Reopen the files, reconsider privatisation

Source: The Hindu 

Relevance: Privatisation has the potential to alter the functioning of the Indian economy.

Synopsis: In the backdrop of an economic contraction, it is important to revisit the aggressive privatization of public enterprises. Focus should be on adopting different strategies for sick and profitable units. 

Background: 

• Privatization of the public sector, including banks, has been part of economic reforms since 1991. This was at the core of the ‘Washington Consensus’ which believes that the private sector is inherently more efficient.
• The socio-political realities of India prevented outright privatisation. However, progressive disinvestment of the shares of public sector undertakings has been taking place over the years.
• Privatisation is now happening, with great vigor and dedicated targets. However, India is right now going through its worst economic crisis. 
  • Unemployment has risen, incomes are falling, and the fiscal deficit is rising. In this situation, outright privatisation may not be justified.

Concerns associated with Outright privatisation:

• First, the number of Indian private firms which can buy out public sector firms is limited. Their limited financial and managerial resources can be better utilised; 
  • In taking over numerous private firms up for sale through the bankruptcy process.
  • In investing in various brownfield and greenfield projects
• Second, the Sale at fair or lower than fair valuations to foreign entities has adverse implications from the perspective of being ‘Atma Nirbhar’.
• Third, PSU enterprises provide for reservations in recruitment. With privatisation, this would end and unnecessarily generate social unrest. 
• Fourth, the Government has been able to use its ownership to get banks and public enterprises to do so many things on an immediate basis during the pandemic. This would not have been possible with private ownership.

Types of Public Sector Undertakings (PSUs):

• First Category: Enterprises which have been sick for a long time. Their technology, plants and machinery are obsolete while managerial and human resources have become inefficient. 
• Second Category: Enterprises which have been financially sick but can be turned around. Their difficulties can be traced to ministerial micromanagement, especially in enterprises with a direct consumer interface. For example, Air India and the India Tourism Development Corporation (ITDC) hotels.  
• Third Category: Enterprises that are generating decent profits.

Cautious approach towards PSUs:

• First Category: Government should close these in a time-bound manner with a generous handshake for labour. 
  • These enterprises may be taken away from their parent line Ministries and brought under one holding company. The company should have the sole mandate of speedy liquidation and asset sale.
• Second Category: Private management through induction of a strategic partner is the best way to restore the value of these enterprises.
  • They should ideally be made debt-free and new management should be given freedom 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.
• Third Category: The Government can continue to reduce its shareholding by offloading shares. It can even reduce its stake to less than 51% while remaining the promoter and being in control. 

This would help in producing Global Champions, as done by China. The country has 91 state-owned enterprises in the Fortune 500 list.