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Complete Information on the “Disinvestment” (Privatisation) Policy of India

December 18, 2018 0 Comment

Government has been encouraged by the strategic sales affected in 2001 and 2002. The Supreme Court’s view is that the disinvestments procedure followed in the sale of BALCO (Bharat Aluminium Company Ltd.) was failed, just and equitable has further emboldened that Govt. The first strategic sale was in the case of Modern Food Industries Limited. After it, a number of other PSUs were privatized. Some of the important privatized PSUs are

These big ticket privatizations emboldened the department of disinvestment to plan for a more vigorous drive in 2002-03 and afterwards. The proposal included a significant amount of holdings being divested in 5 companies in the oil, power and telecommunication sectors (IOC, ONGC, GAIL, NTPC and BSNL). Through offer of 10 to 25% stake in these companies in the domestic market and abroad by ADR/ GDR issues, it was hoped to raise over Rs. 25,000 crores by March 2003.

The other disinvestment plans in 2002 included offer of 36% and 26% in Bharat and Hindustan petroleum Corporations respectively as strategic sale. The ministry of Petroleum as well as a Parliamentary committee did not favour disinvestments of the major oil companies in the public sector.

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The National Aluminium Co. (NALCO) a leading aluminium producer in Asia, was another major enterprise for which bids were being invited for acquiring about 30% of Govt, holdings. The series of sales and the Government decision to push ahead with disinvestments has raised the market value of share of public enterprises in the stock market.

Some Benefits of Strategic Sale:

a. Sale of modern foods rose more than 90%

b. Salaries of modern foods workers went up by an average of Rs. 1600.

c. Paradeep Phosphates saw production triple in 3 months after privatization.

d. BALCO employees saw salary hike by 20% and ex-gratia payment of Rs. 5000.

e. Since January 2000, the PSU index (34 PSU shares) on the BSE index rose by 75%.

f. The effect on public debt and interest payments is also appreciable. Govt borrows at 10% and so the money raised will lessen the debt service ratio.

Pitfalls Associated With the Disinvestment Process:

Since most of the PSU’s are loss making, it is very difficult to find buyers for them. So the government has to restructure and revive them which again call for more funds which is just not available. Closing down unviable units is not an easy political decision to make.

If at all the private sector is interested in taking up a loss making units, it would only be as an excuse to appropriate the real estate attached with these units so that it could make use of the physical assets to start fresh undertakings in the premises available at a very low cost.

This implies that the principle objective of privatization to infuse the commercial spirit in PSU’s may not be achieved and revival of the sick unit may not be the priority for the private sector.

Privatizing profit-making units does not make much sense because the entire rationale of privatization is based on the fiscal health of the unit measured by the rate of return.

But currently what is happening is that we are engaged in disinvesting in profit making PSU’s leading to a situation where we are privatising profits and nationalizing losses. This tendency must be avoided.

The bearish capital markets also stand in the way of meeting disinvestment targets. With a spate of scams hitting the market the investors’ confidence is low. The performance of the markets in the recent past has been at low ebb. The signs of a worldwide recession have added to the problems.

Another problem is with regard to taking care of the interests of the workers. Some estimates reveal that there is 25-30 percent overstaffing in public sector enterprises. So when private parties took over they would naturally want to downsize.

The retrenched workers should be either have to be given alternative employment or have to be adequately compensated. But the government’s track record in compensating the workers has not been very encouraging.

The absence of a social security system in India as against well-organized social security systems in the developed countries is another potent reason why trade unions and workers are against schemes of retrenchment or voluntary retirement.

Major Shortcoming in the Disinvestment Process:

What exactly happens is that there are no bidders for those enterprises that are not at all profitable. Thus all those profitable companies are not being privatized and losses making ones are being retained under the Government. This has resulted in a situation where “we privatize the profits and nationalize the losses”.

The Government had set Air India for privatization. However, after all the formalities have been completed and the necessary conditions have been laid down, no bidder was remaining in the fray. Same is the story for Hotel Ashok of ITDC in Delhi which was put for sale twice but without any takers.

Disinvestment and FDI:

In India, the success of disinvestment has depended on domestic investment and foreign investors have kept away. This contradicts the global trend where according to an UNCTAD report on world investment, FDI inflows in Latin America increased by 22.7% in 1999 due to privatization in telecommunication and oil sector. On the contrary privatization has failed to attract FDI in India. The main reasons of failure on this front are:

a. It took almost a decade to finalize disinvestment policy and there is lack of transparency.

b. Till 1999, the policy harped on controlling power and protecting worker. No attractive policy was formed to allure foreign investors.

c. The disinvestment of 25% equity holding of VSNL was decided in 2001 but actual disinvestment took a year. Global investors won’t wait so long.

Globally, mergers and Acquisition (M & A’s) have been major source of FDI inflows. In India regulatory laws make M & A’s low profile.

