The Telegraph
Since 1st March, 1999
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- The left's arguments against divestment have little substance

It is gradually becoming clear that the proposal of a partial divestment of BHEL has been shelved under exacting pressure from the left and due to an earnest desire of the Congress to clutch at power and remain in business. The left would like to pose it as an ideological victory and the Congress as a tactical retreat but none would really believe that the matter of divestment of public sector units has been settled once and for all. As far as divestment of PSUs is concerned, the left has taken a clear and rigid stand. According to the left think-tanks, it is perfectly sensible to sell off sick or even less profit-making PSUs, but mere stupidity to dispose of the ace income-generating ones. Indeed, among the ace PSUs, nicknamed the Navaratnas, BHEL is one, for it has been making reasonable profits over the recent past.

Hence the present crusade. Some members of the left would even suspect clandestine foul play behind the apparently simpleminded proposal of divestment and would like to give out a war cry for remaining vigilant. As always, the left seems to be blessed with clear answers to everything.

But the less fortunate one, who has neither clarity nor faith nor the privilege of having the insight of a divine doctrine, is constrained to ask na've and dumb questions. In the present context, one is tempted to ask, perhaps with lots of hesitation, why is it foolish to get rid of a good PSU but prudent to sell loss- making ones' The left's answer comes in two parts.

First, it is pointed out that to dispose of a profitable PSU is unwise because this would cut down a source of income for the government. The proposal of divestment, the left would argue, should remind one of the old story of the stupid and greedy man who had killed his magic goose to get the golden eggs all at once. Loss-making units are, of course, a different proposition. They are liabilities to the government and a drag on the national exchequer. It is, therefore, sensible to get rid of them. Second, the government is in no such desperate need of money at present as to justify hasty and careless sales of revenue-generating assets. Even if it needs money, it can resort to traditional ways of raising it, through taxes, borrowing or deficit finance.

The first argument implicitly suggests that the government may potentially get cheated on the sales of good PSUs but can make a smart buck by selling bad ones. This amounts to assuming an inefficient capital market which is unable to evaluate PSU shares according to their real worth. In a reasonably efficient market, the net worth of a company is related to the present discounted value of its future expected profits. If the company is strong and is expected to make good profits in future, its net worth and hence the market value of its shares would be high. On the other hand, if future profit-making prospects for the company are not great, the market would form a low opinion about its worth and fix a low value on its shares. A couple of things emerge from these observations. First, the fable of the greedy man and his golden egg laying goose is not really relevant in the context of divestment, for the market, while evaluating the worth of a PSU, takes into consideration the entire stream of future profits. Second, if the market is efficient, there is little scope for either getting cheated on the sales of good PSUs or making a supernormal gain by selling the worthless ones. The market will give exactly what a PSU is worth. Question is, is the market really perfect and efficient'

The left thinks that the market is not as perfect as it is thought to be. In particular, when a giant PSU unloads its shares in the market, there are few buyers with enough resources to buy them. The number of buyers being restricted, the market is monopsonistic and there is a scope for bargaining and under pricing. This problem, however, could be avoided in two different ways. First, the shares could be sold in small quantities to a large number of small investors so that no one has a control over the company and each behaves competitively. This could have been difficult if a large percentage of shares were unloaded. But in the case of BHEL as only ten per cent of shares were proposed to be sold, it could have been possible to find a whole lot of small investors to clinch the deal. A second way is to allow foreigners to have a stake in a PSU. Given the present euphoria about the Indian stock market, this should not be difficult. But it is unlikely to get the approval of the left which would certainly despise selling off good PSU shares to multinational corporations. The left should realize that if foreigners could be persuaded to hold some PSU shares, they may be able to provide the much required capital necessary for long-run development of the PSUs, capital which the government is unable to furnish.

The market, however, is distorted in a completely different sense. Profits of the so called Navaratnas are often inflated because most of these units enjoy artificial monopoly power in their respective markets. Once these units are privatized and some reasonable competition develops in the market, artificial profits would be eroded away. This would, of course, be socially desirable. In other words, the real social worth of the ace PSUs are often lower than what their current profit levels reflect.

We now take up the second part of the left argument. According to this argument, it is not necessary to sell the good PSUs because the government is not in desperate need of money and in any case has other means to raise it. The problems of raising money through taxes, borrowing or deficit finance are well known and widely discussed, so there is no point in repeating them. We would only point out that while anyone, the government or the private sector, may run a unit producing machines, steel or wristwatches, there are certain crucial sectors providing infrastructure, health or education where private capital is not likely to be forthcoming.

These social sectors being fully dependent on government support, it is not such a bad idea to raise money by selling PSU shares and invest them in the social sector. This surely does not reduce the efficiency of the sold unit, for, the private players who acquire it are expected to be at least as efficient as the government. Indeed, the BHEL proposal was to spend 75 per cent of the sales proceeds on health, education or infrastructure and the remaining on the revival of sick PSUs. Clearly, if money is to be raised for these purposes, it is easier to raise it by selling the shares of good PSUs rather than that of the dying ones.

One suspects that the real concern of the left lies elsewhere. It is their old attachment towards or- ganized labour which led them on a war path against the proposed BHEL divestment. Even a partial divestment of similar PSUs like it was unacceptable because it could potentially make the workers of these organizations less secure. The concern seems to be thoroughly misplaced. Why should we be worried about the job security of a handful of PSU workers when more than 90 per cent of the workforce is working in the private sector and has no job security at all' Formulating policies to protect a few smells of vested interests which the left has categorically condemned so many times. Indeed, if divestment of BHEL and other PSUs is cast aside, it would be a victory not of left ideology, but of the handful of organized labourers over the vast majority of have-nots.

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