Why disinvestment of loss-making firms should be govt's top priority

The word ‘disinvestment’ usually evokes a strong reaction from socialists, the Left and people employed by India’s vast public sector.

In fact, after the latest Public Enterprises Survey (PES) report of 2018-19 was tabled in Parliament earlier this month, there was a lot of finger-pointing at the Narendra Modi government’s so-called penchant for disinvestment, since the survey showed that the total income of CPSEs increased by a fifth or 20% during the year. Total income reported was ₹24,40,748 crore while net profit also jumped in 2018-19, by over 15% year compared to the immediate previous fiscal year.

With CPSE’s overall financial position improving in 2018-19, it was only to be expected that the Modi government’s disinvestment zeal would be questioned. When CPSEs brought in higher net profit in 2018-19 compared to 2017-18 and therefore also paid more in dividend and taxes to the government, what was the crying need for the government to divest its stake, sell off some units or even go in for strategic disinvestment?

The government is betting big on disinvestment proceeds in 2020-21, much like it hoped to benefit from an aggressive disinvestment target in the current fiscal, to tide over a worsening fiscal situation and maintain its fiscal deficit targets for both years. According to the Union Budget for 2020-21, the target for disinvestment proceeds has been kept at an ambitious ₹2.1 lakh crore, a three-fold increase over the revised estimates for the current fiscal at ₹65,000 crore. The Budget estimate for disinvestment proceeds for the ongoing fiscal was ₹1.05 lakh crore.

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This urgency to go in for aggressive disinvestment of public sector enterprises stems from the alarming fall in government’s revenue generation through taxes and other sources in both, 2019-20 and possibly the next fiscal too.

Also, as a reply in the Lok Sabha shows, the government is trying to achieve wider public ownership of CPSEs through the sale of a minority stake in some instances. In select CPSEs, the government may reduce equity below 51%, while retaining management control on a case-to-case basis.

This logic of earning more through disinvestment and enabling wider public shareholding cannot be faulted for a government severely short of earnings, the argument of the naysayers remains that offloading public sector units which are bringing in more earnings and profits than previous years makes little sense.

The CPSE survey not only shows increased earnings and profits of the CPSEs in 2018-19, it also shows that the contribution of these CPSEs to the central exchequer by way of excise duty, customs duty, GST, corporate tax, interest on central government loans, dividend and other duties and taxes increased by about 5% to ₹3,68,803 crore. In simple terms, the CPSEs paid nearly 1,010 crore on an average each day of 2018-19 to the exchequer.

But the naysayers against disinvestment seem to have missed a significant point: the same CPSE survey also showed that the three worst-performing CPSEs not only continued to top the loss graph but also showed a significant increase in losses within just 12 months. In fact, except one year, BSNL, Air India and MTNL have remained the top three loss-makers throughout the tenure of the Modi government’s first term.

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In 2018-19, the three companies together accounted for 85 paise of every rupee lost by 70 loss-making CPSEs. In the immediate previous fiscal, their share of the total loss was significantly lower at just about 52 paise for every rupee. In other words, the top three loss-makers went from bringing in nearly half the total CPSE losses to bringing in more than three fourths, within a span of just one year. The net loss of the top loss maker, BSNL, nearly doubled to ₹14,904 crore by March 2019; for Air India too the increase was significant.

Here’s another startling comparison: These three CPSEs together posted net losses of ₹nearly ₹27,000 crore in 2018-19 or an average daily net loss of almost ₹73 crore. The total losses by these three loss-makers in 2018-19 were more than the losses posted by 10 top loss-making enterprises in 2017-18.

In this backdrop, the argument against disinvestment is surely a flawed one; it should be applied on a case to case basis. Perhaps the caveat should be a careful evaluation of whether disinvestment is being proposed in a profit-making CPSE or in a sector where the larger public good dictates continued presence of the government. In every other instance, the government should, in fact, be encouraged to exit businesses which have been bringing in losses for years.

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Government’s presence may be important in some strategic sectors like defence but why should it be in the business of flying, offering mobile services or in the hospitality business?

In the case of BSNL and MTNL, both of which continue to bring in losses, the government seems in no mood to exit. Instead, it continues to pump in thousands of crores of taxpayers’ money in these enterprises, keeping them alive. This, despite the massive churn currently happening in the telecom market where incumbent private telecom companies are struggling to survive due to policy and legal issues. Government’s continued support to BSNL and MTNL is distorting the market and has prevented private telcos from operating in a level playing field.

As for Air India: In 2018-19, net loss increased by over ₹3,000 crore to reach the highest ever loss figure of ₹8,474.8 crore (₹5,348 crore in 2017-18). Accumulated losses now stand at a whopping Rs 62,694 crore and AI’s current liabilities exceeded its current assets by Rs 65,245.87 crore as on March 31 2019. The total debt on its books on that date was Rs 58,255.9 crore. During 2018-19, four of Air India’s six subsidiaries also reported losses; small profits accrued only from the two ground handling arms. It is clear from these statistics that the government would do itself and the Indian taxpayer a favour by exiting the business of flying and offloading this perennial, loss-making airline.