The Telegraph
Since 1st March, 1999
Email This Page
- Reforms are not halted because disinvestment is

We have superstitions about reform. If one is violated, people say reforms have stopped. An important measure of the commitment of an Indian government to reforms for the chambers and analysts is privatization and disinvestment. Now that they are on hold, thanks to the Dravida Munnetra Kazhagam, are reforms dead' Is this an acceptable benchmark' Does government ownership matter'

Every Central government since 1991 has erratically pursued disinvestment and privatization. All have faced opposition from labour, leftist parties, regional parties and even from within their own ranks. Indians believe that government ownership is superior to private. It is fair to all. Private owners milk the enterprise against the public interest. If this is what most elected legislators feel, even in the ruling party, and for over 15 years, the view requires respect. The need is not privatization; the need is for management autonomy of public enterprises and for the removing of the frequent and detailed interferences of government officials and ministers.

There is little data to determine whether government ownership has been good for society, only anecdotal information about whether private ownership or control of government enterprises is superior. The examples of some privatized companies of the last few years do not categorically show that private owners do better with public enterprises.

Hindustan Lever bought up Modern Bread and ran it to the ground. Reports are that it is now for sale. Sterlite (now Vedanta) bought up Balco. Sterlite has invested fresh funds, changed technology, improved productivity and raised profits. Reports are that work force has been reduced. Ajit Kerkar of Tulip bought the Juhu Centaur Hotel. Sahara now owns the Santa Cruz Centaur. Both transactions are in controversy. There is no information about how far Tulip has gone in renovating, rebuilding and expanding Juhu Centaur. We do not know if the banks that financed the transaction are happy with the position today. The Santa Cruz Centaur has been under reconstruction for three years or so. With its financial difficulties, Sahara may have to sell it.

Maruti has performed very well after privatization, but it was doing well earlier as well. The Japanese partner, Suzuki, was active in the management of the company. The government was unable to exert much influence on purchases, pricing, projects and people, in all of which bureaucrats and ministers in India have always interfered.

State governments also have privatized enterprises. We do not know the extent of successful turnarounds by their private owners. However, none of the privatized enterprises has grown to become very visible. The joint sector of state government and private ownership also appears to have been successful when management autonomy rested with the private partner. Apart from Maruti at the Central level, Titan Watches is a good example. SPIC had the misfortune of poor management and of taking political sides. Its slide over the years reflects this. Hindustan Computers Limited was originally a joint venture with the Uttar Pradesh government but became entirely privately owned quite early in its life.

Disinvestment has taken place in many companies and the government has reduced its shareholding, while retaining control in many enterprises: ONGC, Indian Oil, SAIL, BHEL, SBI and so on. These shares have added breadth to the markets. Selling some shares has benefited the government because of higher market capitalizations of the companies and better dividends. These companies have also improved their performance. The pressure of outside shareholders and the stock markets have helped to keep government interferences to the minimum.

It is surprising that the communists and now the DMK are opposing even disinvestment while retaining government majority ownership. The reasons might be regional pride, prejudice against private ownership, pressure of trade unions accustomed to a relatively lax work culture, gross overstaffing and the desire to protect jobs instead of improving efficiencies.

Ownership should not matter for businesses to perform well. There are many examples of private ownership or part ownership but with control over the business that has seen decline of the businesses. On the other hand, many public enterprises, after listing on the stock exchange, have become top performers. ONGC, Indian Oil, BHEL and SBI are among the many the stock markets have acclaimed.

So it is correct to ask why privatize at all. The other question, why disinvest while keeping government control, is not valid. The government makes a nice capital appreciation on the sale, retains control, is subjected to public scrutiny by private shareholders, and there is much greater pressure to improve. However, the government continues to exercise its baneful influence on even such companies in which it shares ownership with private parties. The government selects and appoints top management; major project investments and major purchases are subject to its scrutiny and control; it lays down dividend policies; the government and political interests can affect pricing of outputs. The attempt to place the regulator, the director of hydro carbons, on the board and the non-continuation in service of an outstanding chairman of ONGC are examples of this. Yet disinvestment provides more autonomy to management. It will increase as shareholders and markets become more active.

Selling off government owned enterprises is not the way to curb government deficits. The government must improve efficiency of expenditures while harvesting all possible tax revenues. Public enterprises are not the cause of government deficits. The government, for many years, has provided very little to them from its own funds.

Economic reforms are not halted because privatization and disinvestment are. A higher priority in reforms must be economic growth ' balanced between sectors, regions and between rural and urban India, power sector reforms, growth in jobs, speedy reduction of poverty, control over inflation, reduction of major inequalities, improved social indicators like life expectancy, education, and better health. Most important, the ability of the administrative system to implement policies effectively and with less red tape is vital. The whole economy must show constant improvement in the efficiency use of resource use. This applies equally to public enterprises.

Performances of public enterprises are influenced by special supports available to them, like interest free grants, cheap loans, price supports that made it incumbent on government purchases to allow them a premium over other prices, low dividends for many years, and so on. Cross-subsidies also hide reality. For example, our state electricity distribution systems have inflated subsidized agricultural electricity usage to hide some of their transmission and distribution losses. Similarly, subsidized petroleum products might hide the real efficiency of our public sector refineries.

The principal reason for privatization or disinvestment is to distance government from the management of public enterprises. Indira Gandhi tried this distancing by bringing in strong personalities from industries as secretaries to the government in ministries controlling key public enterprises: for example, V. Krishnamurthi, D.V. Kapur, Lovraj Kumar and so on. The MOUs between the government and public enterprises and the navratna concept have only added to paper, not to management autonomy. Only a change or dilution of ownership, with strong independent directors on boards who do not represent the government can do so.

The DMK's big stick on government disinvestment is typical of regional parties with neither ideology nor knowledge to guide them. However, the Marxists should know better. Their experiences of China and West Bengal under Buddhadeb Bhattacharjee have not educated them. Ideologically, they can oppose privatization but they should be the first to welcome disinvestment so long as the government retains control but gives management autonomy. The bureaucracy and politicians must be distanced from public enterprises.

Email This Page