods industry while the capital goods industry would demand the output of the steel industry. In other words, the simultaneous creation of several giant firms would circumvent the problem of small markets because each small firm would demand the products of the other firms.

Perhaps an even bigger advantage of the public sector was that these enterprises never had to achieve any hard financial targets ' nation-building was the primary, if not the only, goal. While this made sense in the initial stages of development, the absence of stringent adherence to financial discipline was to prove disastrous for many public sector enterprises in the long-run. Many of these enterprises produced meagre returns on the capital invested in them, and several of them proved to be commercially non-viable.

This did not pose any problems for their survival as long as the governments at the centre and the various states were willing to bail out these enterprises if they failed to generate sufficient revenues. However, government largesse of this kind was viable as long as the governments themselves faced soft budget constraints. Unfortunately, this situation changed dramatically during the Nineties. The financial profligacy of the state and Central governments in India had an inevitable consequence ' they ran up huge deficits. This in turn meant that it was no longer feasible for the governments to subsidize the public sector enterprises.

All this contributed towards a subtle change in attitudes towards public sector enterprises. There was increasingly less opposition to government disinvestment in chronically sick public enterprises because it was felt that the revival of these enterprises required huge infusions of capital at a time when the governments were finding it difficult to find resources for investment in crucial sectors such as infrastructure. So, there was the reluctant recognition that only the private sector could cough up the necessary funds for the much-needed modernization in many of these enterprises. Of course, private venture capitalists would not be willing to take the risk of lending huge sums of money unless they were also promised management control. Hence, the only option was to sell off at least a majority share to the private sector. Not surprisingly, several Central government enterprises were hived off to the private sector. Indeed, a recent newspaper report mentions that as many as 55 public sectors are also likely to be sold off to the private sector even by the Left Front government in West Bengal!

However, it is difficult to shed deep-rooted beliefs. The Left Front and indeed many others still believe that public sector enterprises should be disposed of only as a last resort. Operationally, the 'last resort' principle has come to mean that the Left Front and its fellow travellers are willing to sell off enterprises which have been running at a loss for some time, but are firmly opposed to the disposal of profitable public sector units.

The economic logic underlying the opposition to the disinvestment of profitable public sector enterprises has never been very clearly spelt out, although analogies are often drawn to the foolishness of selling off the family silver. Such analogies are misplaced because the proceeds from the sale of these enterprises can of course be used to build up other national assets such as economic and social infrastructure. Perhaps, a better or more appropriate analogy is to view the government's ownership of these enterprises as national assets. An owner often changes the composition of his portfolio of assets, selling off some assets in order to finance the purchase of others. This is very common practice, and no one labels the reallocation of asset portfolios as necessarily foolish or economically unsound.

Another strand of the arguments against disinvestment of profitable public sector enterprises runs along the following lines. Public sector enterprises have been built up with the tax-payer's money, often in areas where the private sector would simply not have entered because of the initial risks associated with these ventures. If there are sectors and enterprises which are now profitable, then the public sector should be allowed to reap these profits. Why should the government allow private individuals to 'capture' the profits of enterprises built with public money'

However, the fallacy with this argument is that no one is advocating that the profitable public sector enterprises be handed over on a platter to the private sector. Neither is it anyone's case that the government set uniform prices for all the assets that it decides to dispose of. The market value of an asset promising, say, a million rupees every year is much higher than that of an asset promising an annual return of only a few hundred rupees. Of course, this discrepancy in market valuations does not induce anyone to claim that the former asset should not change ownership. It simply means that the more profitable asset should be sold at significantly higher prices. Similarly, the more profitable the public sector enterprise, the higher the price at which can be sold. So, in principle, the government loses nothing by selling off a profitable enterprise provided it can extract an appropriate price from the buyer.

The fact that the government does not necessarily lose out from disinvestment of profitable enterprises does not still provide a 'positive' argument in favour of such sales. However, there are two further issues weighing in favour of such sales. First, there is the widely-held belief that the government is less efficient in running businesses than the private sector. So, even the profitable public sector enterprises could perhaps be run more efficiently if they were free from the clutches of bureaucrats. The recent move to give the Navaratnas greater autonomy is a tacit admission of the inefficiencies that are inevitable when ministries and ministers are the final arbiters of how these enterprises should operate. Second, government investment programmes are severely handicapped for lack of funds. The proceeds from the sale of profitable enterprises can be used to finance much-needed investment in infrastructure, to mention just one area. This can be achieved, for instance, by setting aside the proceeds from such sales in a special fund, thereby imposing some statutory obligation on the government to utilize the funds wisely. This would be an obvious safeguard against frittering away the family silver.

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