Since last year, there has been constant news about privatization of public enterprises, beginning with the failed attempt to sell off Air India to the recent protests of the Opposition against privatization of the Indian Railways and other PSUs. Let’s take a hard look at what might turn out to be this government’s first actually successful mammoth economic move.
In the fifth segment of the ₹20 trillion stimulus package, the Finance Minister announced plans to have at one to four PSUs in strategic sectors, along with privatization of PSEs in other sectors. Details about which sectors are strategic and how exactly the plan will be carried out are awaited.
Why is the future privatized?
‘Business is not the government’s business’ has been the most popular argument in favour of privatization. Anyone who has travelled multiple airlines in this country would agree. Air travel in this country was revolutionized by low-cost domestic carriers like Indigo and SpiceJet, not by the legacy of Air India.
The best example of privatization working was of Hindustan Zinc under the Vajpayee government in 2002. 45% of the company was sold for ₹769 crore. The company went on to become the world’s second-largest zinc-lead miner.
Apart from private competition improving the quality of services, there are multiple pros such as the increase in non-tax revenue to the government, the halt of misuse of taxpayer money in lost causes, and the opportunity to instead use this money for welfare programmes. However, in the current scenario, there are newer layers to the story.
The world is facing a recession which is only getting worse. India announced a ₹20 lakh crore stimulus package. The revenue from GST and other sources was already falling last year. The rupee, at present, is at a low against the dollar at around ₹75.49 per dollar. External borrowing will be heavier at this rate. Paying back is going to be even trickier, since investment of borrowed capital isn’t going to drive GDP and revenue far enough in this economic climate. In this situation, privatization, taxation, and international aid are the most reliable options. None of those is going to lift our economy alone.
How far have we come?
Currently, BSNL, MTNL, and Air India have been the highest loss-making PSUs for the past 3 years. Despite this, the government has declared that it wants to try and revive the two telecom companies instead of selling them off. In a telecom sector dominated by private giants like Jio and the TRAI exercising enough regulation to keep them in check, BSNL and MTNL indeed have no business being alive. However, the government has a more strategic plan in mind.
There have been discussions about privatising public sector banks, and those alone sent their shares up last month. Bank of India’s shares, for example, soared by 20% within a day when the news came out. The government is also selling its shares in the oil companies, BPCL, Indian Oil, and HPCL. These are profit-making entities. However, when they are also the only ones in the market. In such a situation, profits are not a measure of efficiency. Privatisation will bring in more competition and scale up efficiency motives to new highs, and even lower prices to a considerable extent.
In 2019, there was a failed attempt to sell the loss making PSE airline, Air India. Its debt burden of ₹60,000 was probably the major cause. This time around, the government has revived the offer. It transferred ₹29,464 crore of debt to a Special Purpose Vehicle named Air India Assets Holding Limited. However, with the world travel industry in deep trouble, there might be more incentive needed to make the sale happen.
It’s a tough road
There are specific sector-related challenges. The biggest challenge with railways is pricing. The government has always maintained below-par prices. With some trains being up for takeover by private entities, it will be difficult for them to satisfy customers. Having high prices also puts them in competition with airlines, for long-distance routes. Turning a social interest sector into an economically motivated one and not losing votes is a huge challenge for the government.
For loss-making units such as BSNL and Air India, buyers would need a lot of incentives. They won’t just be inheriting a loss and debts, but also a bad reputational precedent. Another problem is regulation. How much control should the government retain in the management of the PSUs it sells? The answer to that probably depends on the sector and the social implications involved.
Tread carefully, state
In May, Elon Musk’s SpaceX became the first private company to launch a rocket- named the Falcon- into space with NASA. The Falcon is the lowest cost space shuttle to be made in six decades, only proving how opening up sectors to innovation can bring in development. A few weeks later, India announced reforms that are on their course to end ISRO’s monopoly in India’s space program. The move is being hailed as one that will produce the likes of Musk from India.
An important area to focus on would be regulation. Like the TRAI, other sectors, too, need a regulatory body to keep social interests in check. Back in 2002, Maruti was valued at ₹4339 crore. In the next 15-odd years post Suzuki entering the picture, it went up to over ₹2 lakh crores and opened up two major manufacturing facilities providing jobs to thousands of Indians. The key was focussing on management models rather than just hurrying away to sell units.
If the current government doesn’t make decisions hastily and balances revenue with long-term social effects, it can usher in a successful second wave of privatization that does more than bringing us out of a recession.
Snehal is Columnist at GGI.
She is a writer, poet, music aficionado, Oxford comma proponent, and a lot of other things. She also writes on personal finance for 'Qrius Creative Labs'. She has worked as a copywriter, content writer, scriptwriter, creative strategist, and direction assistant at multiple organisations in the past.
Snehal is a graduate from the Bachelor in Mass Media, Advertising from St.Xavier's College, Bombay.