The author is an economist at the Indian Statistical Institute, New Delhi
One of the few areas in which the current government seemed to be well on the way to achieving targets was in the disinvestment exercise undertaken by the indefatigable minister for disinvestment, Arun Shourie. Despite opposition both from within the government and without, Shourie pushed ahead with his mission. Unfortunately, he has made far too many enemies. They have combined very effectively and stalled his efforts to sell off large chunks of the oil behemoths — Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited. The cabinet committee on disinvestment, which met recently, has decided to postpone the sell-off exercise in these entities for three months. But newspaper reports seem to suggest that this postponement may be a precursor to a more widespread review of the disinvestment exercise, if not of the entire move towards second-generation reforms.
Thus, the disinvestment exercise also seems to be bitten by the “one step forward, two steps back” bug, which has been so characteristic of the Indian polity’s experience with the overall economic reforms package. Throughout the last decade, the disinvestment of government holdings in public sector enterprises with the eventual goal of privatization has always been a top priority of successive governments. The current government has been no exception. It took bold steps to sell off the Bharat Aluminium Company Limited. The state-owned hotels were also prime targets of the disinvestment programme, and there were also attempts to partially privatize both Indian Airlines and Air India. The budget for the current fiscal year has set a target of Rs 12,000 crore, a figure which suggests that the government did mean business. Until the latest imbroglio regarding disinvestment in the oil sector, there was every hope that the overall proceeds accruing to the government would exceed this figure.
The privatization of Modern Foods, Balco and Indian Tourism Development Corporation hotels has been a positive step. However, the pace of progress was too good to be true. Several ministers in the Union cabinet have been less than enthusiastic about the disinvestment programme. They have received staunch support from the leftist parties, the Swadeshi Jagran Manch and some of the other wings of the Bharatiya Janata Party. While some of their arguments against disinvestment — or sometimes the specific way in which the government holdings are disposed of — cannot be dismissed without careful scrutiny, others are simply the product of convoluted thinking.
Perhaps the best example of the latter is the argument that profitable public sector enterprises should not be sold off. This argument runs as follows. 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 which are now profitable, then the public sector should be allowed to reap these profits. Why should the government allow private individuals to capture profits of enterprises built with public money'
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 a well-built house in a posh locality is several times that of a dilapidated shanty in a shabby locality. Of course, this discrepancy in market valuations does not induce anyone to claim that buildings in posh localities should not change ownership. Similarly, the more profitable the firm, the higher the price at which it can be sold. That is, the government loses nothing by selling off a profitable enterprise provided it can extract an appropriate price from the buyer.
Fortunately, only the most obdurate opponents of the disinvestment exercise now advance arguments of this kind. The more sophisticated opponents, led by Ram Naik, the petroleum minister, question the mode of disinvestment, disagreeing sharply with the views of the disinvestment ministry. The latter believes that there should be an immediate sale to a strategic partner, who would then obtain management control. Shourie and his officials feel that the offer of management control would make the enterprises significantly more valuable to prospective bidders, and hence improve marketability of the enterprise. In other words, the offer of management control would enable the government to maximize the proceeds from disinvestment.
Unfortunately, the downside to this argument is that in some sectors — the petroleum sector itself being a prime example — economies of scale imply that there are only a few enterprises. Thus, the strategic sale option carries with it the danger that the process will result in a couple of business houses capturing an entire sector. For instance, there are fears that the Reliance group will become a gigantic monopoly in the entire oil sector. Others fear that multinational groups such as Shell will capture the oil sector and hold the economy to ransom.
Perhaps it is these fears which led Naik and officials in his ministry to advocate a different route to disinvestment. They prefer the direct sale of shares in the oil behemoths to the retail investors, with the government retaining management control at least in the initial stages. This procedure will inevitably result in lower sale proceeds to the government because of the widely held belief that the government is less efficient in running businesses than the private sector. But, the Naiks and the Fernandeses will argue that this loss in wealth is worth the benefits accruing from the prevention of private monopolies.
The apprehensions about the dangers inherent in the creation of private monopolies in an important sector such as oil cannot be dispensed with lightly. At the same time, the inevitable loss in efficiency associated with public sector enterprises — even a cursory look at the balance sheets of most of these enterprises suggests that they produce paltry returns on the capital invested in them — raises an obvious question. Is there no way of protecting the economy from the ravages of a private monopoly'
Fortunately, we are not a banana republic, and the Central and state governments in India are armed with a diverse set of regulatory instruments. No one can seriously contend that a couple of giant business houses can hold the economy to ransom if they have control of entities such as HPCL and BPCL. For instance, the government can regulate prices, pass regulations requiring them to maintain strategic reserves to be handed over to the government in times of national emergency, and so on.
There are also instances of local monopolies in both the generation and distribution of electricity functioning in India for a long time. This suggests that apprehensions about the dangers of private monopolies have been blown out of proportion to the underlying reality, and so tilts the case in favour of strategic sales wherever possible.