Until 1991, India was one of the most over- controlled and over-regulated economy with a captive domestic market.
The reforms of 1991—the fallout of unprecedented economic crises emanating from inward-looking development strategy—marked a watershed event for the Indian economy.
Liberalised packaged reforms were launched, thereby ushering in market-led development phase characterised by outward-looking development strategy.
One of the economic reforms that had been initiated in 1991 was the restructuring of the public sector enterprises owned by the Union Government so that they become ‘an engine of growth rather than an absorber of national savings without adequate return’. Accordingly, it was decided in the Union Budget for 1991-92 to offer 20 p.c. of government equity in select Central PSEs to mutual funds, public sector financial institutions and banks and, later on, to private investors. This is known as ‘disinvestment’ policy.
The issue of privatisation has come to the forefront due to the poor performance of several (Central and State) PSEs and the consequent huge fiscal deficits faced by the Government of India. Since the Government has to give fiscal support to losing public concerns, the fiscal deficit of the Government kept on mounting up year after year. One specific step that has been taken to reduce such fiscal deficit is privatisation through an act of disinvestment, i.e., selling of public sector equity to financial institutions, mutual funds and the private sector.
This kind of disinvestment policies, as contrasted with the outright sale of a PSE to a private business house (i.e., full privatisation), does not transfer control and operation of PSEs to private hands. If disinvestment policy is believed to be an instrument or a strategy to reap efficiency gains, then the disinvestment policy may not show much results.
In view of this, in the following years, the government decided to reduce its equity in PSEs to 26 p.c. In 1999-2000, emphasis of disinvestment modalities had been shifted from the ‘selective sale of minority shares’ of PSEs to ‘strategic sale’.
In 1996, a Disinvestment Commission was set up to advise the government relating to its disinvestment policy. The Commission was dissolved in 1999 and a Department of Investment was set up. Following the recommendations of the Disinvestment Commission, a ‘Disinvestment Fund’ was set up to use the sale proceeds of restructuring PSEs and to finance voluntary retirements of excess staff as a ‘safety net’.
Initial public offering (IPO) and strategic sale:
However, in simple language, privatisation refers to a change in the ownership of public sector or government-run enterprises to private industries. Such transfer of ownership can be partial or complete. Or such ownership may be transferred by offering the shares of public sector undertaking to the retail investors and institutions, i.e., dilution of equity in favour of the general public through capital market.
This is commonly known as ‘initial public offering’ (IPO). There is another method called ‘strategic sale’ under which management of the public sector undertakings passes over to the private partner.
In India, privatisation is sought to be achieved through two measures:
(i) Selling of shares of PSEs i.e., equity offloading, and
(ii) Strategic sale of a PSE to a private sector company to transfer managerial control.
It may be noted that the first method is purely a disinvestment of government equity while the second method is the privatisation of the enterprise. The country experimented with the first method during 1991-98, while from 1998-99 onward the emphasis shifted in favour of the strategic sale method. This method yielded better result and, for the next five years, strategic sales dominated.
There had been a major shift in 2004-05 when it was said in the Union Budget for.2004- 05 that “As long as government retains control over the PSEs, and its public sector character is not affected, government may dilute its equity and raise resources to meet the social needs of the people.” This disinvestment policy thus marks a significant departure from the ‘strategic sale’ method which continued till 2003-04.
Thus, disinvestment in recent years essentially involves sale of minority government equity through IPOs. Between 1991-92 and July 2007, roughly 65 p.c. of total disinvestment receipts could be earned from this method. As on March 31, 2007 as many as 44 CPSEs are listed in the stock exchanges of India.
Objectives of Disinvestment:
The Government announced in the Parliament in December 2002 the objectives of the disinvestment policy. The main objective is to put national resources and assets to optimal use and, in particular, to unleash the production potential in our PSEs. The policy of disinvestment aims at (i) modernisation and upgrading of PSEs, (ii) creation of new assets, (iii) generation of employment and retraining of displaced or affected workers following closure and internal restructuring of PSEs, (iv) use of proceeds for restructuring sick PSEs, (v) retiring of public debt, etc.
(i) Modernisation and upgradation of PSEs:
To improve the working of PSEs, what is required is the modernisation and upgradation of PSEs so that the current disinvestment policy yields better results. Modernisation demands inculcation of the spirit of private sector in the PSUs. PSEs use outdated technologies. Taking advantage of the ongoing globalisation process and making PSEs more efficient and competitive, these units need to be modernised.
(ii) Reduction of fiscal deficit to meet costs associated with modernisation:
It has been already said that one of the objectives of disinvestment policy is to reduce fiscal deficit. In other words, proceeds from the sale of government equity can be utilised for meeting the following costs associated with disinvestment.
Modernisation and restructuring of PSEs to make them globally competitive requires optimum utilisation of human resource and optimum return on investment. For this, voluntary retirement scheme needs to be introduced as it aims at downsizing the number of workers. It is a method used to release the excess manpower and, thus, improve the performance of the organisation.
In order to protect the interests of the voluntarily retired workers, a National Renewal Fund was set up in 1992 so as to provide (i) assistance to cover the costs of retraining and redeployment of workers as a result of modernisation, technology upgradation and restructuring, (ii) funds for compensation of affected employees, and (iii) funds for employment generation schemes in order to provide a ‘social safety net’ for the needs of labour.
