The Maharaja has been liberated. Finally! In June 2017, this column had observed that the ‘circle of life, moves from despair to hope’ and advocated that the government revert the ownership of Air India to the Tatas. (Liberate the Maharaja Already http://bit.ly/2t4zPhJ). It has taken a while for the decision to arrive but the fact that it has arrived is worthy of applause. Long live the Maharaja.
The question which follows logically is ‘what about other PSUs?’ The state of inefficiency and value destruction across the CPSE landscape calls for urgency in privatisation. The Public Enterprises Survey 2019-20 reveals that of the 256 operating Central Public Sector Enterprises, 84 reported losses adding up to Rs 44,817 crore – that is Rs 5 crore in losses every hour.
In the past five years, on an average, 75 CPSEs have recorded huge losses. Between 2015-16 and 2019-20, the losses incurred by these CPSEs add up to Rs 161,142 crore averaging over Rs 32,000 crore per year. Indeed, the government informed Parliament in August 2021 that “30 CPSEs were incurring losses continuously with cumulative loss of Rs 1,06,879 crores”.
There is the spectre of mounting loss and then there is the erosion of wealth – the management discount suffered by the listed stocks of public sector enterprises owned by taxpayers. The government is the largest industrial house in the country with over 90 entities listed on the BSE. On December 31, 2021, the market value of all listed stocks was Rs 266 lakh crore while that of PSE stocks was Rs 22.01 lakh crore.
The phenomenon is best illustrated by a sectoral snapshot. The government is the big brother in India’s financial sector as Public Sector Banks (PSBs) account for over two-thirds of all banking. The total market value of the shares of all listed PSBs is around Rs 7.7 lakh crore. In stark contrast, the market capitalisation of one private sector player, HDFC Bank, at Rs 8.11 lakh crore is more than the market value of all the listed public sector banks. Indeed, the market value of all PSBs is barely a third of the market value of private banks.
India’s management of the public sector landscape is haunted by inadequate conceptual clarity on what the government must own, what it must own and manage and what it must divest. There have been historic blunders, there is the legacy factor and then there is the fog of what constitutes strategic for an economy at what point. The takeover of Air India was predicted to fail in 1950. The Air Transport Committee headed by Justice Rajadhyaksha had warned that air transport was highly specialised in nature and “the slow and rigid bureaucratic methods inseparable from government are particularly unsuitable to the needs of air transport industry”.
The landscape of government ownership then worsened, fuelled by decisions of political and systemic expediency – for instance, the nationalisation of textile mills in the seventies. The socialistic pattern was sustained by the monopoly status PSEs enjoyed when the economy was closed.
Ideally, policy should have pivoted once the economy was opened in the 1990s. The cohabitation of public sector in domains opened up to the private sector accelerated erosion of public wealth across sectors. In the late 1990s, political pushback both within and outside the ruling regimes created definitions of what was defined as strategic -- for instance, Bharat Petroleum which is up for sale in 2021 was considered strategic even though the petroleum sector was open for private entities. And despite the success of privatisation under the Atal Bihari Vajpayee regime, the political consensus against disinvestment/privatisation has persisted for two decades. Typically, parties in opposition have opposed exactly what they had proposed while in power.
The foundation of aggravation is the political positioning of disinvestment and/or privatisation as a mechanism to bridge fiscal deficit -- that orphan of the political economy, the exotica which defines the gap between government expenditure and income. This positioning enables legitimising failure to target wastage and is manifest in failure of successive regimes to meet targets announced in budgets. The missing piece of communication is the harsh fact that the need for the government to get out of the business is driven by a greater common good – ensuring efficiency, true competition across sectors and value creation.
The success of Air India’s privatisation illuminates the need for championing the cause. The delays afflicting the listing of LIC – and indeed the much-advised dilution of the government’s stake in PSBs – reveal the need for a structural change in approach. In 2021, Finance Minister Nirmala Sitharaman inducted the 13-letter politically combustible phrase ‘privatisation’ into the political narrative. This was necessary but not sufficient.
The political economy of India is beset with competing crises and conflicting compulsions. The challenge central to steering India’s economy is about recovering resources, creating capacity and propelling productivity. It is vital for Budget 2022 to design a blueprint for moving PSEs out of the ambit of government management into a public trust accountable to Parliament to enable the recast of what the government must own and invest in, what it must manage and what it must sell out of.