The year 2015 has been a disappointing one for economic reforms in India. Some of it was political, such as the land Bill, and now GST. But even where reform was entirely in government hands, the progress was inexplicably slow. One of the biggest disappointments of 2015 has been the inability to move forward on even the modest targets of disinvestment of R69,000 crore ($11 billion)—especially strategic disinvestment of R28,000 crore ($4 billion)—out of the total assets of public sector undertakings (PSUs) estimated at over R30 lakh crore ($500 billion); not included here are the state banks, which have also locked in huge amounts of public capital.
If the Narendra Modi government wants to show its reformist tendencies, it could move on disinvestment aggressively without needing any legislative approval and brinkmanship. Instead, it’s floundering around, trying to restructure and improve these companies without a clear game-plan.
What India needs is a much-bolder plan—over the next 10 years—to divest at least half of the government shareholding, largely through strategic disinvestment. The proceeds—roughly $250 billion—could be parked into the strategic investment fund established recently. If these proceeds are used to leverage private funding of the same magnitude, India could be able to invest an additional $50 billion per year—roughly 2.5% of GDP—in public infrastructure for the next 10 years. Such a plan would be essential as we struggle to fund even modest increases of 1% of GDP in public infrastructure in the budget.
However, it’s not just about unlocking funds for public infrastructure, strategic disinvestment also improves the efficiency of capital use. It should be remembered that the PSUs which were strategically disinvested under the previous NDA government have done exceedingly well, thereby enhancing efficiency and improving the return on assets. This government needs a clearer medium-term strategy which builds on Prime Minister Modi’s promise that the “business of the government is not business”, essentially getting the government out of running these companies, increasing the return on capital and raising huge resources for public infrastructure.
Such a medium-term plan should be based on performance, size and sector. Ad hoc expediency based on yearly targets are not going to work.
For now, the plan could leave the Maharatnas in state hands—whose total assets are around R10 lakh crore ($133 billion), about one-third of total PSU assets. In any case, the Maharatnas—BHEL, Coal India, GAIL, Indian Oil, NTPC, ONGC and SAIL—are collectively doing well. Their return on capital and return on assets have been higher than those of comparable corporate firms by 4% and 2%, respectively. However, even in this category the situation has seen a reversal of trends in the last three years; the corporate sector has shown a surprising improvement in return on capital and return on assets, and the Maharatnas are showing a continuous decline in performance. Therefore, among the Maharatnas, SAIL, BHEL and Indian Oil need serious restructuring and better leadership.
The remaining two-thirds of state assets are Navratna and Miniratna companies. The performance of the 17 Navratnas is consistently worse than that of comparable private corporates, with return on capital roughly 2% lower compared to equivalent private firms. This is the group that should be privatised—especially Bharat Electronics, MTNL, NMDC and Oil India.
The category of Miniratna is formed by 73 companies, and these are the ones that are most ripe for strategic disinvestment. A plan to sell most of these companies should be developed, with those in manufacturing and the services sector high on the list for immediate sale as these are the worst performers. There will be many arguments made against selling these companies to the private sector, but there seems to be no reason to run these as public companies except to provide employment to a small number of people and to be able to provide managerial positions to party members once any new government comes into power. A far more serious issue is that of tainted contracts and procurement, where lucrative deals are handed out to cronies.
How and to whom these companies are sold does matter. Russian-style privatisation—where most of Russia’s state assets were sold to “oligarchs”—must be avoided. Transparent processes, competitive bidding and ensuring that some of the funds are set aside for worker compensation are vital for strategic disinvestment to succeed.
Such a bold approach to transferring state-owned assets with generally low return towards public social infrastructure is a win-win idea. Especially because the private sector will improve returns, as was the case with the first batch of PSUs that were privatised under the Vajpayee-led government, whose return on capital tripled after privatisation. The second gain is it will unlock funds for building badly-needed social infrastructure—roads, power transmission lines, sewage systems, irrigation systems, railways and urban infrastructure. This will also help draw in private investment, including FDI.
If the Modi government wants to leave behind a lasting transformation of the economy, getting the government out of business and laying a foundation for rapid growth by accelerating India’s infrastructure plans is the way forward. Develop a 10-year plan to divest at least 50% of PSU assets, shift the proceeds into the strategic investment fund and reap the rewards. The business of the government is public infrastructure, not public companies. Transforming public assets into public infrastructure would be a lasting reform.
The author is a visiting distinguished professor at NIPFP and visiting scholar, Institute for International Economic Policy, George Washington University