India must keep the momentum of Air India’s privatization going

Synopsis: Adopting policies that boost the market valuations of state-run companies will help government to keep the disinvestment momentum.

Introduction

After the successful disinvestment in Air India, many want the government to build on this and carry out more strategic disinvestment, i.e., sell more government companies, to the private sector. But that is a very obvious point.

The right way to carry the disinvestment momentum forth is to formulate policies that lead to the stock-market valuations of public sector companies going up in the years ahead.

How right policies will help the government to carry the disinvestment momentum?

Ensuring right Professional management practices in public sector companies will increase the stock-market valuations of PSE’s.

For instance, take the case of ICICI Bank, a private lender, and Punjab National Bank (PNB), which is state-run.

– Data from the Indian Banks’ Association shows that both banks are more or less similarly sized. As of March 2021, ICICI Bank had total assets worth ₹12.30 trillion, whereas PNB had total assets worth ₹12.6 trillion. However, PNB’s market capitalization was ₹46,852 crore that is less than a tenth of that of ICICI Bank, which was worth ₹5.04 trillion.

One reason for this lies in the higher non-performing assets (NPAs) or bad loans of PNB, at ₹1.04 trillion as of June 2021, whereas those of ICICI Bank were at ₹43,148 crore.

The difference in the two lenders’ market capitalization is not just because of the difference in their bad loans. The market feels that ICICI Bank is more likely to be run like a bank should be whereas it isn’t clear if the same can be said about PNB or other public sector banks (PSBs). Hence, the lower market value.

Government interventions and influence on PSE’s needs to be limited. For instance, public sector enterprises are also used by the government to fulfill its social-sector objectives. In the case of PSBs, there is always the danger of their being pushed to give loans to industrialists close to the government.

To correct this, the government needs to allow managers of public sector enterprises to run them like businesses. This will help improve the stock market valuations of these companies manifold.

Higher valuations mean that the government can keep selling some stake in these companies regularly to raise money. This money can then be used to fulfill the Centre’s social goals, including incentivizing banks and other companies to do what the government wants them to.

Source: This post is based on the article “India must keep the momentum of Air India’s privatization going” published in Livemint on 20th October 2021.