Is Privatization Good for India?

The Government of India’s most determined push for privatization came during Finance Minister Nirmala Sitharaman’s budget speech in February last year, in which she unveiled an ambitious plan to sell state owned companies. The minister announced that with the exception of four strategic sectors, the government would either privatize or merge or make subsidiary of another CPSE or close down all public sector enterprises. The strategic sectors identified include atomic energy, space, and defense; transport and telecommunications; power, petroleum, coal and minerals; and banking, insurance & financial services.

The Government of India has also launched a four-year (FY 2022-2025) road map for a Rs 6 lakh-crore asset monetisation plan, a large chunk of which will be through the long-term lease of brownfield assets of central ministries and public sector entities across road, railways and power sectors. The Government has also added two state-run banks and one general insurance company to the privatisation list.

“Every political party, when in government, promotes privatization – and opposes it when in the opposition,” said Shankkar Aiyar, a political economy analyst and author of “The Gated Republic: India’s Public Policy Failures and Private Solutions.”

The underlying rationale behind privatization of government-run companies is that they would perform better in private hands. Opponents of privatization say public sector enterprises were formed with all kinds of social objectives, and profit-making is not among the primary goals.

“Some of these companies were formed to develop technological self-reliance, others to tap the mineral resources of the country and make sure that the proceeds of the resource come to budget,” Prabhat Patnaik, former professor at New Delhi’s Jawaharlal Nehru University, told DW. Patnaik described privatization as akin to handing over the nation’s wealth to a “bunch of private oligarchs” in the name of reform.

Many have called for divestment as an alternative mechanism to be adopted. This would mean that the government sells some of the shares in its companies, transferring control to the private sector without a change in ownership.

Nearly two decades after the last PSU privatisations in 2002 and 2003, which turned out to be a controversial privatisation exercise — a landmark divestment concluded in 2021 when the loss-making national carrier Air India was sold to the Tatas. This was made possible only after the government changed the track from selling 76 per cent of its stake in the national carrier to putting on block its entire 100 per cent holding, as well as giving bidders an option of deciding how much debt they were willing to take over.

Privatisation of PSUs by the erstwhile NDA-1 government led by Atal Bihari Vajpayee has proven, in retrospect, that family silver was sold to pay the butler. Soon after assuming office in 1999, the NDA-1 government embarked on a privatisation programme of central PSUs. In less than two and half years, the government sold off controlling stakes and transferred management rights in nine profit-making and asset-rich Navaratna central PSU companies to “strategic private partners”. The government also made slump sale of 18 hotels at various important locations belonging to the public sector ITDC.

The buyers were mostly the archrivals and competitors of these PSUs. The NDA-1 government earned a total of Rs 5,544 crore from the strategic sale of nine giant PSUs and ITDC hotels. Every single privatisation was controversial and attracted allegations from the workers’ unions that the PSUs were sold for a song.

After a lapse of 2 decades, two CPSEs, Air India and Central Electronics Ltd (CEL), were privatized in 2021. Air India and CEL were loss making CPSEs. Air India was surviving on Rs 20 crore a day fund infusion by the government and indeed was a white elephant.

But work is also underway to privatise some profit making CPSEs — BPCL, BEML, Shipping Corp, Pawan Hans and NINL. Three Air India subsidiaries too would be privatised during 2022. But the biggest “disinvestment” in India’s history is expected in a few months, with the country’s largest life insurer Life Insurance Corporation (LIC) slated to come out with an initial public offer (IPO) to sell 5% of Govt stake in LIC.

The Government will have to contend with opposition from within the ruling alliance and its affiliates. For example, the Bharatiya Mazdoor Sangh (BMS), a group affiliated to the RSS, criticised the disinvestment programme outlined in the 2021-22 union budget, saying that “the mixing of the beautiful concept of Atmanirbhar Bharat with FDI (foreign direct investment) and disinvestment in the Union budget is disappointing for employees”. Also, the Swadeshi Jagran Manch (SJM), the RSS’s umbrella organisation in the economic sphere, has a long history of vehemently opposing disinvestment and enhanced FDI.

Privatisation and asset monetisation may also turn out to be hard to sell politically. Parallels are being drawn to the UK’s privatisation of the 1980s under Margaret Thatcher. Under the Thatcher government, many industries and utilities that had been nationalised in the Attlee government of 1945-51 were made into private companies — in steel, railways, airways, airports and aerospace; and the utilities, gas, electricity, telecoms and water.

Privatisation has had a huge effect on the global economy. It has spurred economic growth and improved living standards as privatised businesses cut costs, improved labour productivity, increased service quality and innovated. Despite the general success of British privatisation, some of the reforms were quite controversial, such as the rail and water privatisations of the 1990s. In the late 1990s, a few high-profile rail accidents raised concerns about the industry’s new private structure. Those problems prompted the renationalisation of Railtrack in Britain in 2002 as Network Rail. The British government privatised ten regional water and sewer agencies in 1989 and created a new regulatory authority to oversee them. After the reforms, people complained that water prices rose sharply.

“The fear among the political class is that when the public sector enterprise is privatized, a lot of the jobs are lost,” said Shankkar Aiyar. “If enough jobs were being created elsewhere in the economy, privatization would not have so much resistance and pushback,” he added.

There are major concerns regarding the privatisation and asset monetisation programmes of India — loss of jobs in a country with perennial unemployment, monopoly/oligopoly practices and pricing by the private sector players, lack of effective sector regulators, underpricing of the sale of state assets, use of privatisation proceeds to meet Govt’s administrative expenses and interest payments (rather than re-investment of such proceeds to create new assets).

[Photo by Salifa Karapetyan, Seychelles News Agency / Wikimedia Commons]

The views and opinions expressed in this article are those of the author.

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