Mumbai, Sept. 25: McKinsey & Co has suggested a plan t overcome the opposition to privatisation in its special series on India. The global consulting group has asked the government to create a trust or a special purpose vehicle to act as a holding firm for all public sector enterprises on the lines of Singapore’s Temasek.

“After the assets have been transferred, the holding company could be taken public, effectively diluting the state’s share in the companies (without privatising them) and releasing them from statutes applying to the public sector,” said Ranjit Pandit, a director in McKinsey’s India office.

Temasek and the Singapore government hold a controlling equity in practically all the state-run companies, including port, airport and telecom services.

With investment in the island state reaching a point of saturation, firms are looking at other developing countries to invest their surpluses.

In a treatise on ‘Why believe in India ? Fulfilling India’s promise’, Pandit said the government must build on its success in privatising Indian Petrochemicals, Hindustan Zinc, Bharat Aluminium, and Videsh Sanchar Nigam.

“As long as these companies, representing 60 per cent of the country’s capital stock, remain in the state’s hands, their full potential will not be realised. Proceeds from the sales could also be used to bring down the public deficit,” McKinsey added.

“The foundation is in place for the economy to grow by 10 per cent a year,” it added.

“Our projections show that the economy must grow by 8 to 10 per cent a year or risk markedly higher unemployment, so FDI is essential to fill the gap,” it said.

But most foreign companies see India only as a source of low-cost skilled labour, particularly in IT, and not as a major market for products and services. This crucial distinction helps explain why China attracts over 10 times more FDI than India does.

McKinsey has suggested three steps to attract more FDI. First, the Reserve Bank must keep interest rates regionally competitive to sustain a buoyant economy.

Second, all the states and Union territories must implement the value-added tax regime.

Third, state governments must reduce their budget deficits.

McKinsey has also highlighted eight areas where reforms are necessary. These include deregulating politically sensitive sectors like retailing, banking, news media and defence McKinsey also feels power, water, sewerage, railways and airports should be upgraded.

The government must also expedite the recovery of assets from bankrupt companies.