Why Modi govt has made a good call to move out of all non-strategic sectors

The Narendra Modi government has announced a list of strategic sectors where the Centre will keep a maximum of four public sector undertakings (PSUs). Earlier, the Union Cabinet had cleared the sale of 23 PSUs.

An ideological shift

On 17 May, the Modi government had announced a disinvestment plan as part of the Atmanirbhar Bharat package, saying it would keep a maximum of 4 PSUs in strategic sectors of the economy. This plan is unlike previous attempts to disinvest.

In the past, the government would come up with an identified list of PSUs to privatise. This time, it is the other way round. The government will keep some PSUs in strategic sectors and disinvest everything else. On 7 August, the government announced the list of strategic sectors.

This approach signifies an ideological shift. The original idea of nationalisation was to control the commanding heights of the economy. Whatever the original objectives were, the government developed an appetite for nationalising firms.

Most of the PSUs we see today were not started by the government. They were private sector firms, which were taken over by the government. Soon government ownership of businesses spread to many sectors, way beyond what could possibly be imagined as commanding heights. A correction needed to be made.

History of disinvestment

Even after the 1991 liberalisation, the political climate was not favourable for privatisation. The use of the word ‘disinvestment’ instead of privatisation was meant to soften the ideological message that goes with privatisation.

The first National Democratic Alliance (NDA) regime privatised some PSUs such as Bharat Aluminium Co. Ltd, but these ran into trouble as some of the strategic sales were questioned.

The United Progressive Alliance (UPA) did not seem to have the political belief or the will to privatise. Both UPA I and II made a conscious decision not to privatise companies. Some companies would be listed with a small amount of shares in the market, but control would remain firmly with the government.

Many, especially foreign investors and the foreign media, expected that the Modi government’s economic reform agenda would include action on privatisation. In the first term of the government, many of the transactions under the disinvestment head were not privatisation. One PSU would just be sold to another.

For example, the Hindustan Petroleum Corp. Ltd shares were sold to Oil and Natural Gas Corp. Ltd. Even for the IPOs of PSUs, amid little public interest, the Life Insurance Corporation (LIC) would be called in to buy shares. The IPOs of Hindustan Aeronautics Ltd, New India Assurance, and General Insurance Corp. got LIC as a shareholder.

Now for the first time, the question of the government’s role in business is being squarely addressed: Government should be in strategic sectors and should exit other sectors.

In an interview to the Economic Times in June 2012, Prime Minister Narendra Modi, then Gujarat chief minister, had said, “The government has no business to be in business.”

The announcement is a step in that direction.

While the move to limit government to strategic sectors is a step to restrict government in business, the critical issue is identifying what a strategic sector is. The Minister of State for Finance Anurag Thakur had provided some answers last year when he answered to the Parliament that the government would be:

“…guided by the basic economic principle that the Government should not be in the business to engage itself in manufacturing/producing goods and services in sectors where competitive markets have come of age.”

This principle can be the consideration for PSU sales in coming days.

The government today operates businesses ranging from hotels (India Tourism Development Corporation) and travel agencies (Balmer Lawrie) on the one hand to manufacturing floor cleaners (Bengal Chemicals and Pharmaceuticals) on the other.

Reasons for disinvestment

The Modi government seeks to control a few critical sectors like coal, banking, transportation and infrastructure. Other industries would be free for the private sector.

Many may argue that the list could be shorter. Others could quibble about the mode of privatisation. But certainly the intent that the government should not be in the business of business, other than in specific strategic sectors, should be welcomed. This is the most important reason for disinvestment.

In the past, disinvestment was usually considered for budgetary considerations. The government would want to get rid of perpetually loss-making enterprises. Few of these would find buyers. Repeated efforts with Air India’s sale have failed. But other than loss-making enterprises, the government had no problems with PSUs competing with the private sector.

This time, the government is acknowledging that it has no general role in business. Government participation in the market should be the exception and not the norm.

With the government out of the business of business and no PSU in an industry, the private sector can be more confident of not being driven out by a competitor that has no constraints on the access to capital. This principle may contribute to increased investment from the private sector.

Private sector companies face unfair competition from the presence of PSUs. Unlike the private sector, where capital is limited, PSUs have a virtually infinite source of capital: the tax revenues of the government.

Further, the cost of capital for PSUs from the market is also lower as they enjoy an implicit government guarantee. Competing with such a giant is fraught with risk for the private sector. All private airlines in India have to compete with Air India that has accumulated losses of Rs 70,000 crore and outstanding debt of Rs 58,000 crore. Jet Airways, however, went out of business with less than half the size of that debt, at Rs 25,000 crore.

Another problem arises from a conflict of interest. Where there are PSUs, the government acts both as a player and a regulator in the market. The government will always be tempted to tilt the rules in favour of its PSUs. We often see this in the case of PSU banks, which get favourable treatment from the government and the Reserve Bank of India.

The move forward

The government must be careful that its presence is not preventing private markets from taking off — whether due to regulations or due to subsidies.

Until recently, in many areas, the government had excluded the private sector by law. For example, the private sector was banned from the insurance industry until 1999. Similarly, telecom was a government monopoly because no private company was allowed to operate. When the government removed the legal barriers, we saw rapid private sector growth in these sectors.

In other areas, government subsidies prevented private sectors from taking root. In 2008, it started subsidising diesel. However, the catch was that only PSU oil companies had access to this subsidy. Reliance had to shut down its fuel pumps until 2015 when the subsidy was removed.

Privatisation of PSUs should not be viewed as a revenue generation exercise. It frees up resources that are being used unproductively for more productive use.

For economic revival in the coming months, the Modi government should not focus on the proceeds from disinvestment, but from the benefits of privatisation in terms of better use of land, labour and capital that bring productivity gains to the economy.

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