Fast privatisation vital for economic turnaround

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Updated: September 9, 2019 2:10:15 AM

Apart from easing govt finances, faster privatisation will boost productivity and also help finance fresh investments.

Privatisation of PSUs is also closely linked to the revival of India’s investment-cyclePrivatisation of PSUs is also closely linked to the revival of India’s investment-cycle

News reports suggest that, along the lines of ONGC’s purchase of oil marketing company (OMC) HPCL, the government is trying to persuade Indian Oil Corporation’s (IOC) supposedly independent board to buy BPCL, the third government-owned OMC in the country. This is in keeping with the government’s goal to have bigger PSUs so that they can have more financial muscle and will also help meet this year’s Rs 105,000 crore disinvestment target; but should this happen, it will be unfortunate for a variety of reasons.

For one, India’s OMCs need to become more efficient, and it is difficult to see how that will happen if they remain in a public sector environment. That is why, for instance, in just the period since Narendra Modi assumed office in May 2014, the share of PSUs in the country’s overall market-capitalisation has fallen from 22.5% to 11.6%—while overall BSE market capitalisation rose 61%, that of PSUs fell 17%. This means a notional loss in the value of PSUs of Rs 15 lakh crore in the last 5+ years! Since the market-share of PSUs is falling anyway—whether in banking or airlines or telecom or any other sector—why not formally privatise them and earn money from this instead of suffering a loss of value (market capitalisation) along with that of market share?

Second, were the IOC-BPCL sale to happen, the amount of competition in the sector will fall by a third as there will then be just two major players, ONGC-HPCL and IOC-BPCL; there are, it is true, private sector oil companies like Reliance and Essar, but these operate mainly on the highways as getting land in cities/metros is next to impossible. Since it is not even clear whether the Competition Commission will clear such a deal, the government should ideally even invite global giants to bid for BPCL.

There are other reasons also for why the government would do well to genuinely privatise instead of just forcing PSUs to borrow in order to buy other PSUs; this, not surprisingly, also lowers the ability of the buyer-PSU to invest in capacity expansion in its main line of business. While genuine privatisation means the losses of PSUs will no longer have to be borne by the government, this is also important for other reasons; Air India’s FY19 losses were up 38% to Rs 7,365 crore despite this being the year in which Jet Airways was cancelling flights in the run-up to it shutting, and BSNL’s FY19 losses almost doubled to Rs 13,804 crore. And while the Centre is working on a revival package for BSNL, with such high labour costs, it is unlikely it can ever be revived (bit.ly/2k6IPB2), especially in a post R-Jio scenario where tariffs have no relation with costs.

As a general rule, India’s imports have tended to be high in areas that are either dominated by PSUs or are their almost-exclusive preserve; oil and coal are two good examples where, despite having the best acreages, low production by PSUs has necessitated large imports to meet domestic demand. In the case of coal, it is only a few weeks ago that the government allowed 100% FDI in commercial coal mining, but even though Indian miners were allowed even earlier, no coal mine has been given for commercial mining so far; as a result, India’s coal imports rose almost threefold from $9bn in FY10 to $26bn in FY19. In the case of oil, where ONGC is the main producer, import-dependency continues to rise, from 77.3% in FY14 to 82.8% in FY18. To put this in perspective, over the last decade, ONGC’s production has fallen while that of private sector Cairn has risen by over 3.5 times; so if more private sector exploration firms were encouraged, instead of being discouraged by unfriendly policy as happens now, India’s imports could slow considerably. In other words, privatisation is critical to raising the country’s productivity.

Privatisation of PSUs is also closely linked to the revival of India’s investment-cycle; as a share of GDP, gross fixed capital formation fell from 34.3% in FY12 (new series) to 29.3% in FY19 (see graphic). In capital-intensive sectors, and where all manner of government clearances—from land to environment etc—are required, there are few firms that are interested in making big greenfield investments right now since there is a big operational risk in the permissions either taking too long or not coming at all. If, however, a firm is in a position to buy a PSU that is already in the business, there is no need for fresh permissions; over time, if the buyer is able to expand the business, as profits rise, these can be used as equity to fund expansion plans. Indeed, the insolvency process, where firms are being sold at a hefty discount, is also a good way to revive investments but, sadly, the legal process is taking far too long.

To take the example of Hindustan Zinc that was bought by Vedanta in 2002, ore production was around 3 million tonnes; today, this is close to 14 million and, thanks to continuous mining and exploration using better techniques, HZL’s reserves and resources are up from 154 million tonnes before it was privatised to 403 million tonnes today. Zinc production is up from 2 lakh tonnes to nearly 7 lakh tonnes and silver from 47 tonnes to 713 tonnes, and close to Rs 40,000 crore has been invested by Vedanta; it is not certain this could have taken place if HZL had continued to remain a PSU.

In the manufacturing sector, it is only after the government sold Maruti to Japanese firm Suzuki that the Indian auto major became a big player in the global market for small cars; indeed, after taking over Maruti, Suzuki increased its R&D work out of India and, not only is Maruti exporting cars for Suzuki, Maruti engineers are also an integral part of Suzuki’s global R&D. The imperatives for privatisation have been quite clear for several years; it remains to be seen if prime minister Modi acts upon them.

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