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ShareOne of the paradoxes concerning former finance minister P Chidambaram is that he had the best ideas, but only an average ability to implement them.
Early in the UPA government's first tenure, he talked about outcomes being more important than outlays. His own tenure ended up being largely about outlays. His main legacy is a humongous Budget deficit that we didn't have even in the darkest days of 1991.
He talked about simplifying taxes and then went on to create a complete alphabet soup of new taxes (DDT, FBT, BCTT, CTT, STT), half of which are now being abolished by his successor Pranab Mukherjee.
When he was not a minister, Chidambaram came up with another brilliant idea -- that we don't need disinvestment. We need investment.
This was an effort to belittle disinvestment minister Arun Shourie's enthusiastic -- and sometimes mistimed -- efforts to sell some public sector units to the private sector. But during his own reign as finance minister till last year, we heard very little about the idea.
Chidambaram, in fact, tried to push disinvestment in the initial years, only to be rebuffed by his own party (no doubt under Leftist pressure).
This essay is about the real merit in what Chidambaram said. Let's be clear. India's biggest challenge is to get investment going -- in infrastructure, in our banks, in our energy companies, and in our public and private sector companies.
The best thing about Pranab Mukherjee's recent Budget is that he didn't mention the D-word -- disinvestment. Instead, he talked about giving the public a share of ownership in government companies, listing more of them on the stock exchanges, etc.
However, despite his intelligent handling of this political minefield, I suspect that the real idea of listing public sector companies is to camouflage his disinvestment agenda. Every time the government lists a public sector company, it will probably offer some of its own shareholdings for sale, thus leading to disinvestment by the backdoor.
This is a very bad way to list public sector companies. Almost all of them need capital, and giving away government-owned capital to the public is not going to help them. When the government disinvests, the money raised goes to its coffers, when it is the company that needs the capital.
The best way to help the public sector is to allow it to raise capital directly from the markets without government shedding it own holdings. If money is raised this way, the company gets resources for investment and growth. The government benefits later, when business grows and more taxes are paid by the public sector company as a result.
Disinvestment, especially when it does not result in a change of ownership, is the best way to kill the public sector, a little bit at a time. This suits private sector rivals fine.
Look at the number of profitable public sector companies that have come to grief due to this policy of not investing adequately in the public sector. The telecom companies MTNL and BSNL are struggling to maintain their profitability in a competitive marketplace. The oil companies are comatose. Air India is on its last legs. Many public sector banks are unviable, but government ownership keeps them afloat with barely adequate injections of capital.
The moral of the story is this: to survive, all companies need capital investment. Government companies are not exceptions to this rule. Disinvestment makes sense only when the idea is to enable them to raise capital for their use and grow. Governments should not be using disinvestment proceeds to plug the gaps in their Budgets.
That's like selling the family silver to buy food. While there is nothing morally wrong in this, we should be clear that this is not about helping the public sector companies. Disinvestment anyway provides only one-time revenue buoyancy to the exchequer.
In the long run, therefore, there are only two clear options: if a company has to remain in the public sector, it should not be listed.
If it is listed, its management must be given autonomy to raise capital, and government must be prepared to be treated like any other shareholder. If it does not want to invest further, it must allow a company to dilute its holdings through higher infusions of public equity. The best option after that is to let private bidders buy the company by making open offers for the outstanding equity.
The second-best option is to issue a golden share so that government keeps 51% management control, but economic ownership passes on to ordinary shareholders. The worst option is to disinvest by selling equity to the public in bits and pieces. This way, the government never gets full value for its holdings, and the companies themselves get the worst of both worlds: bureaucratic mismanagement and capital starvation.
