Narendra Modi’s talk of privatisation implies big reforms

Allowing a new buyer of a PSU to get rid of staff, or to shut subsidiaries, implies a whole new approach to business

Narendra Modi’s talk of privatisation implies big reforms
The Ministry of External Affairs on Monday said the virtual summit will provide a blueprint for the future expansion and diversification of the India-Finland partnership.

If prime minister Narendra Modi’s full-throated support for the private sector in his speech in Parliament a few weeks ago wasn’t a big enough departure from the policies of the past, he ratcheted this up with a 20-minute justification – on Wednesday – of his government’s decision to speed up privatisation.

The budget had more details of what finance minister Nirmala Sitharaman had spoken of even earlier, that PSUs not in the list of strategic sectors would be sold and, within the strategic sectors, the number of PSUs would be kept to a minimum. On Wednesday, Modi gave an eloquent rationale for the decision.

There was, he said, probably a rationale for setting up PSUs when they were originally established, but this was no longer the case in many areas. So, for instance, though telecommunications remains a strategic sector in even the new definition, setting up an MTNL probably made sense when there were no private firms supplying telecom services, as the number of private sector telecom providers rose, the need for an MTNL came down dramatically.

Several of these PSUs, the prime minister said, were, in fact, a burden on the exchequer as their losses have to be funded. Though Modi didn’t mention names, Air India ran up losses of Rs 27,255 crore in FY16-20 and BSNL/MTNL lost Rs 62,725 crore in the same period (at some point, the government will have to remove MTNL/BSNL from its list of strategic PSUs as well!). Funding these losses have meant, Modi said, that many less schools, less roads, less hospitals, etc; so while the country’s poor have the first right on government resources, funding PSU losses was cutting into their rights.

And though the prime minister didn’t actually use the term ‘asset recycling”, by using the proceeds of privatisation – and asset monetization by selling assets of PSUs – to build new roads etc he was pointing out that, far from selling the family silver, he was helping the country’s poor.

While the prime minister did not spell out the impact of PSUs on restricting competition, this is equally important. For decades, the threat of Coal India’s unions going on strike has delayed the opening up of commercial coal mining, apart from adding to the country’s balance of payments woes. And surely the Rs 33,000 crore bailout given to Air India worsened the competitive environment considerably? After all, had Air India shut down, or not got the bailout money, fares would have gone up considerably and others like Jet Airways would have found it easier to survive.

More important is what the push for privatisation can do to further economic reforms in the country. Based on what both Sitharaman and Modi have said, if a PSU can’t be privatized and it is non-strategic, it will be shut down. Contrast this with the problems General Motors is having in shutting its plant in Maharashtra. Once PSUs are shut, it is safe to say, India’s approach to allowing private sector firms to shut shop will change considerably.

Indeed, since one of the reasons for the failure of the first bid to privatise Air India a few years ago was the lack of clarity on whether the new owner would be allowed to retrench staffers, it would appear the new privatisation policy will allow it. If it doesn’t, after all, people will be reluctant to buy overstaffed PSUs. In which case, a successful PSU privatisation policy will change the application of labour laws on the ground as well.

An important point that needs highlighting, of course, is the issue of dealing with PSUs till the time they are privatized; after all, in even the Atal Bihari Vajpayee government, the number of cases of privatisation were limited. Even when PSU managers, the prime minister said, were competent, their hands were often tied since any decision they took could be reviewed later and they could be accused of corruption later.

While that is certainly true, the issue the prime minister needs to address is that of how PSU managers can be freed since, it is clear, it will take several years – if not decades – before he can sell all the non-strategic PSUs. In the case of the listed PSUs, one way to do it, is to reduce the share of the government to below 51%; the firm will no longer be a PSU and its managers will no longer be answerable to the CAG etc even though the government owns the majority stake. And, as in the case of Maruti – with Japan’s Suzuki – a controlling interest can later be sold at a strategic premium to a private firm.

Another way, as this newspaper has advocated several times in the past, is to amend the Constitution. Right now, PSUs are considered an “instrumentality of state”; that is, they have to behave exactly like the government would do. That is why, for instance, they need to take out tenders for most things they procure. While that may help ensure public money is not lost to corruption, how can PSUs hope to compete when their private sector counterparts don’t have to call for tenders for everything? So, in areas where PSUs are competing with the private sector, the Constitutional amendment can say, they will no longer be considered to be ‘instrumentalities of state’.

Forget about allowing PSUs to take commercial decisions, in the case of BSNL, the government forced it to cancel its 4G tender on grounds that no Chinese suppliers should be allowed; but surely the non-Chinese bidders could have been allowed to bid, especially since BSNL urgently needs to be able to offer 4G services to customers if it wants to retain them? If that wasn’t bad enough, the government has decided, much against the wishes of BSNL’s management, that it cannot tender for a turnkey 4G solution – which is what telcos like Bharti Airtel do as one vendor is then responsible for setting up the entire network – but that the tender will be broken up in such a way that Indian vendors get a greater chance to participate.

While it is true that BSNL is not going to be privatized even under Modi’s new policy, surely the government realizes it needs to genuinely free up PSUs if they are to perform? Otherwise, BSNL’s losses will keep rising and, to quote the prime minister, the rights of the poor will be further hurt. In a nutshell, Modi’s policies towards PSUs – and that includes privatisation – will test India’s overall resolve for reform.

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