After racking up accumulated losses of Rs 50,000 crore, debt of Rs 55,000 crore, a failed Rs 30,000 crore bailout in 2012 and an aborted disinvestment attempt in 2001, the NDA government bit the bullet: last month, the Cabinet gave its nod to sell its stake in the beleaguered Air India. It isn’t the only state-owned behemoth in which the government reckons it doesn’t need to be wasting its time.
Half of India’s 235 Central public sector enterprises (CPSEs) are under scrutiny for a possible disinvestment. The government’s think tank NITI Aayog has recommended a strategic sale in over 40 public sector undertakings (PSUs) and outright closure of 26 sick PSUs.
This time, it may not be all talk and little action. Various governments have toyed with disinvestment since 1991, but with limited success. The biggest sell-off surge happened under the NDA government of 1999-2004, when PSUs like Maruti, VSNL, IPCL and IBP were privatised. It is hard to argue against the economic rationale for privatisation.
While CPSEs contribute over 20% to India’s GDP and employ over 10 lakh people, many have turned into bloated, inefficient behemoths and a drain on the national exchequer. One-third of the CPSEs today are making losses. Even a maharatna like BHEL has slipped. Between 2011-12 and 2015-16, a recent CAG report points out, its turnover declined from Rs 49,510 crore to Rs 26,587 crore and profits slipped from Rs 7,400 crore to losses of Rs 913 crore. Between 2007 and 2016, sick CPSEs reportedly logged losses of Rs 19.68 lakh crore. Small wonder, then, that NITI Aayog CEO Amitabh Kant suggested that the government should hand over schools, colleges and prisons to the private sector as “the government has no business to be in business”.
The reality, globally, is a bit more nuanced. PSUs aren’t exactly out of fashion and have often been used to stoke nationalistic fervour. The French government has threatened to nationalise the shipyard in Saint-Nazaire instead of selling it to Fincantieri of Italy. Italians are nervous about French “colonisation” as many cross-border deals (like the €50 billion Essilor-Luxottica merger) have resulted in French firms having the upper hand.
In India, PSUs were created post Independence to build a self-reliant, state-led economy. Through the 1970s, amid a nationalisation drive, PSUs dominated the economic landscape before a bankrupt government was forced to rethink its strategy post liberalisation.
India echoed what was happening globally. Professors Aldo Musacchio and Sergio G Lazzarini talk about evolution of state capitalism in their book Reinventing State Capitalism (2014). Globally, too, state capitalism peaked around the 1970s. As a result, output of state-owned enterprises (SOEs) to GDP reached 10% in mixed economies and 16% in developing economies.
Then reality dawned. The oil shock of the 1970s and the liquidity crunch of the 1980s meant SOEs globally ran average losses equivalent of 2% of GDP, according to the World Bank. In developing countries, they stood at 4% of GDP. Between 1980 and the turn of the century, the focus shifted to a wave of PSU reforms that included minority stake sales, listings and overhauls of PSU management.
The year 2008 was an inflection point when state-led bailouts of distressed companies — PSUs or even private — became the norm. The US government bailed out private firms like GM and AIG. By some calculations, firms under government control today account for a fifth of the world’s total stock market capitalisation.
While state capitalism has been in vogue, governments have been trying to make it efficient. The book refers to two examples. In 2007, Brazilian private firm JBS acquired US-based Swift & Co for $1.4 billion to become the world’s largest beef processing company. Then it acquired Pilgrim’s Pride for $2.8 billion. JBS, identified as a national champion, was funded by Brazilian National Development Bank (BNDES), which became the largest minority shareholder in JBS. SOEs in China are coming from the other end. In 2010, Agriculture Bank of China’s mega IPO raised $22 billion.
The two examples reflect the new forms of state capitalism taking root. Both are distinct from the traditional (often inefficient) PSU model where government owns and manages the SOE like an extension of public bureaucracy.
PSUs have often helped government deal better with economic cycles. “In China when the economy is in danger of recession, SOEs can quickly deploy government resources and play a counter cyclical role. India is different in that governments, especially Central governments, are relatively much weaker,” says Xi Li, professor at Hong Kong University of Science and Technology.
After its independence in 1965, Singapore government owned a lot of companies like SingTel and Singapore Airlines. In 1974, it set up Temasek Holdings, a sovereign wealth fund, to hold and manage its assets on a commercial basis and push the nation’s growth agenda. Temasek today owns and manages a portfolio of over S$250 billion.
Japan and Korea took a different approach. Chaebols in Korea and Keiretsu in Japan have played a key role in the economic growth of the two countries. And governments in both the countries have nurtured them. This also led to crony capitalism which they are now trying to tackle. For example, Chaebol reforms was a key issue in the 2017 election in Korea. “To avoid the trap of import substitution and make local firms globally competitive, governments gave these companies export targets. When achieved, they were given special credit and land,” says Ajay Chhibber, visiting distinguished professor, NIPFP, a research institution.
NITI Aayog CEO Amitabh Kant recently told ET Magazine that “the government should spend money on improving social indicators like health, education, nutrition”. Beyond disinvestment and sell-off, some shifts are already visible. PSUs like BHEL are morphing to be relevant. Besides renewable energy, it now wants to make components for metro rail and defence. “To facilitate public spending, new PSUs are sprouting in areas like inland waterways, metro rail and renewable energy,” says Vinayak Chatterjee, chairman, Feedback Infra. The government has set up the National Highways and Infrastructure Development Corporation to build highways. New mechanisms are being explored to help PSUs operate efficiently. For example, National Investment and Infrastructure Fund (NIIF) will help fund projects where the government’s stake will be capped at 49%.
Former bureaucrat Pradeep Baijal says PSUs are a necessity in areas where government has a natural monopoly; like railways, metro rail, utilities or sensitive areas like satellite or nuclear power. In a rapidly evolving world, ¡§there should be a model of constant review of the PSU portfolio – what to retain and what to divest,” adds Amit Sinha, partner, Bain & Company.
Gaurav Taneja, partner, EY, says PSUs are necessary in areas where private sector is not keen to invest, like public health in rural areas. ¡§In fact, government should convert many of these operations into public sector outfits and set up a strategic framework to evaluate their performance,” he says. Consider the case of not-so-profitable Jan Dhan scheme where public sector banks were asked to roll it out without adequate compensation and yet are expected to compete with the private sector.
“The difficulty with PSU emanates from a misplaced sense of their reason for existence,” says Utkarsh Palnitkar, partner, KPMG in India. “Distortions come into play when a PSU is expected to perform on similar lines as private sector units yet is deprived of management autonomy,” he adds. Experts recommend that disinvestment proceeds must be parked in a separate fund to be used in infrastructure investment. “We should not be selling the family silver to pay the grocery bills (which is the case now),” says Chhibber.
Ranen Banerjee, partner, PricewaterhouseCoopers India, says: “Private and public sector need not be completely divorced. While PSUs can build and own the infrastructure, private sector could do operations and maintenance efficiently.” An example: railway tracks could be state-owned, and trains with the private sector. Any takers?