Partial divestment better than full sell-off

The finance minister has set a target of mopping up Rs 40,000 crore through disinvestments this fiscal.

Since last year, disinvestment has taken place in Oil India, NHPC, NTPC and Rural Electrification Corporation (REC) while the process is going on for National Mineral Development Corporation and Satluj Jal Vidyut Nigam. Notwithstanding the lukewarm response to sale of equity in the power PSUs NTPC and REC, the government plans to press ahead with disinvestment.

Public sector undertakings (PSUs) were set up specifically to meet felt gaps in the social and economic development, such as industrial growth, economic development, provision of amenities, health, education, etc. Their contribution to economic and social development cannot be wished away. It is to the credit of the public sector that services like electricity, transportation, medical care and irrigation have reached people in far-off places. Not for nothing have critics railed against proposals to privatise these units.

The government has in the past faced opposition from various social and political pressure groups in undertaking privatisation. However, the absence of effective corporate governance mechanisms and apprehensions about job losses are hastening the call to full privatisation.

Disinvestment, or the process of diluting government stake in public sector units, is a part of the Industrial Policy 1991, which introduced liberalisation and privatisation into the Indian economy and outlined a completely new approach to Indian public sector units.

As per the Cabinet’s decision, all listed profitable PSUs should have a public holding of at least 10% and all profitable unlisted PSUs should be listed while retaining 51% equity or more and the management control with the government.

As per the criteria, as many as 60 PSUs are eligible for disinvestment.

That would encourage citizens’ participation in management of public enterprises and improve the capitalisation of stock markets. Listing of enterprises on the bourse adds certain economic and financial benefits to the economy. This is known as financial deepening, a term used by development economists.

Deepening share ownership, or making available new stocks to be held by individuals, generates large investible funds. It is evident from the fact that market capitalisation of five companies, which have been listed since October, 2004, has increased by 3.8 times from the book value of Rs 78, 841 crore to a whopping Rs 2,98,929 crore, making a case for the disinvestment programme.

Therefore, partial disinvestment seems to be a feasible alternative to full privatisation as financial deepening improves the efficiency of the financial system as well as contributes to GDP growth.
There are few positive international experiences of public sector reform. Empirical work by Duncan and Bollard (Corporatisation and Privatisation: Lessons from New Zealand, Auckland: OUP, 1992) also supports the reform alternative. They found that New Zealand’s corporatisation efforts in the mid-1980s resulted in efficiency and financial gains in 10 out of 11 enterprises studied.
Work by Pinto, Belka and Krajewski (Transforming State Enterprises in Poland, Brookings Papers on Economic Activity, 1993) confirms that there were significant improvements in the performance of most manufacturing firms subsequent to Poland’s ‘big bang’ reforms of January 1990, which included deregulation of prices and introduction of competition in many industries.

China’s experience of public sector reform is also worth highlighting. China has moved cautiously in its privatisation efforts. It privatised only smaller state owned enterprises (SOEs), while the government has retained control over the larger ones. Li (The impact of economic reform on the performance of Chinese state enterprises 1980-1989, Journal of Political Economy, 105, 1997) also documents marked improvements in the marginal productivity of factors and in the total factor productivity of 272 Chinese SOEs over the period 1980-89, resulting from reforms initiated in 1979. China has gradually introduced reforms of SOEs and their performance has improved as a consequence of such reforms.

Various writers have come out in support of such reform.
Yarrow (Privatisation in theory and practice, Economic Policy, 2, 1986), argues that competition and managerial accountability are more important than privatisation, per se, in promoting economic efficiency.

Bardhan and Roemer (articles on market socialism in Journal of Economic Perspectives, 6, 1992), argue that suitable mechanisms can be designed to insulate private actors from undue state interference, and efficiency can be achieved by corporatisation, deregulation and competition, without resorting to privatisation.
In the Indian context, Sivadasan (Reforming PSE: lessons from the Indian experience, curriculum paper, Graduate School of Business, University of Chicago, 2002) investigates the impact of the public sector reform measures of partial-privatisation and increased autonomy, along with the competition enhancing deregulation and liberalisation policies adopted by the Indian government in the 1990s. The results of this study support that increased competition leads to improvements in efficiency.
Therefore, making partial disinvestment of public enterprises may be beneficial for the economy also.

For utilising disinvestment proceeds, the government constituted the National Investment Fund (NIF) in 2005, though it became operational from 2007. The government decided that 75% of NIF’s annual income should be used in various social sector schemes, while the rest should go for revival of Central PSUs.

Looking at the high fiscal deficit of 6.8% of GDP for the current financial year and objectives of Fiscal Responsibility and Budget Management Act, the government may keep the NIF on hold for sometime, which would enable it to channelise disinvestment proceeds in the Consolidated Fund of India for bridging the burgeoning fiscal deficit.

The writer is associate professor, Institute of Management, Nirma University and can be reached at deepak_bitm@rediffmail.com. Views are personal.