The Privatisation Puzzle
The argument that privatising public sector units (PSUs) is akin to selling the family silver deserves to be buried for good. The sovereign – the Indian government – is a bad money manager. Yet it holds on behalf of the people of India shares in hundreds of PSUs. Around 70 central PSUs, including ONGC, NTPC and GAIL, are listed on the stock exchange: their combined value is around Rs 23 lakh crore. Many more, including potential blue chips like BPCL, are not.
Among the biggest is Life Insurance Corporation (LIC). Its initial public offer (IPO) will open several jaundiced eyes. The government owns 100 per cent of LIC’s equity. By divesting around five per cent this fiscal, the exchequer will receive, depending on issue pricing, around Rs 75,000 crore. The government’s 95 per cent balance shareholding in listed LIC will be valued, according to market projections, at over Rs 15 lakh crore. That is nearly two-thirds of the market capitalisation (Rs 23 lakh crore) of all 70 listed central PSUs. It underscores the hidden value that resides in India’s unlisted central and state PSUs. This wealth belongs to the people of India. The sovereign government is merely its guardian, holding that wealth in trust.
Political leaders of a certain persuasion have strongly criticised privatisation. Congress leader Rahul Gandhi declared grimly: "The youth need jobs but the Modi government is destroying employment and capital by privatising PSUs. Who is benefitting? It is only doing development of a few ‘friends’, who are close to Modi. Stop privatisation. Save government jobs."
This of course is standard political rhetoric. Gandhi knows as well as anyone else that the government has no business being in business. The 67-year-long saga of nationalised Air India does not bear repetition. Not only was Air India losing over Rs 9,000 crore a year under government ownership, it was subverted by corrupt ministers and bureaucrats, leading to a loss of revenue and profitable Gulf routes.
When PSU shares are listed, they go into the hands of their true owners – the Indian public. Some go to Indian financial institutions and mutual funds, the majority of whose stakeholders again are Indians. Many shareholders are middle-class professionals, several are women and increasing numbers are young. It builds their personal wealth, helps pay for education, and acts as a retirement fund for senior citizens.
In a country like India where social security is largely absent, the elderly are forced to depend financially on their children. Small equity holdings in divested companies like LIC can be a Godsend.
How should the Indian government take privatisation forward in 2022-23 after LIC’s IPO? The Union Budget has targeted a modest revenue of Rs 65,000 crore from divestment. The government is clearly worried about trade unions protesting against full-throated privatisation.
Public sector bank unions have held a series of strikes over the past few months. They fear job losses as privatised banks prioritise efficiency and productivity. They overlook history. One of India’s most successful “private” banks, ICICI Bank, was a progeny of the Industrial Credit and Investment Corporation of India (ICICI), promoted by Indian public sector banks and insurance companies along with the World Bank.
ICICI Bank was privatised and listed on Indian stock exchanges in 1998. Its ADR was listed on the New York Stock Exchange (NYSE) in 2000. ICICI’s market cap is today over Rs 5 lakh crore – higher than the market cap of the State Bank of India (SBI).
The government should not back away from more privatisation in the face of union threats. It withdrew three progressive farm laws because wealthy farmers in Punjab and Haryana threatened the BJP’s electoral prospects in western Uttar Pradesh. The government is moving forward gingerly on labour legislation. It has mothballed the land acquisition bill. Privatisation must not be allowed to fall victim to either blackmail or political and bureaucratic inertia.
The economist and journalist Swaminathan Aiyar wrote recently in the Sunday Times of India: “One solution would be to sell 1 per cent of the shares of selected PSUs every month at the going market price. That would avoid accusations of under-pricing and cronyism. Right now, we hear constant fears of what might go wrong and how structures and procedures must be devised to avoid scam accusations and ensure a good sale price. By all means, address those issues, but meanwhile, keep selling 1 per cent per month so that money for fresh investment keep rolling in and is not hostage to constant roadblocks from vested interests.”
Following LIC’s listing, the market capitalisation of central PSUs will climb to around Rs 40 lakh crore. Assuming arise in their value, at a conservative average growth rate of 10 per cent a year, the valuation of the government’s listed stocks will increase by around Rs 4 lakh crore a year. If the government targets divesting five per cent of its PSU holdings annually, the exchequer would receive Rs 2 lakh crore a year even as the market value of its total stock holding continues to rise.
This isn’t all. There are dozens of PSUs that haven’t been privatised. A top candidate is BPCL. It has outstanding assets. The government must therefore follow a dual divestment policy. On the one hand, privatise unlisted PSUs like BPCL and on the other offload small equity holdings from the 70 listed PSUs. After LIC’s listing, the Rs 40-lakh market cap corpus of listed PSUs will give the government sufficient headroom to collect revenue far in excess of Rs 2 lakh a year. These funds can be deployed in the health, education, agriculture and defence sectors.
Privatised PSUs will be accountable to public shareholders. Their management will be scrutinised. Unlisted PSUs are often warrens of corruption and inefficiency. This will reduce on listing. Sunlight, in the form of market forces and public accountability, is the best disinfectant.
What about job losses? There will be initial culling. But improved efficiencies and productivity will lead to expansion and more jobs at better salaries. The hopelessly bloated MTNL and BSNL are good examples. The merged entity, when privatised, will be a leaner, stronger competitor in the cut-throat telecom industry.
It will also establish a basic truth: the government’s business is governance, not business.
The writer is the biographer of Rajiv Gandhi and Aditya Biral and author of The New Clash of Civilizations (Rupa 2014). He is founder of Sterling Newspapers Pvt. Ltd., which was acquired by the Indian Express Group
