A change of course on privatisation

News: Recently released India’s Budget 22-23 has signalled that the government will proceed cautiously on privatisation.

The article says that the retreat on privatisation is a pragmatic economic policy.

Why the Budget has changed the course of privatisation?

The Budget has set a modest target for privatisation of Rs 65,000 crore. Also, much of the receipts for FY 21-22 will be accounted by disinvestment in LIC, not from privatisation.

Though the privatization of Air India is successful, but the fact is that the Air India’s privatisation took four years to conclude.

Also, to privatize it, the government took various measures such as taking over nearly 75 per cent of Air India’s debt, employees are guaranteed jobs for one year, and then it was sold to a trusted business group.

Taking so many measures for other public sector undertakings (PSUs) is time-consuming and impossible as well.

What does the government’s decision to de-emphasise privatisation reflect?

One, the Indian state lacks the capacity to execute privatisation on a large scale.

Two, carrying out the sale of public assets carelessly can prove costly in both political and economic terms.

Three, it is not helpful to turn privatisation into a benchmark of overall economic performance. It overshadows all other reforms and initiatives of the government.

Why executing privatisation is a challenge?

First, the objective is to bring more efficient utilisation of assets and fetch revenues. But for this to happen, the government must get the valuation right. For instance, in a depressed market, the chances of the asset being under-valued are higher.

Second, the firm needs to undergo a certain amount of restructuring before it is offered for sale so that it attracts the right suitors. To attract a better price, there must be multiple bidders. Ensuring these conditions is not a simple matter.

Third, rushing for privatization by setting targets with no proper valuation becomes controversial. For example, in the Hindustan Zinc Limited (HZL) sale, the Supreme Court has asked the Central Bureau of Investigation to conduct an enquiry into the transaction.

Fourth, for the sale of public sector banks (PSBs), there is a need to be clear as to who the potential buyers might be. The larger private banks of India are not interested due to legacy issues with a PSB.

Foreign banks are also not ready to come into India by setting up a wholly-owned subsidiary, as the Reserve Bank of India (RBI) wants.

Also, selling to a scattered group of foreign institutional investors creates a governance vacuum. For instance, public sector entities had a significant stake in the UTI Bank and a large stake was sold to FIIs. Now, they continue to hold a significant stake in Axis Bank.

Fifth, bank failure has numerous negative economic and political consequences such as disruptions in Parliament, paralysis of the administrative machinery and negative media coverage. For example, Yes Bank.

What is the way forward?

First, government should set a modest target for privatisation, or it should avoid setting the targets and use the disinvestment and privatisation receipts as a balancing item in the Budget.

Second, government should consult the RBI on “fit and proper” criteria for potential buyers.

Source: This post is based on the article “A change of course on privatisation” published in Business Standard on 11^th Feb 2022.