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Reconsidering privatization

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June 30, 2021

What is the issue?

  • After a pause for few years, now, privatisation is being pursued with vigour in India.
  • In the backdrop of an economic contraction, it is prudent to revisit the aggressive privatisation of public enterprises.

How advisable is privatisation now?

  • India is right now going through its worst economic crisis.
  • The highest-ever contraction in the economy took place in 2020.
  • Unemployment has risen, and incomes for growing numbers are falling.
  • Banks’ non-performing assets (NPAs) may be increasing, and fiscal deficit is also rising.
  • In these circumstances, it would be prudent to think through the pros and cons of the aggressive privatisation of public enterprises.
  • There are three categories of public sector enterprises, with each needing its own analysis.

What about the enterprises that have been sick for a long time?

  • Their technology, plants and machinery are obsolete.Their managerial and human resources have been lost.
  • Such enterprises are beyond redemption. They should be closed, and assets sold.
  • But this has been difficult with successive governments.
  • Because, the labour in these enterprises have had a political constituency which has prevented their closure.
  • The Government should take efforts to close these in a time-bound manner.
  • After selling machinery as scrap, there would be valuable land left.
  • Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
  • These enterprises may be taken away from their parent line Ministries and brought under one holding company.
  • This should have the sole mandate of speedy liquidation and asset sale.

What is the second category of enterprises?

  • These are the enterprises that have been financially sick but can be turned around.
  • Wherever possible, private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
  • Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.
  • Air India should ideally be made debt free.
  • And a new management should have freedom permitted under the law in personnel management to get investor interest.
  • Once debt free, management control with a 26% stake may be given.
  • As valuation rises, the Government could reduce its stake further and get more money.
  • If well handled, significant revenues would flow to the Government.

What about the profitable enterprises?

  • With profitable public enterprises, the government can continue to reduce its shareholding.
  • It can offload its shares and even reduce its stake to less than 51% while remaining the promoter and being in control.
  • In parallel, managements may be given longer and stabler tenures, greater flexibility and more confidence to take well-considered commercial risks.
  • They can also be asked to invest patient capital in strategic areas where risk is high and where risk averse private investment may not be easily forthcoming.
  • The Chinese have done this well.
  • The Chinese chose to nurture their good state-owned enterprises as well as their private ones.
  • This helped it succeed in the domestic and global markets, by increasing their competitiveness in cost, quality, and technology.

What is the way forward?

  • The number of Indian private firms which can buy out public sector firms are very few.
  • Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
  • Then, these successful large corporates need to be encouraged to invest and grow.
  • This is much better than using the scarce resources for taking over government enterprises with no real value addition to the economy in the near term.
  • Another consideration is that public enterprises provide for reservations in recruitment.
  • With privatisation, this would end and unnecessarily generate social unrest.
  • India has a strategic interest in the ownership of public enterprises including financial ones. It cannot afford to lose this.

 

Source: The Hindu

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