At a time when the government is hard pressed to reduce its fiscal deficit and reduce budgetary support through subsidies to PSUs, the need of the hour is to take urgent measures to instill market discipline among PSUs, retain the profit-making and strategic ones and exit those which are economically unviable and where it has no business to be in business such as hospitality and airline.
Since 1948 when India got its first PSU (Public Sector Undertaking), in the form of ITI (Indian Telephone Industries Limited), their number and significance grew enormously in the next four decades that followed. In the first First-Five Year Plan, the country got five central PSUs. By 1980, the number of PSUs had grown to 163. Just before India embarked on the privatization or disinvestment drive beginning 1991-92, there were 244 PSEs at the end of the Seventh Plan in 1990. According to the CAG, there were 404 central PSUs, including six corporations and 94 deemed government companies, as on 31 March 2006, operating across a wide spectrum of businesses that include sectors such as banking, coal, engineering, power, oil, steel, textiles etc., (during the same period, there were 1062 State Government companies). The central PSUs employ about 2 million people in the country.
The PSUs were created to play a pivotal role as envisaged in the economic model adopted by the country in the post-independence era, inspired essentially by the Soviet socialist model. A large number of PSUs were set up across sectors, which have played a significant role in terms of job creation, social welfare, and overall economic growth of the nation. Over the years, the PSUs emerged to occupy commanding heights. However, according to critics, many PSUs were also set up in non-traditional areas like cement, hospitality, trading etc. Further, they prospered in an era of protectionism, and enjoyed subsidies, which led to inefficiency and falling productivity at many PSUs, leading to huge losses to the exchequer. The collapse of the erstwhile Soviet Union and India’s BoP (Balance of Payment) crisis in 1990, made a strong case to revisit the country’s Soviet-style economic model and make a transition to free-market economy.
Further, the piling losses at many PSUs too added the pressure on the government, to explore the ways, including privatization, to fix the woes. As reforms were unleashed in the post-1991 period, concerns grew over the survival of these PSUs, as critics apprehended them to succumb to competition as they lacked market discipline. The difficulties of governments that run businesses are well-known. The government opted to go for selective privatization, on case to case basis, rather than going for rapid privatization. This gradual approach has been hailed by many, as it is felt that, this is the best way to achieve better results. While this was done owing to political compulsions, it has certain advantages like it gives government and other participants in the privatization process time to gauge the possible impacts. In their paper, “Privatization in India: The Imperatives and Consequences of Gradualism”, Devesh Kapur and Ravi Ramamurti, say that rapid privatization was not necessary because the country did not satisfy two necessary conditions for rapid privatization: severe macroeconomic crisis, including high inflation, and a strong executive that could ram policies through. They say that many developing countries satisfied one of these criteria, e.g. Brazil and Turkey experienced several bouts of macro-economic instability, yet these countries did not privatize rapidly.
In fact, they observe, even countries that satisfied both criteria, e.g., in sub-Saharan Africa, privatized gradually or not at all. They cite the examples of countries such as Argentina, Chile, Peru, Czech Republic, Estonia, etc., that met both criteria and also privatized deeply and quickly.
An across the board privatization is also not required given the fact that, there are many PSUs which have either turned profitable or have continued to improve their profitability during the last few years. For instance, according to CAG report, the number of central government companies and corporations that earned profit increased from 156 in 2003-04 (Rs.64,174.44 crore) to 175 in 2005-06 (Rs.79,426.52 crore). Further, as per the report, the number of dividend declaring Central Government companies and corporations also went up to 109 (including two statutory corporations and 30 listed companies) in 2005-06 from 106 (including two statutory corporations and 30 listed companies) in 2004-05. Also, dividend declared as a percentage of net profit earned by these companies and corporations increased from 28.69 per cent in 2004-05 to 32.15 per cent in 2005-06.
