THE PSU STORY: FROM DISINVESTMENT TO PRIVATISATION

One subtext of this year's Union Budget has been the push for privatisation of the public sector. EPISODE #16

Hi Everyone,

A very happy Monday and a very Happy Holi to you.

Last week witnessed a spike in the new wave of covid-19 infections in India. The authorities across the country have upped their game to contain its spread and hopefully people will do their bit: practicing personal hygiene, sporting a mask and maintaining social distancing. India can’t afford the economic cost associated with drastic curbs like a lockdown. The battle against this amazingly resilient virus which originated in Wuhan, China can only be won by collective action. Keeping fingers crossed.

The other big development was the beginning of the latest election cycle. The first phase of voting concluded in Assam and West Bengal with high turnouts. All eyes are on the Bharatiya Janata Party—fighting as an incumbent in Assam and as an audacious challenger in West Bengal. The keenly awaited results are due on 2 May.

This apart, the Union Budget for 2021-22 was formally passed by Parliament just before it adjourned the Budget session ahead of schedule. I put the spotlight on it. Not just because it is a seminal one: Haseeb Drabu and me had co-authored a piece describing Finance Minister Nirmala’s Sitharaman’s effort on 1 February as among the top five budgets ever in the cover story for Open magazine. Those interested to re-read it please click here.

Instead I seek to highlight how this budget has set in motion an unprecedented transformation in the economic history of modern India. This is the story about public sector reform. Coincidentally this makeover of PSUs culminating in privatisation has spanned the length of my professional career as a journalist, giving me a vantage point.

A big thank you to Rahul Sharma for this week’s picture.

Once you read this post, please, please do drop me an email with your thoughts or ping me on twitter at @capitalcalculus.

A big shout out to Nimesh, Yugainder, Gautam, Mahalingam, Kapil, Aashish and Rahul for your informed responses, appreciation and amplification. Would be nice if more of you joined the conversation. It is key to growing this newsletter community. And, many thanks to readers who hit the like button 😊.

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Read on

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Pix by Rahul Sharma

A SHARP TURN

Last week the Lok Sabha approved the annual spending proposed in the Union Budget and the accompanying Finance Bill laying down the tax proposals. A few days later the Rajya Sabha too accorded its stamp of approval. With this the Union Budget for 2021-22 is officially ready to be rolled out from 1 April.

However, there is one very important sub-text to this development.

It has formally buried the Nehruvian legacy of the commanding heights of the public sector. More importantly it has also bid goodbye to the long held practice of “reforms by stealth”.

This is because Finance Minister Nirmala Sitharaman’s speech—which is part of the Union Budget—included a very important annexure: the new policy on disinvestment. The actual moniker for the new divestment policy should be privatisation. The passage of the Union Budget by both houses means that the new policy has been sanctioned by Parliament. In other words this structural change is as good as written in stone.

The New Normal

A cursory read of the annexure to the FM’s speech will make it apparent that this is no incremental PSU reform strategy: But for a few sectors—Atomic Energy, Space and Defence; Transport and Telecommunications; Power, Petroleum, Coal and Other Minerals; and Banking, Insurance and Financial Services—the public sector will exit from all other business.

And for good measure it adds: ‘In non-strategic sectors, CPSEs will be privatised, otherwise shall be closed.’ Justifying the radical shift in stance towards the public sector, the statement says,

“[The idea is] Minimising presence of Central Government Public Sector Enterprises including financial institutions and creating new investment space for private sector.”

Trial and Error

Significantly this makeover has long been in the making. Several regimes have chipped away at the Nehruvian edifice which built the Indian economy around what was called the ‘commanding heights’: the public sector.

Ironically it began with Jawaharlal Nehru’s daughter Indira Gandhi. Though she is identified as a populist, a closer scrutiny of economic history will reveal a significant pivot in her last stint as Prime Minister beginning 1980. The Sixth Five Year Plan framed by her government captured this shift.