Measures to Remove the Pitfalls:

Another pitfall in the privatization and disinvestment process is the failure to consider alternative models. For example before going in for disinvestment the option of establishing worker’s cooperatives should be explored.

The amount that would have been paid out as compensation could be handed over to these worker’s cooperative who could utilize it for reviving and modernizing the concerned PSU.

Such an experiment can smoothen the transition to privatization and also link worker’s interest with the corporation’s interest. If the workers can improve the capacity utilization of these enterprises, it would be possible not only to wipe out losses, but also generate profits.

The shares of the sick PSU’s may be gradually transferred to the workers on terms to be decided between the government and the representatives of the employee’s co-operatives. The idea of establishing worker’s cooperatives gets more credence from the fact that according to a study conducted by the RBI based on data provided by 378 large sick units, it was revealed that 66% of industrial sickness could be traced to mismanagement, while workers were held responsible only in 2% cases.

Another model that could be considered is the leasing system. The public enterprise while retaining ownership may lease out to a private bidder for a specific period for use. The Chinese government adopted the Asset Responsibility System (ARS) in which a tenderer becomes the general executive for a specified period of say five years.

But before the appointment of the bidder is finalized the tenderers have to be given an undertaking of the profits they would pass over to the state and also give a convincing set of measures that they propose to undertake in this regard.

The government enjoys the right of obtaining profits as per agreement. On the other hand, tenure ownership is expected to lead to efficiency an (I lower costs of operation. In case a particular bidder fails to come up to the expectations of the government, the latter reserves the right to replace him with more promising bidder.

The performance of PSUs in general has improved a lot after the initiation of reforms. This has been mainly due to measures like granting greater autonomy and operational freedom to many PSUs especially the well performing ‘Navaratnas’.

This demonstrates that efficiency is not a function of ownership but is depends on the organizational culture. So the emphasis should not be merely on privatizing sick units but sincere efforts should be made to revive them through operational measures like granting greater autonomy and reducing bureaucratic and political control thereby allowing them to run on sound commercial principles and business practices.

The government’s propensity to use the proceeds of disinvestment-tp finance fiscal deficits is not a healthy one. The proceeds should be either ploughed back into the PSUs for their up gradation or it should be used for purposes like infrastructure development or retiring national debt.

To sum up, the measures that need to be taken are greater transparency in the disinvestment procedure, avoiding politicization of the process, due and timely protection of the interests of workers, using disinvestment proceeds for productive purposes and also guarding against selling away profitable PSUs at low rates.

Evaluation of Disinvestment Process:

At the very outset we would like to say that though there are many drawbacks of the public sector in form of corruption, bureaucratization & red tapism, low return on investment etc. sweeping disinvestment cannot be the answer to all these.

This is because disinvestment has its own set-backs, especially, in a developing country like India where there is inequitable distribution of income.

Again apart from opposing complete and blind disinvestment we also oppose the process of disinvestment which is raising controversies in the political circle and is also drawing flak from the experts. To sum up we may put our opinion in light of the above facts under two heads as follows:

Process of disinvestment: “Controversial”: The process of disinvestment followed by the previous Atal Bihari Vajpayee government raised loads of controversies all over the country.

It was drawing flak from many experts who are quite justified to an extent. For example, the sale of BALCO to STERLITE was done in such a fashion that it invited criticisms. Again, the sale of some ITDC hotels to different private companies at throw-away prices also generated controversy. In view of above is desirable that

(a) The entire disinvestment process must be fully transparent. Everyone concerned must be fully aware how disinvestment is to be done, the policy or method followed in fixing the price of the PSUs and so on. In that way nobody can complain later on that the process was biased and unfair.

(b) While striking a deal with the private company overall interest of the country or more specifically interest of the public must be given top priority. This is necessary because the private owner may tend to divert the PSU’s resources for their own benefit (as done by TATAS after they acquired VSNL).

Need for a Harmonious Strategy:

During the course of our assignment we have come across the shortcoming of both private and public sector. Public sector comes with corruption, bureaucratic hurdles and red tapism, deeming contributions to national savings etc.

Again in a country like ours complete disinvestment isn’t at all possible because of huge income differences between the rich and the poor. A vast majority of population don’t have access to some basic needs of life. Again privatization may also facilitate concentration of economic and social power in the hands of a few.

So, need of the hour is to reach a midway point between the two extremes disinvestment & nationalization. In such a scenario there will neither be an ideological bias nor prejudice against either of the two sectors.

In India an initiative has been taken by the railways to invite greater private participation. Again, certain capital-intensive roadways built by government agencies have had substantial private sector presence as contractors.

Further recent developments in the telecom and petroleum sector show an unmistakable trend towards a healthy public-private sector partnership. We open-heartedly support to all these initiatives which allow the two sectors to complement each other and yet return the spirit of a free, healthy and well-directed competition.

So, to end up, it is suggested that the disinvestment process should be fully transparent and unbiased. Again, we do not-support complete disinvestment. After all, mind-less competition devoid of social justice would do no good the nation and might just make the situation even worse.

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