India: India’s derailed disinvestment program - the end of the road?


Suresh Iyer

The week of Diwali, the Hindu festival of lights (4-7 November), ironically brought gloom to the supporters of the privatization process led by the disinvestment minister, Arun Shourie. The week was witness to unprecedented events starting with the roughing up of executives of aluminum-maker, Hindalco Ltd., and investment bankers of ABN-Amro, Enam Consultants and Rothschild, whilst they were visiting the plants of public sector company, National Aluminum Corporation Ltd. (Nalco). Nalco was supposedly the next on the disinvestment block. This background hostility (read politics) forced the Ministry of Disinvestment to call off due diligence audits by bidders at Nalco’s public sector unit (PSU) plants in Orissa. With Nalco’s privatization schedule being altered and the sale of oil public sector units, Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum (HPCL), stalled the government will not meet its budgeted divestment target of Rs120 billion (US$2.4 billion). At the beginning of the year, it was widely expected that the government would easily surpass this target. This is seen as a personal setback for the high profile and media savvy disinvestment minister, Arun Shourie, who had successfully started the disinvestment process over a year-and-a-half ago with strategic sales of PSUs such as telecom and IT companies, Videsh Sanchar Nigam Ltd (VSNL) and CMC Ltd; petrochemical companies IBP Co. Ltd and Indian Petrochemicals Corporation Limited (IPCL); Bharat Aluminum Company Ltd (BALCO); and Paradeep Phosphates Ltd (PPL), among others. Over the last two months, politics has clearly taken precedence over economic rationale. Coalition partners and factions within the Bharatiya Janata Party (BJP) have been openly voicing protests against privatization. It’s not difficult to read the reasons behind this. Privatization clearly weakens politicians' clout in their respective ministries. With protest led by Uma Bharati, the Minister of Mines, who has publicly criticised the sale of Nalco, the Chief Minister of Orissa state (where Nalco is located) has also opposed the privatization in order to recover political ground lost due to bickering within his party, the ruling Biju Janata Dal (BJD). Another important coalition partner of the BJP, the Samata Party led by India’s defense minister George Fernandes, has questioned the sale of oil PSUs. The principal opposition, the Congress Party, which is seen to be pro-reform, has also not come out to openly support the Disinvestment Ministry. The politically-motivated opposition notwithstanding, a strong case exists for the disinvestment of PSUs in India. Disinvestment has led to more efficient financial management and a greater adaptability of privatized PSUs to market forces. Privatized loss-making PSUs, such as Modern Food Industries (MFIL) sold to HLL (Hindustan Lever Ltd) and PPL sold to Zuari Industries Ltd, have shown a remarkable recovery. Given this strong showing of disinvested PSUs, the government ideally should have had broad-based support for the more rapid reform of the PSUs. However, events in the recent past have shown that some of the blame in the current impasse lies with the Disinvestment Ministry. Questions have been raised over the procedures used for the disinvestment process. One of the key coalition partners of the NDA, the Samata party, has cited the case of the sale of the Mumbai–based Centuar Hotel. The hotel was divested in February this year for a sum of Rs830 million (US$16.6 million) to Batra Hospitality, but within six months was resold to the politically influential Sahara group for Rs1.15 billion (US$23 million). This sale for a mark-up price at a time of market recession was bound to raise questions. Many are arguing that the Disinvestment Ministry needs to adopt more transparent procedures towards disinvestment. This will be the key if this beleaguered ministry is to rally support in the future.

WATCHPOINT: Will the Prime Minister assert his authority and pave the way for reforms in the public sector units or will he give in to the pressures and pulls of coalition politics?


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