PSUs HAVE OUTLIVED THEIR NECESSITY AND SHULD BE DISINVESTED??

When India became a republic on 26^th January, 1950, the first Prime Minister of India, Pandit Jawahar lal Nehru had a vision for the Indian economy which later came to be known as Nehruvian Socialism. After 200 years of suffering at the hands of a foreign power, who came to the country masquerading as businessmen, he envisaged a socialist economy in which there will be barriers for the entry of foreign firms, the government will do most of the production with public money, and the benefit will go back to the people. It looks good on paper. But as the years went on, it became increasingly clear that the economic paradigm of Nehruvian Socialism had problems. No competition for the PSUs, less job creation, underutilization of resources and faulty allocation of taxpayer money came to be associated with it. But the public sector grew organically. By 1970s it was about one fifth of the total GDP and by 2004 one fourth of the total GDP. The number of PSUs has now increased to 242, with a massive total investment of Rs. 2,74,114 crore.

As time went on it became clear that there were a lot of businesses in which the government had no social goal to fulfil and it should exit those businesses. A lot of PSUs have been privatised since. But a lot of other PSUs have not been privatised. There are a lot of factors which may work against the logic of privatisation. There are social goals which a PSU can fulfil. One of those is keeping the prices in check. A PSU in any sector would ensure that if the other private companies form cartels and try to sell at higher prices, there will be at least one company to go to. There are a lot of sectors like banking, steel, coal in which the government operates not with the motive of making profit, but with the motive of fulfilling social goals. The government wants banks to set up branches in rural areas where the profitability might not be high enough to attract private players. There it needs PSU banks. Government needs guaranteed coal for the power plants even at the cost of making less profit. Thus it needs PSUs like CIL, which it can control by issuing presidential directives! It needs financially disciplined insurance companies to serve the needs of the people. Thus it needs insurance companies in both life and general insurance segment.

Given these social goals, the government will not want to exit from some of the sectors. But given the inefficiencies and non competitive environment which some of these PSUs operate in, is the resource and factor allocation really optimal? Should a private company, which operates more efficiently, is very competitive, gets more work done with less labour and capital, not get preference for the allocation of labour and capital? The truth is that a lot of PSUs survive on  bailouts which the government keeps providing them time and again. Air India is a case in point. A 30,000 crore bailout has been doled out to the erstwhile Maharaja last year, with no guarantee that the airline will operate efficiently. PSU banks are recapitalized time and again by the government. All this also creates a distortion in the sector where the private players are disadvantaged vis-a-vis their PSU counterparts.

The government had set a target of 30,000 crore to be raised through divestment this fiscal. So far it has been able to raise about 6,900 crore. In 2011-2012 fiscal year in order to complete its disinvestment targets the government tried a share auction of ONGC. Since during the whole day of the auction there was not much buying in the auction, the government had to summon LIC to pump in Rs. 11,426 crore and pick up a 4.4% stake in the company. Now one could easily make out that this is transfer of money from one hand of the government to the other. This fiscal too the government is going to set a target of 30,000 crore. It may achieve higher than the previous year because of the market rally. But still a lot of companies which the government has put up for disinvestment are not expected to attract too much attention from the investors. In such a situation what the government is left with is clever manoeuvring like the ONGC fiasco. Just recently 3 coal mines have been returned to NTPC ahead of its 12,000 crore disinvestment plan. How much these manoeuvres yield results remains to be seen. In September 2012, disinvestment has been approved in four PSUs; MMTC, Hindustan Copper, Nalco and Oil India.

So that brings us to the question. Is disinvestment such a big urgency that it has to be done irrespective of the prices expected? Well possibly no. Although it may so happen that in the next 20-25 years we may feel the need to privatise all the PSUs because they would not be able to compete with the private firms in their industry, but now is not the time for that. Also, the process of disinvestment has to be carefully planned. The PSUs have some social goals to fulfil. But when these huge behemoths are divested, conflicts of interest may arise between the interest of the shareholders and the purported social goals. The CIL v/s TCI spat is a case in point.

To sum up, disinvestment of PSUs can bring more efficiency into their functioning, but there are social goals which a government has to fulfil. So, the disinvestment process has to be done strategically by carefully selecting the sectors and the impact of the disinvestment on these sectors in terms of the conflicts of interest that might arise. Also, these huge behemoths hold a lot of resources and capital. If managed efficiently, these can actually earn a lot more revenue for our fiscally starved government.