With a Government that is looking at the sale of PSU assets including under-utilised plants and land, it makes sense to look at rapid denationalisation, thereby creating a vibrant space for the private sector
The Finance Minister has indicated that BPCL (Bharat Petroleum Corporation Limited) and Air India are likely to be privatised by March 2020. This is an extremely significant development as India hasn’t seen big ticket privatisation since the Atal Bihari Vajpayee Government between 1999-2004. Although, there were attempts to privatise Air India in the previous tenure of the Narendra Modi Government, however, the terms didn’t generate adequate interest. Things have changed since then and we’ve seen many investors express interest in acquiring Air India. Privatisation of Air India is not just about freeing critical taxpayer resources that are deployed to keep the debt-ridden airline alive but it is more about a signal to the world, that the Indian Government is finally back on track to gradually move out from businesses. This implies a greater role for the private sector in the Indian economy — a welcome sign for the rest of the world that is looking at India as the next driver of global growth.
The fact that we’re looking at privatisation should not come as a surprise given that Modi himself mentioned how the Government has no business to be in business. Therefore, a mandate of 303 gives him the necessary political capital to denationalise many of our public sector assets. The sale of BPCL is perhaps more significant as unlike other Public Sector Undertakings (PSUs), it is not exactly a loss-making enterprise funded by taxpayer largesse.
However, its operations in an oligopolistic setting mean it is yet one of the least-efficient companies in the sector. Therefore, clearly, the new rule for privatisation is not just about getting rid of loss-making PSUs but instead getting rid of any inefficient unit that can be better operationalised in the hands of the private sector.
This renewed approach towards privatisation is indeed required in order to transform the Indian economy and therefore, while political opposition may persist to the move, the potential benefits from such a move will overshadow any such resistance. It is important to recognise that a major share of wealth created in India happened post-1991 reforms where the Indian Government removed the policy of licensing.
In fact, ever since such requirements began to be muted in the 1980s, we see a sharp increase in India’s growth rates. All of this reveals an undeniable fact that India’s growth has accelerated ever since we embraced private capital. Therefore, getting rid of these companies will result in an overall value creation, not just for these firms but also for the rest of the economy.
The biggest advantage of privatisation over disinvestment is that it facilitates the change in management of these PSUs. A major reason why the PSUs are not as efficient as the private sector is their management and the lack of an incentive structure that focuses on economic efficiency and generation of private profits.
Therefore, while disinvestments would result in non-tax revenues for the Government, the management remains largely the same. However, the management remains largely the same. Therefore, there are limited implications for broader wealth creation for these companies through disinvestment.
The timing of privatisation is also critical as it comes at a juncture when our growth has slowed down. Therefore, privatisation will have two positive implications for the economy. First, it will revive the sentiment and since economics is about self-fulfilling prophecies, a positive sentiment is critical towards accelerating the process of growth recovery. The second aspect is more transactional as it is to do with public finances.
During an economic slowdown, a Government’s tax revenues don’t grow as per expectation. We see some of this in the current financial year as there’s a major revenue shortfall which is likely to affect the financials of the Government. The other aspect is that since deficit is reported as a percentage of the Gross Domestic Product (GDP), slow growth will amplify the amount of deficit during slow growth years.
However, privatisation can bridge the deficit through non-tax revenues and its positive impact on sentiment will also have a muted, yet important second order effect on growth rates. Just as the Government is looking to privatise Air India and BPCL, it is also looking to revive BSNL (Bharat Sanchar Nigam Limited) and MTNL (Mahanagar Telephone Nigam Limited). The plan to introduce a voluntary retirement scheme and to merge these two enterprises is good. However, it will succeed only if we scale down their operations significantly. That is, the Government should downsize the merged entity and retain only the strategic operations of the company while the rest of it and its assets can be sold off to private players.
With a Government that is looking at the sale of PSU assets including under-utilised plants and land, it makes sense to look at rapid privatisation, thereby creating a vibrant space for the private sector. The exit of the Government from production will free up critical resources that it can then devote to enhancing State capacity and provisioning of the public goods and services.
(The writer is a New Delhi-based public policy researcher)