A Federal series on three decades of reforms
As part of our series on three decades of liberalisation, today we look at how India's crown jewels were sold off to finance deficits and pursue populism
How reforms helped regimes to rob PSU Peters to pay govt Paul
Uploaded 28 December, 2020
If the government successfully sells Air India, and if it gets a decent price for the ailing airlines – both are “big ifs” – it will still prove that this was the wrong way to pursue disinvestment. Wrong timing! Wrong strategy! Wrong objective! We will know what happens over the next few weeks. But the quixotic case of Air India tells a story of how India’s privatization efforts over the past three decades were riddled with confusion, corruption, controversies, and consternations.
Like it or not, the state-owned entities were sold at an inopportune time, i.e. during crises. Believe it or not, they were auctioned off without coherent plans in mind. The desire was merely to raise money to fill up the official coffers, and not to benefit the PSUs (Public Sector Undertakings). The net result: the country’s crown jewels were sold for a song, and money either lined up the pockets of corrupt people, or was wasted to buy vote banks through ostentatious subsidies.
Obviously, the first issue to consider in disinvestment is why. Why does the government wish to sell Air India? One of the answers stares in your face. The State has no business to be in most businesses, definitely not aviation. But if this is true, why did the politicians across parties latch on to the airline after 30 years of reforms? More importantly, there is no need for the government to be in other sectors such as telecom (BSNL), power (NTPC and BHEL), and insurance (LIC).
Despite disinvestment, the State continues to hold majority holdings in several companies, which are non-strategic, non-sensitive, and not in security interests. India hasn’t seen privatization, except in a few strategic sales. Over the years, the government’s holdings were sold piecemeal. The aim wasn’t to yield control to the private sector, but to list them on the stock exchanges. Fortunately, Air India, or a substantial part of the group, is being hawked off lock-stock-and-barrel.
The second argument too is apparent. PSUs are saddled with huge losses, or lower profits, due to corruption, government interference, and inherent inefficiencies. Hence, it is better to get rid of them. This belief misses two crucial issues. One is that the private sector can be as dishonest and ineffective, if not more, as the public sector. The thousands of bankruptcies of private players in the past few years reflect this dismal truth. They include hitherto well-known names.
At the same time, recent figures seem to belie this truism that the private sector is better than its public counterpart. According to the 2018-19 annual report of the Department of Heavy Industry, “Out of the 257 operating CPSEs *Central Public Sector Enterprises), as many as 184 showed profits during 2017-18.... The ‘profit’ of profit-making CPSEs was Rs 159,635 crore.... The ‘loss’ of the loss-making enterprises (71 in number) stood at Rs 31,261 crore during the year.”
Chew these facts for a few moments. They imply that over 70% of the PSUs were profitable. The combined profit of the universe was Rs 128,374 crore, after subtracting the losses. There is another way to look at the ‘Private versus PSU’ debate – stock valuations. According to www.bsepsu.com, as on November 30, 2020, 78 listed central PSUs accounted for almost six per cent of the market capitalization of all the companies listed on the Bombay Stock Exchange (BSE).
If one considers that the BSE has more than 4,700 listed companies, the PSU percentage looks quite impressive. However, if you realize that the market cap of the 100 most valuable stocks on the BSE accounts for 67% of the total market cap as on December 24, 2020, the figure for 78 PSUs seems pathetic. One needs to take into account the value erosion of the latter in the past six years. According to some analyses, the market cap of PSUs is down to a third between June 2014 and now.
Hence, the decline in valuations is fairly recent, and can be credited to several factors. State-owned banks were decimated as they showed their real bad loans, and accounted for a series of bankruptcies. Other state-owned majors in the oil and gas, and power sectors were destroyed by global factors, and internal economic haemorrhages. In some cases, like Air India, the government was partially responsible, as it allowed private competitors to thrive at the expense of the former.
The third contention to the question of why the government should disinvest or privatize is that it is better for the owner to monetize the crown or family jewels. Sell them at the best possible prices to profitably recover its investments (sorry, the money paid by taxpayers). One can buy this because even the private players do it. Serial entrepreneurship – sell existing businesses to start new ones, and then sell these too to start new ones – is the new name of the old capitalist game.
Experts contend that the best way is to give majority control to a private owner, i.e. privatization through a strategic sale. This ticks the above three boxes – government gets out of business, it aims to inculcate professionalism, and helps monetize past investments. But this wasn’t the preferred route. Only a few PSUs – VSNL, Hindustan Zinc, and specific hotel properties – were sold in this manner. Only now, in the case of Air India and BPCL, does this regime wish to opt for this option.
In most cases, the government shares were sold in bits and parts to either institutional or individual investors in the open market. Dribbles of shares, 5% or 10%, were offloaded at regular intervals, as will be the case with the proposed part-disinvestment of LIC. The net effect was that the State continued to be a majority shareholder, and dictated the policies of the PSUs. The old so-called rotten system remained firmly in place. The politicians reigned, and the ‘Babus’ ruled.
Of course, there is nothing wrong with such tactics. One can maintain that a slow process allows the government to maximize profits as the value of the stock gains over a period of time. In addition, since many PSUs are hugely valuable, a sale of sizable holding sucks up, or dries up, money available in the marketplace. For example, if 10% of LIC is offered in the future, it may mop up Rs 80,000-100,000 crore! This can distort and disrupt the stock market in myriad ways.
The issue stinks as the major reason behind disinvestment is to fill up the official coffers to bridge the fiscal deficit, and squander away the money for political mileage. The genuineness of the process is questionable if the crown jewels are sold, not during rare emergencies, or at opportune time to get the best returns, but to fund welfare schemes or subsidies to woo vote banks. The deficit becomes bigger only when the government revenues are wasted on grandiose plans.
A 2015 FICCI study said that Indian disinvestment was “primarily driven by the compulsion of financing the fiscal deficit”. This was unlike the cases in the developed nations, where it was “driven by a conscious recognition that this improved efficiency (of the PSUs)”. Instead of profits, this led to “huge losses to shareholders” who, unfortunately did not comprise the governments but millions of taxpayers, whose money was invested to build the modern temples in the first place.
What is worse is that the obsession with funds for myopic economic and political gains resulted in an ongoing ‘Rob Peter to Pay Paul’ syndrome. The ‘family silver (and gold)’ was sold among the various state-owned entities. The money was transferred from one set of cash-rich PSUs to the Exchequer through purchases of shares in another set of PSUs. Many times, the roles were reversed. They were only ledger entries – from Pocket A to Pocket B, from one head to another one.
In 1991-92, when disinvestment began, small stakes of PSUs, dubbed “very good”, “good” and “average”, were clubbed in bundles. These were sold as complete packages. Half of these bundles were bought by the state-owned Unit Trust of India. During the late 1990s and early 2000s, this was enhanced to cross-holdings, where various PSUS in a sector purchased shares in each other. ONGC bought a part of government stake in Indian Oil, which along with GAIL, held shares in ONGC.
The height of this statistical jugglery came in 2018, with the much-hyped merger of the two state-owned oil giants, explorer ONGC and refiner-marketer Hindustan Petroleum. The latter became the subsidiary of the former, which paid a massive Rs 370 billion to the common owner, the government, for the acquisition. In a similar vein, ONGC took over a dud and loss-making Gujarat State Petroleum. The two deals drained the cash reserves of the explorer, which was saddled with huge debt.