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A Poor Policy for the Poor

An inclusive agenda means proper privatisation of CPSEs, their competitive functioning, and market-determined prices. Anything else is sleight of hand, even if it is in the name of the poor.

Bibek Debroy        Last Updated: August 4, 2011  | 15:59 IST

The disinvestment target for 2011/12 is Rs 40,000 crore. Since 1991, we have never actually touched Rs 40,000 crore. Before 2009/10, the best was 2003/04, when around Rs 15,550 crore came in. But those were days of strategic sales, when management could also be transferred. One could hope to improve the efficiency of Central Public Sector Enterprises, or CPSEs.

The efficiency objective has disappeared now, unless competition triggers efficiency - a doubtful proposition when assorted constraints shackle managerial decision-making and prices are administratively determined, so "efficiency" and "profits" are what you choose to make them.

Bibek Debroy
True, efficiency isn't about equity ownership. Had we been able to unshackle PSEs, equity wouldn't have mattered. But the point is: those shackles cannot be removed as long as government equity is more than 51 per cent. Strategic sales are over now, as signalled by conversion of divestment ministry into a department. In any event, strategic sales are non-transparent, almost definitionally. In this era of scams, even if strategic sales had been possible, no one would have ventured.

With UPA-I, privatisation was dead. We debated what to sell (profitable versus loss-making) and blamed it on the Left and the National Common Minimum Programme. Consequently, barring spillovers from an earlier government (ONGC), sales to employees (IPCL, Maruti Udyog) and sales to public sector financial institutions (Maruti Udyog), nothing significant happened during UPA-I.

One may dislike the policy because it isn't proper privatisation, but with UPA-II (since November 2009), there has been some semblance of policy. Government will retain 51 per cent. Citizens must own shares (IPOs). A profitable and listed CPSE must offload 10 per cent. A profitable and unlisted CPSE will first be listed. An excess of 10 per cent can be offloaded on a case-by-case basis.

Not only do we no longer use the word privatisation, but we consciously say disinvestment rather than divestment. Admittedly, disinvestment and divestment are synonymous. However, investment adds to productive potential. Disinvestment seems more of an antithesis to investment than does divestment. That is, we recognise nothing productive is going on. Efficiency objectives have been overtaken by deficit management objectives, especially when growth and revenue are down and expenditure is increasing.

It is a moot point whether receipts from asset sales should be shown in deficit reduction figures. But let's leave that aside. Subject to that qualification, we got between Rs 22,000 and Rs 23,500 crore in 2009/10 and 2010/11. There was no specific target in 2009/10. But there was one in 2010/11 - Rs 40,000 crore. Despite Coal India's success, we didn't touch it, though because of relatively respectable deficit numbers, some disinvestment was consciously postponed to 2011/12.

Till July, we have got Rs 1,150 crore in 2011/12. Given the self-imposed constraints of the disinvestment policy, Rs 40,000 crore is an unlikely target. Rs 25,000-30,000 crore is more plausible and in 2011/12, the cushion of 2G receipts doesn't exist. Apart from Power Finance Corporation, in which disinvestment has already happened, SAIL, ONGC, Hindustan Copper, Rashtriya Ispat Nigam and NBCC have been lined up. There aren't too many listed CPSEs to play around with, and of the 25-odd (depending on how one defines listing), only about 10 fall short of that SEBI requirement of 10 per cent. Listing takes time, though there are almost 150 profit-making CPSEs (75 with positive net worth) that one can persuade to opt for listing. Policy uncertainty, low growth, high inflation and high interest rates have ensured that markets are cagey.

Despite the scarcity of good scrips, every IPO will not witness the kind of oversubscription that Coal India did. The government itself seems to be concerned about deficit numbers and whether the target of Rs 40,000 crore will be reached, despite the companies already lined up. That explains why CPSEs not mentioned earlier now figure in the disinvestment schedule. BHEL and MMTC are two examples. Stated differently, there is no option but to use follow-on public offers (FPOs) in excess of 10 per cent.

However, no matter how optimistic one is about the FPOs of SAIL and ONGC, Rs 40,000 crore is a long way off. Any back-of-the-envelope calculation based on the present market price of CPSEs due to be disinvested suggests that we are on track for something like Rs 15,000 crore. There is no obvious way to achieve targets in 2011-12, given the constraints. If the listing attempt can be pushed through, 2012/13 should be better. How the Finance Ministry manages the deficit problem is one question. But more importantly, when will we remove that self-imposed constraint of prohibiting privatisation? It is unlikely with UPA and its focus. However, an inclusive agenda doesn't mean that every citizen should own a CPSE through shares.

Constitutionally, every citizen owns CPSEs, and their losses, subnormal profits and inefficient functioning result in taxes on citizens, through opportunity costs of lost physical and social infrastructure. An inclusive agenda means proper privatisation of CPSEs, their competitive functioning, and market-determined prices. Anything else is sleight of hand, even if it is in the name of the poor.

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