India budget 2021: Will PM Modi hasten stake sale of state-run entities?

Various governments in India, except for the Vajpayee administration, have fallen short of goals to privatise public sector undertakings and such moves have always been under the lens of government agencies. Will India’s Finance Minister bite the bullet and take a leaf from Dr Manmohan Singh’s 1991 book?

By Dhirendra Tripathi

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Published: Sat 30 Jan 2021, 10:03 AM

India’s Union budget for the financial year 2021-22, which runs from April 1 to March 31, to be presented on February 1 by Finance Minister Nirmala Sitharaman, is expected to go big on the divestment of stake in public sector undertakings (PSUs), a label for government-owned enterprises. It’s an exercise successive Indian governments, irrespective of the party, have been both wary of and ambitious about but largely failed in through the years.

It’s important to understand why proceeds from dilution of government’s stake in various PSUs over the last two decades or so have been short of targets before we discuss why this year’s budget could be the big bang on divestments. The genesis of this is in the country’s divisive politics.India, where social divides of several hues still run deep and disguised unemployment is rampant, PSUs have long been seen as an equal-opportunity job provider. The ‘Temples of Modern India’ set up large steel and power plants in backward areas and provided employment to millions of people, in a bid to alleviate poverty and deliver social justice.

Those companies also came at a time, mostly in the 1960s and 70s, when private capital formation was minimal. Scientific and technical know-how lay with the Western nations and India was dependent on them. All of it was also in line with the socialistic vision and philosophy of India’s first Prime Minister, the late Jawahar Lal Nehru, and subsequently his daughter, the late PM Indira Gandhi. Private businessmen were frowned upon those days, which, unfortunately, became the DNA of successive governments.

As the country began to unshackle its economy with the 1991 reforms, expectations were that its PSUs, many of which by then had come to be dens of militant unions and lethargic bureaucracy, would be got rid of. But governments, sensitive to social backlash and afraid of being seen as pro-capital and crony capitalism, went slow. A private enterprise isn’t bound by PSUs’ norms, where the latter has to defer to affirmative action and other corporate social responsibilities (CSR).Barring the Atal Bihari Vajpayee dispensation (1999-2004), which managed to privatise a few government-owned companies — namely Videsh Sanchar Nigam Limited (now known as Tata Communications Limited), Bharat Aluminium Company Limited (Balco), Indian Petrochemicals Corporation Limited (IPCL), Hindustan Zinc Ltd, CMC Ltd, Jessop & Co Ltd — all other governments, including the current Narendra Modi administration, have so far chosen the politically sound route of divestment to reduce their stake in the companies and raise resources.

There are many reasons behind it. One, it allows the government to reduce its stake to fund the fiscal deficit while ensuring it retains more than 51 per cent stake in the company. This way, it raises resources while retaining control over the enterprise. Secondly, the government’s stake, to the extent it is sold, goes into the hands of various financial institutions as well as the general public without inviting any allegation of selling the family silver to a capitalist.

Parliamentary elections in India take place once every five years while a state or a union territory (UT) goes to polls every now and then.

PSUs often employ locals and can sometimes be the only employer in an area. A government withdrawing from it is also bad optics that political parties would stay away from. India has 28 states that also go to the polls every five years. So do some union territories like Delhi and Puducherry.While the share of the private sector in the economy has risen since the days of liberalisation, the market capitalisation of the government-owned enterprises has eroded, or mostly, has been an under-performer. One just has to look at Bharat Heavy Electricals Ltd, NTPC Ltd, and Mahanagar Telephone Nigam Ltd (MTNL) and get a sense of the massive erosion of shareholder value. Of course, there can be exceptions like the 2019 bumper initial public offering (IPO) of Indian Railway Catering and Tourism Corporation (IRCTC), an Indian railways’ subsidiary, but that’s a monopoly, and exceptions are bound to exist.Of course, the business realities count too. The world is moving away from coal-based plants, the mainstay of Bharat Heavy Electricals Limited’s (BHEL) business that makes equipment to generate thermal power. Similarly, MTNL or the unlisted Bharat Sanchar Nigam Limited (BSNL) has lost out due to older technology and nimbler private sector rivals.Not just the public, the government is a loser as well because the value of its shares has eroded.

That has left the government with fewer options. Indian markets, mirroring those in the rest of the world, have developed over the last two decades. There are enough quality companies for investors.

There is no attraction to buy government-owned companies. Investors also realise that the government’s dilution of its stake isn’t tantamount to a more efficient enterprise, which would otherwise be expected to be more accountable to the demands of the capital market.While there has been much debate on how the mop-ups from the sale of stakes should be used, the sums garnered have so far gone into funding the large fiscal deficits that Indian governments have run up all these years to fund their populist welfare schemes.So how could this year’s budget be a big bang? The government is likely to push for both outright privatisation and divestment, which in the latter case, translates to a stake sale in its companies through IPOs and offer for sale of its already-listed enterprises.