However, on the flipside, there are some disturbing facts. For instance, the same CAG report discloses that close to 70 per cent (Rs.54,933.54 crore) was contributed by a handful of companies i.e., 38 Central Government companies and corporations under four sectors viz., Petroleum, Power, Telecommunication Services and Coal & Lignite. Further, the number of loss making PSUs have remained stagnant at around 100 although accumulated losses of central government companies decreased by 9.50 per cent, i.e., from Rs.67,344.11 crore in 2003-04 (105 PSUs) to Rs.60,948.56 crores in 2005-06 (94 PSUs). The report also highlights that as on 31 March 2006, 116 central government companies and corporations (including 10 listed companies and one statutory corporation) had accumulated losses of Rs.84,155.22 crore, which included 29 profit earning companies (including four listed companies). However, equity capital of 82 companies (out of 116) under 19 Ministries/Departments had been completely eroded. The accumulated losses in these 82 government companies were Rs.81,617.04 crores against equity investment of Rs.13,902.20 crores as on 31 March 2006 making their combined net worth negative at Rs.67,036.47 crores. This included six listed companies whose accumulated losses were Rs.4,880.30 crores against equity investment of Rs.1,417.69 crores, making their combined net worth negative at Rs.3404.74 crores. According to the report, Out of 82 companies that had their capital completely eroded, 46 companies had been referred to the Board for Industrial and Financial Reconstruction (BIFR).
Proponents of privatization say that, it is the time now to push the process further so as to free labor and capital from the loss-making firms before they turn out to be “zombie firms” (a popular term used to describe loss-making firms in Japan that tend to have low or negative productivity for many years and drag down the productivity performance of the overall economy). Many even highlight positive outcomes from some of the strategic sales that include Modern Food Industries (bought by HLL), Bharat Aluminium Company Limited (by BALCO), VSNL (by Tatas) etc.
However, a section of experts caution that privatization is not the panacea. The government needs to consider other alternative models like leasing out, while retaining ownership of a PSU, besides exploring approaches like according greater autonomy, bringing in professionals, and doing away with protectionist regime could ensure improved performance for PSUs. Further, to make the case for privatization strong, the government also needs to ensure transparency in the privatization process, protection of the workers’ interests, avoiding politicization of the process, devising strategies for effective use of the disinvestment proceeds, guarding against selling away profitable PSUs at throw-away prices, and taking employees and all affected parties into confidence.
Experts feel that the disinvestment process that was initiated about one-and-a-half decades ago has clearly gone off track. Though successive governments since 1991-92 promised to make bold decisions and achieve major breakthroughs with clear cut milestones for each financial year, the government’s move of, since 2005-06, not keeping any fixed targets tell a lot about a program being stuck owing to compulsions of coalition politics. So far, the privatization program has remained limited to 100% divestment in a handful of profit-making PSUs CMC, VSNL, Balco etc. Beyond which there are some stray cases of divestment of limited stake in a few profit-making PSUs. A major problem, critics cite with respect to the disinvestment agenda, is that it has been done largely with the sole objective of reducing the country’s fiscal deficit rather than aimed at improving performance of the concerned PSUs. Inconsistency in policies of successive governments at the center during the last one decade and a lack of consensus among coalition partners in the government has seen the government following a ‘blow hot, blow cold,’ approach regarding its privatization program. Further, growing protests among workers and trade unions along with compulsions of coalition politics, they all have ensured that privatization program reach its logical end. This is evident in the fact that even today there remains a number of PSUs which are chronically-sick and loss-making.
Conclusion
Given that the reforms were started with the objective of improving the operational efficiency and hence productivity of the government-owned enterprises, it was imperative that the government initiated appropriate and sound measures to bring down the burden on exchequer by getting rid of loss-making units and also exiting businesses such as hotels and hospitality, and better let the private sector play a role here.
The big question, however, is: Will the privatization meet its logical end, at least in long-term, if not in the near future? The government’s dilly dallying over privatization of Air India and Indian Airlines do not inspire confidence. And so the inordinate delay over the fate of MTNL and others slated for privatization. For now, it appears the IPO route is the only way disinvestment could go, however, it is doubtful that IPOs alone could help them much in absence of professional management, market-orientation, and autonomy. To conclude, it is imperative that to survive and sustain in the long-term PSUs would need all these and hence it is imperative that the government develop a long-term perspective and devise mechanism, which is transparent and has a wider acceptance, to take the privatization program to its logical end.
N Janardhan Rao, Lead Economist
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