Disinvestment in India

Privatisation of public sector enterprises in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Privatisation of PSUs

The article suggests the privatisation of public sector enterprises by analysing their performance and devising strategy for privatisation accordingingly.

Three categories of public sector enterprises

1) Sick for long time and beyond redemption

  • There is the category of enterprises which have been sick for a long time.
  • Their technology, plants and machinery are obsolete. 
  • They should be closed, and assets sold.
  • The labour in these enterprises have had a political constituency which has prevented closure.

What should be done with these enterprises?

  • The Government should close these in a time-bound manner with a generous handshake for labour.
  • After selling machinery as scrap, there would be valuable land left.
  • Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
  • All this would need the creation of dedicated efficient capacity as the task is huge and challenging.
  • These enterprises may be taken away from their parent line Ministries and brought under one holding company.
  • This holding company should have the sole mandate of speedy liquidation and asset sale.

2) Financially troubled but can be turned around

  • Private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
  • Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.

What should be done with these enterprises?

  • Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
  • As valuation rises, the Government could reduce its stake further and get more money.
  • If well handled, significant revenues would flow to the Government.

3) Profitable enterprises

  • Pragmatism instead of ideology should guide thinking about them.
  • The Chinese chose to nurture their good state-owned enterprises as well as their private ones to succeed in the domestic and global markets by increasing their competitiveness in cost, quality, and technology.
  • The Chinese chose to promote both their public as well as their private sector enterprises to rise.
  • Both have made China the economic superpower that it is today.

What should be done with profitable enterprises?

  • The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
  • Calibrated divestment to get maximum value should be the goal instead of being target driven to get a lower fiscal deficit number to please rating agencies.
  • In parallel, managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.

Challenges

  • First, the number of Indian private firms which can buy out public sector firms are very few.
  • Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
  • Then, these successful large corporates need to be encouraged to invest and grow both in brownfield and greenfield modes in the domestic as well as international markets.
  • Sale at fair or lower than fair valuations to foreign entities, firms as well as funds, has adverse implications from the perspective of being ‘Atma Nirbhar’.
  • Again, greenfield foreign investment is what India needs and not takeovers.
  • Public sector enterprises provide for reservations in recruitment.
  • With privatisation, this would end and unnecessarily generate social unrest.

Conclusion

Would it be in India’s interest to lose the strategic capacity that its ownership of public enterprises including financial ones provide it? It would be better to think carefully now.

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