PSU Silver Bullet

When Narendra Modi was chief minister of Gujarat, many believed privatisation of the state’s cash-rich public sector units (PSUs) would be a priority. It turned out that while Modi turbocharged foreign and domestic investment with “Vibrant Gujarat”, privatisation of the state’s PSUs did not take off.

On Modi assuming office as prime minister in May 2014, it was again widely expected that privatisation of central PSUs would form a part of his reform agenda. After all, former Prime Minister Atal Bihari Vajpayee had made privatisation a key reform of his government in 1998-2004.

To stem criticism from the Left that he was selling the family silver, Vajpayee had called his privatisation programme “disinvestment”. Arun Shourie was appointed Minister of Disinvestment in 2001. Diligent as ever, Shourie quickly got down to work. Several PSUs were privatised – or disinvested – during his ministership, including Maruti, VSNL and Hindustan Zinc.

The bureaucratic antipathy towards privatisation – most PSUs have bureaucrats as chairman or directors – torpedoed the programme following the controversial privatisation of Centaur Hotel which was investigated for financial irregularities.

When Modi took charge as prime minister in 2014, Shourie was back in the reckoning as the BJP’s likely new finance minister who would give PSU privatisation new impetus. By now, however, Shourie had moved from Delhi to Lavasa, the township located between Pune and Mumbai. He was summoned to Delhi by the incoming BJP government. The general impression was that he would be given an important portfolio – finance or a revived disinvestment ministry. In the event, he got neither. Shourie returned to Lavasa a bitter man. The new finance minister was Arun Jaitley.

During the first two Modi terms, privatisation of PSUs was still a priority. The Life Insurance (LIC) disinvestment was a success. But there were few others bar Air India. The aborted disinvestment of Bharat Petroleum (BPCL) was a signal: privatisation was no longer in favour. The numbers told the tale. In the 2020-21 Union Budget, the target for disinvestment was Rs 2.10 lakh crore. By the 2023-24 Union Budget, the target had dropped to Rs 51,000 crore.

*Bull by the horns
The bull market has meanwhile raised the market value of India’s stock market to over $5.3 trillion. This presents a new opportunity for the Modi government to monetise PSUs without actual privatisation. There are over 56 listed central government PSUs. Most recorded surging profits in 2023-24. According to data published in Mint, the 56 listed PSUs recorded a 48 per cent increase in net profit over last year. Their combined net profit was over Rs 5 lakh crore. These PSUs include State Bank of India, LIC, ONGC, Indian Oil and Coal India.

The market value of listed PSUs doubled from $404 billion in 2022-23 to $804 billion in 2023-24. That puts the valuation of PSUs within reach of $1 trillion (Rs 83 lakh crore) by end-2024. The government now has an opportunity to balance its books by divesting small tranches from its PSU holdings. Even a two per cent annual divestment across listed companies currently valued at $804 billion (Rs 68 lakh crore) would fetch the treasury Rs 1.36 lakh crore – more than double the privatisation target in last year’s Union Budget.

This does not mean privatisation of specific PSUs can’t go ahead simultaneously. The strategy should be to fix a privatisation target in the Union Budget (as is customary) along with a new separate market divestment target. With the stock market likely to rise in the long term by a compounded annual growth rate (CAGR) of around 12 per cent, divestment of two per cent among listed PSU stock could be replenished within months while adding significantly to government revenue.

As Mint pointed out: “With such good valuations, the government will get the best possible price for its stake. It needs money to invest in infrastructure and spend more on education and health without upsetting fiscal consolidation. Divestment will help it raise the necessary resources. The money can also be used to pare its debt which is currently at unsustainable levels.”

But the newspaper also sounded a word of caution: “In the last five years, the Centre planned divestments of Rs 6.16 lakh crore and all that it managed to achieve was Rs   1.79 lakh crore. Even here, the bulk of the proceeds came from the sale of minority stakes. The only exception has been the divestment of Air India. Not once since FY19 has the government come even close to meeting its divestment target. This despite the target being reduced every year since FY21. In FY24, all it managed from divestment was Rs 30,000 crore.”

The problem is bureaucratic stasis. PSUs lie within the bureaucratic domain. Many provide sinecures for retired IAS officers on the boards of PSUs. Full privatisation, as in the case of Air India, deprives them of that privilege. Market sales will sidestep the problem. Monetising a small stake sale in cash-rich PSUs will keep government administrators in control while providing additional funds.

Modi has relied on bureaucrats to run his pet schemes. He put his former principal secretary Nripendra Misra in charge of the Ram Mandir project. The prime minister’s office (PMO) is packed with former bureaucrats and domain-specific technocrats. It is no coincidence that the two most prominent and successful ministers in the Modi cabinet are a former IFS officer (External Affairs Minister S. Jaishankar) and a former IAS officer (Railway, IT and I&B Minister Ashwini Vaishnaw). The Gujarat model was exactly the same. Senior IAS officers did the heavy lifting on both policy and execution.

In his third term, the prime minister can employ a new hybrid disinvestment model – privatisation and market divestment – that would have appealed to both Vajpayee and Shourie.