It’s not that the government has not enjoyed the success of its previous privatisation efforts. Consider this. The government sold 25 per cent out of its total holding of 52.9 per cent stake in 2002 in Vidhesh Sanchar Nigam Limited (VSNL) to Tatas at Rs 202 per share. That share alone worth is close to Rs1,000 today, not counting the billions received in dividend and dividend tax subsequently. The government still retains 74.44 million shares, or 26.12 per cent equity in the company.Be that as it may, it is also now clear that private companies are unwilling to have a government nominee sit on the board of a company it has come to acquire through a transparent process – a reality if the government continues to hold a stake in the company even as its day-to-day control has been handed over to a private entity.

The government’s restrictions on retrenching employees and usage of the land of the company, even after the stake sale, have been other hindrances in attracting private companies to buy its companies. It’s no surprise then that its attempts to privatise Air India, initiated in 2017, have so far failed. Of course, the government seems determined in executing that privatisation along with that of oil refiner Bharat Petroleum Corporation Limited (BPCL) and continues to remove impediments to the two processes. Past privatisations were subjected to investigations by various government agencies. It only led to bureaucrats sitting on files, lest they were hounded by investigative agencies of subsequent governments led by other parties. The United Progressive Alliance (UPA) government’s first term between 2004 and 200 and led by Dr Manmohan Singh, the architect of the 1991 reforms as finance minister then, investigated officials and former disinvestment minister Arun Shourie during the Vajpayee era for allegations that they sold stakes cheap.However, no skeletons were found in the cupboard.It’s likely that privatisation is now going to be high on the agenda, given that the government is going to massively fall short of its Rs2.1 trillion divestment target for the ongoing financial year. The government has managed to garner only close to Rs 180 billion during this fiscal. This excludes dividends declared by its companies and receipts from the sale of bonds under exchange-traded funds.

The change in the government’s stance, first noticed in former finance minister late Arun Jaitley’s 2018-19 budget when he used the word ‘privatisation’, stems from other reasons too. The recent slew of labour and farm reforms indicates that the government has shed its dithering.Increasingly, there is also a realisation in the corridors of power that a booming stock market doesn’t necessarily translate into a higher market valuation of government companies.The S&P BSE Sensex, the benchmark share index of the country and Asia’s oldest stock exchange, the BSE, touched its 2020 low of 25,638.90 on March 24. It almost doubled since to touch a lifetime high of 50,184.01 on January 21 this year. In the same almost 10-month period, the S&P BSE PSU, an index tracking public sector undertakings, gained a little over 50 per cent to move to 6,021.90 from 4013.91. Sure, statistics carry their own biases, but the proverbial family silver is no longer getting the government the bang for its buck even as it milks them more every year for higher dividends.“

In light of the pandemic and revenue collections having suffered from a lockdown, India’s fiscal deficit is expected to be 7 per cent of GDP for 2020-21. At this critical juncture, it may look odd to talk about fiscal discipline, and with the Indian government needing access to all available resources, disinvestment should be aggressively undertaken and figure prominently in 2021-22 budget,” says Dr  Pooja Misra, associate professor of economics at Birla Institute of Management Technology, Greater Noida, bordering the national capital, Delhi.

The Union Cabinet, the apex decision-making body of the government comprising the PM and senior ministers, recently approved the much-awaited policy on the privatisation of PSUs. Details are expected to be announced in the budget.The government aims to limit the presence of PSUs to one to four in strategic sectors while privatising or merging others. The state plans to completely withdraw from companies in non-strategic sectors.The government has already appointed merchant bankers to dilute its stake – could be anywhere between 5 per cent and 10 per cent - in Life Insurance Corporation (LIC).

The budget could also talk about the merger of more public sector banks. Since 2017, the number of such banks has come down to 12 from 27. There is no denying that India needs bigger PSU banks to fulfil social sector needs but it also needs fewer of them, given that many of them require capital infusion from the government time-to-time. Most are also ill-equipped to compete in the fast-changing world of banking and finance which is moving to a more tech-based ecosystem (fintech) from the bread-and-butter branch-based banking of credit and deposit.India, like many other economies, reforms in times of adversity.

That time is now like it was in 1991.Even as circumstances were very different and India is on a far more solid footing now, Sitharaman could borrow from Dr Singh’s 1991 concluding speech:  “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

Dhirendra Tripathi is a senior journalist based in Delhi, India

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