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Disinvestment in Public Sector Units (PSUs) has been an important component of India’s economic liberalisation program since 1991. Despite successes on other fronts the Government’s disinvestment targets have not been met with the entire process seeming to have hit a roadblock in recent months. A cabinet reshuffle in February 2003 has signalled to detractors that the Government means business. However, what the future pace and extent of progress will be is anybody’s guess.
The prolonged hemorrhaging of public resources due to inefficient PSUs has embarrassed succeeding governments and cannot continue. Some PSUs have performed well, but critics argue that such performance has been the result of monopoly power or restricted competition, particularly in the cases of ONGC (Oil and Natural Gas Commission) and MTNL (Mahanagar Telephone Nigam Limited). Furthermore, it cannot be presumed that their performance would not have improved in a liberalised framework with an adequate regulatory structure. The fact remains that many ‘failed’ PSUs have been allowed to survive beyond the rational limits of an economically justifiable life cycle. The disinvestment program lags behind other components of the economic liberalisation program, for which three factors are primarily responsible:
• the vested interests of rent seeking politicians, bureaucrats and trade union lobbies; • ideological baggage and institutional structures (Parliament, Judiciary and Financial Institutions) since the socialist Nehruvian era that have allowed a deep-rooted inefficiency and corruption to breed; and, • apprehension that future foreign ownership could threaten sectors linked to national security
The present government has tried to utilise its alliances with a cross-section of other political parties to develop a consensus in favour of privatisation in the belief that this will bring about all-round improvements essential to competing in an increasingly globalised world. A separate Ministry of Disinvestment under Arun Shourie and a Cabinet Committee on Disinvestment (CCD) with representation from various stakeholder ministries were set up to review and decide on disinvestments. They are among key elements of the government's reform program. Despite successes in accelerating the pace of reforms over the last two years, it is now clear that the ruling coalition is itself a house divided. Congress, the major opposition party, has engaged in a series of flip-flops, further complicating matters rather than evolving a national consensus.
India’s public debt at about 60 per cent of its GDP is comparable to crisis-ridden Brazil's financial situation. The recent Government decision to rescue major Public Sector Financial Institutions UTI (Unit Trust of India) and IFCI (Industrial Finance Corporation of India) at a cost of about US$ 4.5 billion could contribute significantly to the rising fiscal deficit in a drought year. The budget target of raising nearly US$ 2.6 billion through disinvestment seems distant, due to the government's failure to take a firm stand on privatisation. Matters have come to a head over the privatisation of oil majors HPCL (Hindustan Petroleum Corporation Limited) and BPCL (Bharat Petroleum Corporation Limited), pitting Shourie against cabinet colleagues, Ram Naik and George Fernandes, Ministers for Petroleum and Defence, respectively. Initially the debate was over whether these corporations should be privatised. The RSS (Rashtriya Swayamsevak Sangh or National Volunteer Organisation), a key member of the Sangh Parivar to which the major ruling constituent BJP (Bharatiya Janata Party) is ideologically affiliated, openly denounces disinvestment as harmful to national interests and accuses the program of being a means of ‘selling off’ to foreign interests.
Prime Minister Vajpayee and other cabinet colleagues intervened and resolved in favour of privatisation in February 2003. The debate is now focused on fostering ‘a level playing field’, more specifically on whether to allow the ONGC (another PSU) or the private sector Reliance Group to bid for shares in these corporations. Fernandes and Naik recommend barring Reliance since it has a seventy per cent market share in the Petrochemical sector. Shourie argues that one PSU buying another is simply not privatisation and therefore ONGC should be kept out. The Congress and other left-wing parties insist that the sale of the oil units must be approved by the Parliament since they were incorporated under an act of Parliament. Shourie points towards the sale of Maruti Limited as creating a precedent. The debate seems to be never-ending with new arguments being presented in favour or against ad nauseam. Some Indian financial analysts estimate the impact of this political feud to be a loss of about US$ 3.5 billion in market capitalisation of PSU stocks between June and September 2002, reflecting the mood of markets after reports of the opposite stands taken by warring cabinet ministers. The media and other stakeholders have implored all parties to desist from impeding the reform process and have recommended a backroom political consensus on issues, rather than endless public debates. But when this imbroglio will be resolved is anybody’s guess.
WATCHPOINT: Can the government bring about a consensus on the disinvestment program before the annual budget and restore popular confidence in its capacity to implement the program?
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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