This process got a big push from Rajiv Gandhi, her son who took over as the PM following the tragic assassination of Indira Gandhi in 1984. Baby boomers may recall that the Delhi and Mumbai telecom circles were hived off in 1987 to create a corporate entity, Mahanagar Telephone Nigam Ltd. The idea was that they would not be shackled by bureaucratic controls and move swiftly to exploit the emerging potential of telecom. (Another matter that today MTNL is a mere shell.)

Simultaneously, a move was initiated to walk back the budgetary support to PSUs. Instead the entities were required to either rely on internal resources (raise tariffs, improve productivity) or borrow commercially. While the vision was justified the implementation was a disaster. Since it was politically incorrect to undermine a Nehurvian legacy, especially by regimes headed by the Congress, the entire process was framed as a means of shoring up the union government’s finances—in short balance the FM’s books.

Over time this strategy of reforms by stealth failed on both counts: neither did it balance the books nor did it reform the public sector.

The idea of disinvestment was first proposed in the aborted budget of 1990—the government collapsed and finance minister Yashwant Sinha had to present a vote-on-account. However, the next regime headed by Narasimha Rao picked up from where Sinha left off and formalised public sector disinvestment.

Initially it was held through auctions, the results of which was disclosed publicly by the merchant banker. I remember landing up at these events armed with data sheets and furiously noting details about the bidders. But this basic transparency was was shelved and disinvestment moved into the realm of pinstriped investment bankers. Overnight the corridors of North Block were gentrified. Yet it was mostly old wine in a new bottle.

It was not until Atal Bihari Vajpayee—the previous avatar of the Bharatiya Janata Party-led National Democratic Alliance—that full blown privatisation was attempted. The boldness lasted till the end of the regime in 2004. Under the technocratic leadership of Prime Minister Manmohan Singh radical flourishes were not encouraged. So PSU reform was mostly on hold.

The Privatisation Test

Yet it is not that Prime Minister Narendra Modi was from the word get-go ready to reorder the national mindset on the public sector. It has taken his government some time to arrive at what was eventually laid out by FM Sitharaman and now approved by Parliament.

In an interview granted to the Wall Street Journal in 2016, Modi had said:

“In any developing country in the world, both the public sector and the private sector have a very important role to play. You can’t suddenly get rid of the public sector, nor should you.”

It clearly suggests that the government had a serious rethink in the last one year. For one, it has overcome the ghosts of “suit-boot ki Sarkar” jibe levelled by Congress vice president Rahul Gandhi. Second, the policy change aligns with its view that India Inc is part of the solution (and not the problem as the perception emerging from the government’s actions over the last six years suggested). This pro-business argument is something PM Modi unambiguously spelt out in his recent speech in the Lok Sabha. (Those wishing to re-read my previous column on it please click here.)

The big test for the government will be the proposed sale of Air India. The debt overhang of an estimated Rs60,000 crore has scared off most potential investors. The two bidders who stayed the course did so after an assurance from the government that this debt will be hived off. Simultaneously Air India itself, as the advertisement below suggests, is making a business case for itself.

The government is seemingly clear that it not a case of how but when Air India will be taken off the government’s books. Civil Aviation minister Hardip Puri did not mince his words:

“We’ve decided that Air India will be 100% disinvested. Choice isn’t between disinvestment and non-disinvestment, it is between disinvestment and closing down. Air India is a first-rate asset but has an accumulated debt of Rs 60,000 crore. We need to wipe the slate clean.”

Clearly Air India will be the litmus test for the NDA’s blueprint for radical public sector reform.

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Recommended Viewing

Thanks to the era of OTT now the inevitable social engagement question is: “What are you watching”. This has only gained urgency during the last one year with most of us confined to our home.

I have a personal preference for crime-based serials. Though I am a big fan of NYPD Blue, CSI, Wire, Blue Blood and all, frankly the British serials are streets ahead. I just can’t seem to get enough of it. My latest find is C B Strike streaming on Hotstar.

It is a gripping British crime drama television programme co-produced by the BBC and based on the Cormoran Strike detective novels. I believe it has four seasons, though Hotstar India includes only two in its offering. And wonder of wonders when I discovered the novels are written by J. K. Rowling under the pseudonym Robert Galbraith.

Sharing a trailer:

Happy watching.

Till we meet again next week. Stay safe.