Disinvestment programme in India: A look at the returns

Updated: Mar 28 2013, 19:08pm hrs
RupeeIt may be appropriate to assess the results of the program in India to date. (Reuters)
Kumar V Pratap

As the government mulls a step-up in the divestment programme, it may be appropriate to assess the results of the program in India to date whether it is just a revenue raising exercise or are there sustainable improvements in profitability, productivity, employment, and reduction in government interference in public sector undertakings (PSUs), which are important objectives generally associated with privatisation of PSUs.

Disinvestment receipts

The figure shows the receipts from divestment of Central PSUs (CPSUs). Over Rs 1.13 lakh crore have been raised from divestment in the period 1991-2011 and this has bridged about 0.2 per cent of the fiscal deficit per year, on an average.

The pattern of divestment receipts is highly uneven with receipts being as high as 0.6 per cent of GDP in 2003-04 and zero in three of the last 20 years. This is partly because a case-by-case approach to privatisation has been followed with some stakeholders having a virtual veto on every divestment proposal.

Divestment has been carried out overwhelmingly in the form of share issue privatisation (partial privatisation without transfer of management control whose receipts account for 84 per cent of the total) as opposed to strategic sale (or asset sale leading to transfer of management control account for 6 per cent of the total).

Strategic sale of PSUs took place in the period 2000-03 and removed the recurrent need for subsidising many divested loss making enterprises (like Modern Food Industries and hotel properties of ITDC and Hotel Corporation of India).

Strategic sales despite being a financially prudent method of divesting loss-making PSUs have not been favoured in India in recent years, mainly because of the low level of formal employment in the country, which stands at less than 3 per cent of the total population.

Since many PSUs are over-manned, strategic sales have caused universal job losses in the first three years of privatisation, which has made it difficult to sustain public support, even if these effects are in the short-term.

As per the Public Enterprise Survey (2010-11), there are 62 such loss-making PSUs, exemplified by Air India, BSNL, MTNL, ITI etc, incurring a loss of Rs.21,693 crore annually. Shunning strategic sales would mean that the government would continue to subsidise many PSUs in future years as there are no takers for loss-making PSUs through share issue privatisation.

Other outcomes

Profitability increases after divestment because of reduced agency problems in that multiple and often conflicting objectives of PSUs become forged into the dominant objective of profit-maximisation.

This is clear from the profitability of enterprises that have undergone both strategic sale and share issue privatisation. Even though public sector managers are not replaced under share issue privatisation, the presence of other (than public sector) interests at the Board level does not allow excessive political interference.

The case in point is the experience of Coal India Limited, which continues to be in the public sector with government shareholding of 90 per cent. However, a minority institutional shareholder, the UK-based Children's Investment Fund has ensured that the government cannot issue directions to the company that would hurt its profitability.

By concentrating on the dominant objective of profit maximisation, firms are expected to become more efficient in utilising their resources. As a result, both employee and capital productivity improves even after share issue privatisation.

Since many of the PSUs are over-manned and since there is a tendency to reduce manpower after privatisation, it is obvious that employee productivity improves.

Part of this gain is shared with the retained employees through higher wages to make them important stakeholders. However, since the losers and the gainers from privatisation are different groups of people, political economy problems persist.

These results are in line with global experience that has been documented through research studies in several countries. They have found that change in management produces better, which highlights the importance of strategic sales in producing benign outcomes.

In order that disinvestment becomes a more dependable source of receipts to the government, there is a need for a rule-based approach as opposed to the case-by-case approach being followed now.

To enable that, the government may, for example, announce that its shareholding in non-strategic PSUs would be brought down to 26 per cent.

In order to get better returns, the government should also try to include strategic sales of PSUs in its arsenal of disinvestment methods so that small loss-making enterprises (and large ones like Air India) may be sold through this method to prevent their continued deleterious impact on fiscal resources. But, these decisions are as much political as economic.

The author is a civil servant. Views expressed are personal.