The author is former director general, National Council for Applied Economic Research [email protected]
The first major attempt to disinvest in state-owned enterprises at the Centre was in Manmohan Singh’s first (or second') budget. So-called “bundles” of public enterprise company shares were created, consisting of those felt to be of low market value and others of high value. There was no clear basis for the valuations except perhaps their profit record. The shares were not in marketable lots but were bundles. The marketable lots came later. The Unit Trust of India, many of the then mutual funds, the financial institutions and some nationalized banks, were the principal buyers. For many of them, a good number of the companies in the “bundles” became dead investments. They were not in demand, and when they were, the prospective buyers valued them at well below the prices paid.
At the same time, a few of the companies in the bundles soared in value as speculators, the late Harshad Mehta among them, pushed them up in the market. There were unfounded allegations that the government officers who had created the “bundles” had been less than straight in doing so because they went up in value later, and hence that the prices were deliberately undervalued. It was not appreciated that stock market prices are volatile.
Subsequently, shares were sold in the open market. The prices were low, and the attempt was to raise some money, not to hand over control.
The next major effort at disinvestment was by the National Democratic Alliance government. By then there was some debate on which companies could be privatized altogether through “strategic sales”, versus selling shares in the market or directly to employees. It was realized that buyers would pay a large premium if they were to get control over the company, but a mere investor would not pay such a premium. None of today’s vociferous anti-strategic sale ministers had any views on these alternatives.
Since then of course they are better educated (in the famous Enron way), and understand the effect on their turfs, powers and perquisites if their ministries lost control over a public enterprise, which strategic sales would do. The dithering by politicians on the sale of Maruti, Bharat Aluminium Company, Air India and so on was a last-ditch attempt at stopping privatization. The government earned substantial premiums when strategic sales were made, as with Maruti and Balco. With the apparent weakening of prime ministerial authority, strategic sales of Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Limited, Coal India, National Aluminium Company, National Fertilizers and so on are once more opposed by a bunch of disparate ministers, .
Three or more years in power should have taught even Lohia socialists, let alone the economically illiterate Akalis, that government ownership is a drain on the public finances. The companies owned by the government are badly managed and there is bureaucratic and political interference in their investment decisions, purchases, staffing, especially of top management, pricing, expansion, and almost anything that could earn someone in control windfall earnings or some other way to exercise power and influence. The investment in these enterprises earns far less than the interest that the government pays on its borrowings, and much of the original investment used borrowed funds.
Even the apparently profitable public enterprises show profit because they have monopoly positions, price and purchase preferences, protection from external competition, or their prices are administered to ensure that the enterprises make profits. In any case, the companies do not pay much by way of dividends to the government, out of the profits that they earn.
In past years the old left (now suitably modernized as in West Bengal), would agitate that disinvestments would cause retrenchment and increase unemployment. The sadhvi in charge of coal and so in control of Coal India and NALCO, now expresses this dubious concern about the jobs of largely inefficient and excessively well-paid employees at the cost of the government budget. Coal India is a loss-making enterprise, dominated by a mafia that steals a large part of the output, whose high prices result in the high cost of electricity, with dangerously poor quality, short weight and so on. The sadhvi wants the government and the economy to continue paying for the mismanagement. She does not want NALCO to leave her ministry’s control because it is a profit-maker. NALCO can fetch the government a good price, and the proceeds could be used for building human capital, roads, rural storage, canals, small dams, and so on.
Of course the privatization will make redundant the ministers and the bureaucracy to support them. What is a coal ministry without Coal India or a steel ministry without SAIL, or a fertilizer ministry without NFL' These ministers imagine that they will live forever and remain in politics as ministers, to enjoy the perquisites of this surrogate ownership.
Much of the inefficiency of the Indian economy is because of the thoroughly mismanaged and loss-making enterprises run by the government, whether departmentally as in defence and railways, or as corporations by ministries like finance. Defence enterprises are believed to be inefficiently run. Agents and touts, mostly former senior officers in the military, hold up product development by preventing the acquisition of technology or equipment to upgrade the products. Their interests lie in continuing the import.
Even the finance ministry, the bastion of reform, has avoided any attempt to denationalize the banks and financial institutions that it controls, as also of the UTI.
The information and broadcasting ministry has now discovered that it runs a “public broadcasting service”, though its listeners and viewers would probably migrate en masse if they could, to cable or the private FM radio operators. The information and broadcasting ministry has not even learnt yet that it sits on a gold mine of terrestrial linkage which can earn a lot of money if used more fully and rented to private users as well, for a variety of uses.
The latest noise against disinvestments is not because of concerns about the national interest, national security, or fears of monopoly. It reflects the pure self-interest of the short-term occupants of ministerial chairs, who would rather keep the goose of the public enterprise and let it bleed the government, than give it up.
Ministers who want to disinvest in the market are assuming that there are enough prospective buyers for the shares to be sold. The state of the stock market does not suggest that this is so. Even if there were enough small investors, they will not buy these shares for investment, since the dividends are poor. They will buy the shares because they see early windfall gains (as was the case in past years when mulitinational corporations were forced to part with their shares in their companies at low prices fixed by government). So small investors will buy for early resale, not to hold the shares. And whom would they sell to in order to make a big profit' The buyers of these shares in bulk from the market would be the same people that our ministers do not want to sell to today, as strategic buyers.
The concerns expressed against disinvestments and handing over control are not genuine. They cover much baser motives that have to do with political power, prime ministerial succession and pelf.