Wrong Way & The Right Way
It is time to fully privatise the CPSUs, starting with the Maharatnas
Photo Credit : Reuters
As the Prime Minister has rightly said, “It is not the Government’s business to run a business”. Yet, more than three years into this administration, India still has 298 centrally-owned PSUs, together with countless companies owned by the states. The CPSUs alone have assets of more than $500 billion and yield a measly five per cent return on assets, on average. The superior returns of the few good PSUs are being diluted by the many underperforming ones.
The intent fully to privatise Air India, a persistent poor performer, is a welcome policy change. In the private sector Air India has a chance of becoming a decent airline again, or alternatively for its critical assets (the departure slots) to be more effectively used by another airline better to serve the Indian traveller.
After a spurt of 14 disposals under the Vajpayee government in 2001-2003, India’s “disinvestment” policy has in recent years amounted merely to the sale of minority stakes onto the market. Control has remained with the government and management has been unchanged, so the performance of these listed companies has not improved. Essentially, the Finance Minister has been raising cash to address the budget deficit, without any other economic benefit. This year, Mr Jaitley aims to raise $9 billion in this fashion.
The government is missing a significant opportunity to boost the Indian economy through this tentative and wrong-headed “disinvestment” policy. Neither the exit from marginal companies like Air India, nor the sale of a minority of shares in Coal India or NTPC to investors while retaining control, amounts to “a hill of beans in this crazy world”. The time has come to live up to the promises of change and to be radical and bold. It is time to fully privatise the CPSUs, starting with the Maharatnas.
Experience in other countries, especially in the UK (which I witnessed as a member of the No 10 Policy Unit), demonstrates that privatisation can contribute significantly to the competitiveness and performance of an economy, if well executed. The critical learning is that, while transfer of ownership to the private sector makes some difference, the real change comes from engendering more intense competition. Monopolies need to be broken up into competing businesses before sale.
India already has competing banks and oil companies in the public sector. These should be aggregated into fewer entities before sale so as to strengthen their competitive impact. The quasi-monopolists, such as Coal India, NTPC and ONGC, should be broken into competing entities before ownership is offered to strategic buyers or, preferably, the market.
The core of economic policy should be to create an intensely competitive market to benefit the consumer, not producers. Privatisation policy is one vector of such a policy, along with other initiatives like an effective anti-trust and regulatory regime, a real welcome to foreign investors in every sector and the encouragement of a proper market for corporate control.
The Modi government has boosted expectations of improved economic performance, but so far the results have disappointed. More radical measures are called for, including full privatisation. The Nehruvian ideal of a towering public sector has failed India. A rapid series of disposals of major assets would, cumulatively, change the structure and performance of the large chunk of the economy currently languishing in the public sector, and serve the consumer far better.
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