However, this Fund has been dissolved. As a step towards providing a ‘safety net’ for the affected employees as a result of restructuring of PSEs involving downsizing, a revised VRS Policy the scheme of counselling, retraining and redeployment (CRR) is in operation since 2001-02. Such scheme aims at extending a human touch to the separated employees.
Disinvestment process began in 1991-92 through minority share sale. During the 1990s, restructuring of CPSEs involved the disinvestment of government equity instead of transfer of management of control. Disinvestment policy underwent a change in 1998-99 when the strategic sale route transfer of management control was to be employed. This method continued till 2003-04. Another major shift took place in 2004-05. This time, disinvestment procedure involved sale of minority government equity through IPOs.
Fiscal Ramifications of Disinvestment Policy:
Let us now consider the fiscal ramifications of disinvestment policy.
(i) Little gain in resource mobilisation:
The Government has been able to realise Rs. 51,573 crore by way of disinvestment of PSEs during the period 1991-92 to 2007-08. Till 1999-2000, disinvestment primarily involved minority share sale. But the disinvestment proceeds that accrued during this entire period were far below the targeted amount, except 1991-92, 1994-95, 1998-99 and 2003-04.
It is indeed a fact that disinvestment plans did not progress in the direction as desired. On the contrary, it resulted in low resource mobilisation. Further, disinvestment policy, after a close scrutiny, has not been successful in addressing fiscal difficulties.
(ii) Shrinking employment opportunities:
In India, the policy of disinvestment has been looked with suspicion. For instance, when BALCO an aluminium company was handed over to a private business house in 2000, the workers resisted the move, with little success. Work stoppages were organised by workers in the case of Sterlites Industries Ltd relating to non-retrenchment of workers and trade unions had to suspend their agitation.
The essence is that this disinvestment policy followed over the years has made employment situation grim in the organised public sector enterprises. Reduction in employment in disinvested PSEs is a matter of grave concern.
(iii) Privatisation does not necessarily improve efficiency:
The disinvestment and privatisation policy is based on the argument that chronically sick PSEs have become unsustainable and, thus, requires restructuring. It is argued by its advocates that the private sector is more efficient than the public sector. Critics argue that privatisation does not necessarily lead to better economic performance.
In fact, there is hardly any correlation between ownership and operational efficiency (performance). No doubt competitive markets are necessary to achieve an efficient and vigorous economy, but full-scale private ownership is not necessary for the successful operation of competitive markets (i.e., for keeping competition alive and the markets free).
The fact is not that all PSEs are models of inefficiency while all units in private sector are efficient in their operation. There are efficient or inefficient enterprises in both private and public sectors . Thus, it appears, on balance, that in order to improve the performance of inefficient units the creation of a competitive market environment is essential. The crux of the matter is that it is the competitive environment rather than ownership that ensures an efficient allocation of society’s productive wealth, i.e., its capital.
(iv) Handing over public profit to private pockets:
Further, not all PSEs are chronically sick. There are many, star performers, called ‘Navaratnas’ and ‘mini ratnas’ which are making profits consistently. Thus, by deregulation and debureaucratisation of PSEs, sick units can be reviled without handing over these to the private sector. If shares of PSEs are offered for sale to the private sector, the latter will be more interested in the shares of such profit-making concerns.
In fact, shares of many profit-making CPSEs (such as BALCO, CMC, HTL, VSNL, Hindustan Zinc, Maruti Udyog Ltd and many more) have been sold to private partners. This amounts to transferring ‘public profit’ to the private pockets. This is hardly justifiable by an rational economic logic.
(v) Performance of PSEs not connected with disinvestment:
The stated objective of disinvestment is to ensure market discipline and to improve the performance of PSEs. But the experience of disinvestment policy shows that neither market discipline nor performance of PSEs is linked to disinvestment. It is also unclear as to how disinvestment can ensure viability and sustainability of PSEs. Increased disinvestment cannot be seen as the panacea for all the ills of PSEs.
(vi) Weakening of infrastructural base:
One may note that the sale of real assets of large PSEs like the SAIL or Coal India Ltd. is likely to weaken the very base of the economy by creating infrastructure deficiency. If the new owners of these companies (the replacement values of the assets which are in the neighbourhood of Rs. 25,000 crore each) enjoy the discretion of using the resources as they deem fit, this will virtually amount to shifting over the control over the vast resources of PSEs at throwaway prices.
A logical question that arises here is the question of financing public sector industries. To achieve the goals of social justice, public sector investment needs to be stepped up. Public sector investment in larger doses is possible if the government disinvests its share of luxury hotels and restaurants, bakery, etc.
By disinvesting shares of these non- priority, luxury goods producing PSEs, the Government could have garnered larger financial resources. Furthermore, loss-making PSEs should not be allowed to function unless they improve their performance. However, the Government thought it proper to disinvest shares of profit-making PSEs.
It may be pointed out here that the disinvestment process has lost its momentum with the change of the Union Government. In fact, in 2004-05, there was a policy shift and the UPA Government, while expressing a commitment toward a strong and effective public sector, decided that ‘generally profit-making companies will not be privatised’. It has also been decided that successful profit-making PSEs would be granted ‘full’ managerial and commercial autonomy and restructuring programmes for sick PSEs would be undertaken.