With more than half the financial year behind us, and the slowdown showing no signs of a quick recovery, the Narendra Modi government is set to aggressively push disinvestment in the hope of boosting its revenue receipts, among other things. But there is a deeper economic rationale for disinvestment, based on better use of resource allocation and reducing the long-term burden on the taxpayer.
Public sector undertakings (PSUs) often suffer from lower levels of efficiency compared to their private sector counterparts, when they operate in competitive markets. There are, of course, always exceptions to any rule. But in general, while their private sector counterparts are under pressure to perform or perish, PSUs, with their secure jobs, salaries delinked from performance, political influence, misuse of resources and bureaucratic culture, are usually unable to compete. The incentive structure, HR practices, management skills and work culture of PSUs fall behind compared to their more dynamic counterparts.
As a consequence, PSUs are not able to utilise resources efficiently, and the output is often below what it would have been had the same resources been utilised in the private sector. PSUs often become a sink where, year after year, resources that go into the company are combined in a manner that produces less goods or services than the same combination of resources in the private sector.
In pursuance of its plan, the government has given in-principle approval for strategic disinvestment of 23 Central Public Sector Enterprises. The list includes Air India, Pawan Hans, BEML and BPCL, among others.
Receipts from disinvestment are budgeted at Rs 1.05 lakh crore for 2019-20. Until August 2019, receipts from disinvestment amounted to Rs 12,358 crore, or 12 per cent of the budgeted amount.
Also read: India has met its disinvestment target only once in the last 10 years
Arguments for privatisation
Analysis measuring the productivity of PSUs operating in competitive markets provides a strong rationale for privatising them.
If the same combination of staff, planes, buildings and managers in a private sector airline can produce more passenger flying miles that in a PSU, it makes sense for the economy to shift those resources to the private sector. This argument would hold regardless of whether the PSU made losses and kept asking for taxpayer money to survive or not. It rests on where the resources of the economy are best allocated to produce goods and services for consumers.
The second argument for privatisation is that if a PSU is functioning in a competitive market, in which it is less efficient, it is often loss-making. It continues to operate by promising to “turn around” if given a shot of capital. Yet, nothing much changes when that happens; ‘revival packages’ are rarely one-time things.
The exchequer would benefit from the sale of such a PSU, even if it was at a sale price of one rupee. The sale of Centaur Hotel by NDA-1 when Arun Shourie was the disinvestment minister was guided by this logic. Instead of putting money year after year into a loss-making public sector hotel, the government was better off if the hotel was removed from its balance sheet.
Also read: Modi govt met disinvestment target only because one public sector company bought another
Monopoly PSUs
A public sector enterprise usual makes profits when it is in a monopoly — typically, the origin of the profit lies in the monopoly rent rather than in higher efficiency.
In such situations, there are two alternatives: Either the government can continue to own and operate the company as a PSU, or, it could privatise it and then regulate the company.
In cases like airports, the latter model has been followed in India in recent years. The Airports Economic Regulatory Authority regulates airports because they are local monopolies and would be able to charge airlines and customers high fees and make monopoly rents. This would be against the interests of the consumers. The earlier model for airports was that the government ran all of them, not very efficiently. The present model is to have private companies operate them while regulating them.
Six airports were privatised last year. The government is planning to privatise 20-25 airports in the second phase.
Political difficulties
While there is clear economic rationale for the privatisation of many PSUs, the difficulties are often political. This is often the reason why it is easier to privatise in times of fiscal stress — there is less political resistance.
The economic logic was always there, but now the idea of sharp expenditure cuts, in the absence of the fiscal relief that would come through privatisation, implies that the opposition to it comes mainly from those directly affected, like trade unions, rather than a broader political opposition.
Times of fiscal stress might be the only time when the politics allows the country to disinvest, and governments should not lose these opportunities.
Also read: Privatisation comes to the rescue of Modi govt, but accompanied by political risk
The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.