As the new government takes charge, the central question in the minds of several policy analysts is what it would mean for economic reforms under a coalition. The reforms to particularly watch out for would be the disinvestment plans announced in the last term. Even in normal times, privatisation has been relatively more politically sensitive than other reforms. The challenges have now grown exponentially with the revitalised Opposition determined to throw sand in the gears.
The Opposition is likely to appeal with emotive jibes like “suit-boot ki sarkar (a government of those dressed in suits and boots) helping private players make money at the expense of the exchequer.” Regardless of the economic merits, such arguments—that the government is selling publicly-owned companies to the private players, harming the poor—could resonate with people. This has the potential to derail the privatisation efforts.
An indication of this nature came last week. Back in 2022, privatisation of Bharat Petroleum Corporation Ltd (BPCL) was on the priority of the government. But on 11 June, the government announced that it had shelved the plan.
If the reason why PSU privatisation is politically challenging is that the broader population is swayed by emotional arguments, then it is incumbent on the government to work on its communication. The battle is essentially one of taking sound economic ideas to the people so that the clamour for reforms becomes bottom-up.
Making a case for privatisation along the following three points may enable the government in building ‘popular will’ for reforms.
Loss-making PSUs
First, people must be consistently reminded about who pays for the loss that PSUs make. For example, before its privatisation, Air India’s annual loss was upwards of Rs 8,000 crore. In fiscal year 2023, the State-run Bharat Sanchar Nigam Limited’s (BSNL) annual loss was Rs 8,161 crore. Who pays for it? It is the ordinary citizens. These losses are recouped either through taxes, or through government borrowing. Often, people who scoff at privatisation would be the ones paying directly or indirectly to finance the profligacies of bureaucrats flying first-class in Air India had it not been privatised. If not through taxes, the government would finance these losses through borrowing. This would mean an increase in deficits, putting a strain on future resources and, most likely, causing inflation. Inflation is a tax on the poor. So, effectively, it is the poor who would disproportionately foot the bill of the loss-making PSUs.
Yet, this realisation does not dawn on people. From free electricity to free bus rides to any other freebies, the fundamental point is that the money for all these expenditures comes from peoples’ pockets. It is either paid directly through taxes, or indirectly through inflation, or rationing or reduced quality. Even if the constraints of a coalition necessitate going slow on the privatisation efforts, the government should continue to educate young minds about this very basic fact.
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Thinking about the counterfactuals
The second point that needs to be stressed is to think of the counterfactuals—that a PSU is profit-making is not justification enough that the government should run it. The question is, what would its value be if the ownership was transferred to the more efficient manager, i.e., a competent private player? This is especially relevant because several PSUs have witnessed extraordinary growth in profits in recent times. Notwithstanding the profits, it still is worthwhile focusing on how much larger the profits could be if the ownership is transferred.
India has seen two major rounds of PSU privatization—between 1999-2004 and the second one that started in 2014. It has been long enough since the first round of privatisation to reflect on the experience. A comprehensive analysis of this period is recorded in the 2020-2021 Economic Survey of India. On various metrics like net worth, profit, return on assets, the privatised firms have done significantly better relative to their government-owned peers. The most cited success story is that of Hindustan Zinc Ltd. Its first tranche was sold during the Atal Bihari Vajpayee government in April 2002, and the second one was sold in November 2003 to a company belonging to Vedanta group. To this date, the government retains a 29.54 per cent stake in the company. From that point to today, the company’s market capitalisation has grown over 150 times. To put things in perspective, the benchmark NIFTY 50 index has grown 21 times over the same period. This extraordinary growth also translates into vastly improved dividend payments as well as tax receipts for the government.
Crucially, by allowing private players to control and run these companies the government can harness the gains from the efficiency of the private sector. Resistance to privatisation also stems from the possible loss of employment. However, even that seems to have not happened at Hindustan Zinc. While there were 10,608 employees at the company in 2001, the number grew to a little over 23,000 in 2023. This growth is significantly faster than population growth in the same period. Several other PSUs privatised during 1999-2004—Modern Food Industries, Jessop & Company, Bharat Aluminium Company Ltd (BALCO), CMC Limited—have shown similar and significant change in profitability post privatisation, as per the Economic Survey of India (2020). What must be impressed upon people is that the gains from privatisation can be used to finance various welfare programmes that often suffer from lack of funds. To put things in perspective, the government’s divestment target for FY 2024-2025 is Rs 50,000 crore.
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Privitisation anxiety
Finally, the third issue that needs to be communicated effectively to the public is related to the concern that private players may exclude the poor people. However, a good precedence in this regard is already in place. The Reserve Bank of India mandates that whenever a bank wishes to open new branches in the country, a certain fraction of it must be in the unbanked rural areas. Similar regulations can be used to ensure that low-income households are adequately served without the government running businesses themselves. More importantly, the real objective of the government should be to ensure that this message reaches the people: It is possible to ensure that the private sector does not exclude the poor.
It is also worth noting that these privatisation exercises were carried out at a time when the BJP enjoyed far fewer numbers than today. Therefore, a determined government should be able to manage its coalition partners and communication strategy to deliver economic progress to the citizens through divestment.
If current political realities make meaningful disinvestment challenging, it may be a good idea to change people’s mindset so that the pressure to reform would be bottom-up, rather than top-down.
Aditya Kuvalekar is an academic economist, and a faculty at the University of Essex, UK. Views are personal.
(Edited by Aamaan Alam Khan)
Leftists will get heart attacks at the mention of privatisation. Commeidians like Karats, Rajas, and Yechurys will die en masse.
If privatisation was politically challenging Air India would have never been privatised. The truth is that it is the government itself that isn’t interested. PSUs are milch cows for the government to please it’s own with perks, posts, dividends etc all with tax payers money. If the government was serious it could have set the ball rolling by selling some shares, at a good price to retail investors and then negotiate a price with any group that wishes to takeover the rest. The realised funds could be earmarked for the aam aadmi’s welfare, further muting any opposition.