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Time to relook at the Privatisation Policy

  • IASbaba
  • February 10, 2022
  • 0
UPSC Articles
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ECONOMY/ GOVERNANCE

  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  • GS-3: Indian Economy & its challenges

Time to relook at the Privatisation Policy

Context: There is consensus among policymakers for privatisation of public sector undertakings (PSUs), especially in neo-liberal world order, for its ability to grow faster. 

What is the reality of Privatisation?

  • Performance of Privatised Firms not guranteed: The gap in growth (and service) between PSUs with autonomy and private firms is not significant.
    • For example: Studies have shown that the famed British privatisation initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance
    • Evidence on performance after privatisation is even more mixed in developing countries. 
  • Performance may be due to other factors: Growth post-privatisation is often due to multiple factors (for example, better funding under a private promoter versus a starved government budget, a better business cycle). Sometimes, the difference in a PSU’s performance is simply government apathy.
  • Low Realisation of Revenues: Privatisation as a revenue source has also offered paltry return with actual receipts from disinvestment always significantly short of targets. For example, in FY11, ₹22,846 crore was raised against a target of ₹40,000 crore; by FY20, ₹50,304 crore was raised against a target of ₹1 lakh crore.
    • In total, between FY11 and FY21, about ₹5 lakh crore was raised (that is, about 33% of just FY22’s projected fiscal deficit of ₹15.06 lakh crore.)
  • Outright Privatisation has not been yielding results in India. Aside Air India, a recently held auction of about 21 oil and gas blocks had only three firms participating, of which two were PSUs; 18 blocks ended up with just a single bid.
  • Challenge of valuation – for example, about 65% of about 300 national highway projects have been recording significant toll collection growth (>15%, since they have been in operation); any valuations of such assets will need to ensure they capture potential growth in toll revenue.
  • Social consequences: PSUs have been significant generators of employment in the past, with multiplier effects – there were about 348 CPSUs in existence in 2018, with a total investment of ₹16.4 trillion and about 10.3 lakh employees in Central PSUs (in 2019). A push for privatisation is a push for mass layoffs, in a period of low job creation.
  • Concentration of public assets in select private hands: In India, about 70% of all profits generated in the corporate sector in FY20 were with just 20 firms (in comparison, the situation in FY93 was about 15%). Across sectors oligopoly is emerging. Such concentration, mixed with privatisation of public assets, is likely to lead to higher usage fees (already being seeing in telecom) and inflation, coupled with a loss of strategic control.

Are there any alternative models for Privatisation?

  1. Maruti Model
  • The government had a joint venture with the Suzuki Corporation, but ceded control, despite Suzuki having only 26% shareholding. Exits from Maruti were conducted in small tranches, ensuring a better valuation for the government
  • Empirical evidence highlights that stake sales are considered a preferred route (about 67% of all PSU sales in about 108 countries between 1977 and 2000 were conducted via this route), as it gives time to ensure price discovery, allowing improved performance to raise valuations over time, 
  1. Corporatisation of PSUs under Holding Company
  • In China, for the past few decades, growth has been led by corporatised PSUs, all of them held under a holding company (SASAC), which promotes better governance, appoints leadership and executes mergers and acquisitions.
  • In Singapore, the Ministry of Finance focuses on policymaking, while Temasek (the holding firm) is focused on corporatising and expanding its PSUs (for example, Singtel, PSA, Singapore Power, Singapore Airlines) towards a global scale. 
  • A PSU with greater autonomy, with the government retaining control via a holding firm, can also be subject to the right incentives.

Conclusion

The time has come to take a relook at privatisation. Simply pursuing this path, while utilising such proceeds for loan write-offs or populist giveaways in the election cycle will not do. A hunt for immediate revenue should not overshadow the long-term interest of the ordinary Indian.

Connecting the dots:

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