The Business of the State is Government, Not Business’
When the State ignores this maxim, it does so at the cost of the education and health of the poor and the disadvantaged. As the Gujarati proverb goes, “When the King takes to trade, the people must take to begging!”
While over the years many countries across the world have evolved and implemented successfully the strategy of disinvestment and privatisation of public sector enterprises (PSEs), this powerful tool of public policy still continues to remain contentious in India. When undertaken sensibly, PSEs’ disinvestment and/or privatisation certainly lead to greater productivity and better economic performance.
Unfortunately, in India the process of disinvestment and privatisation of PSEs has virtually been stalled for the past over two years. Most strident opposition to PSEs’ disinvestment is coming from the Left allies of the UPA Government, which is largely driven by ideological considerations, and not so much based on the courage of their genuine conviction. While this is not surprising, it is extremely damaging from the viewpoint of the long-term interests of stakeholders (except for the vested interests of a select band of politicians and bureaucrats). Indeed, it stifles incremental growth momentum of the economy.
So often in recent times, economic reformers have reminded policymakers that persistent “Left” criticism should not deter the Government from reviving a vigorous disinvestment and privatisation policy. It is high time to call the bluff of its Left allies, as there is so much at stake for the Government itself. The UPA government is halfway through its full five-year tenure, and will be presenting its fourth Union Budget by the end of this February in the context of one of the most fortuitous economic ambiences for the past many years.
Why is the present time perceived to be so opportune? The forthcoming budget will perhaps be the last opportunity for the UPA government to prove its credibility with some big-time reforms. The subsequent two years will largely be preoccupied in managing the political economy prior to the next general election, and hence nothing significant is likely to be accomplished. Secondly, the economy for the past four years has been giving a consistently robust performance and this now needs to be leveraged by bold policy initiatives. Thirdly, the Government’s concerted attention is increasingly being drawn towards the lagging physical and social infrastructure sectors like power, irrigation, rural connectivity, education and health. Apart from policy and institutional support, all these functional areas call for massive financing support from the government. Indeed, the sustainability of high economic growth will depend on how effectively the government deals with these challenges.
What is now essential is a powerful message from the Government demonstrating its ability to push through some challenging reforms like vigorous disinvestment of PSEs or their strategic sales. At this stage, such efforts make sense for a variety of reasons.
To mention four key ones:
First, the Central Government has a major responsibility towards improving the nation’s budgetary health on a sustained basis, not merely in response to the FRBM targets, but also keeping under tight leash its internal indebtedness. India’s debt to GDP ratio (excluding contingent liabilities) continues to be very high at about 68%, and annual debt servicing (principal plus interest) at Rs. 3,81,929 crores knocks off over 38% of total revenue receipts of the Central Budget. Withdrawal of budgetary support to sick PSEs will reduce the pressure on budgetary resources immediately, while the subsequent strategic sale of many such PSEs will unlock significant resources – part of which could be deployed for the repayment of the government’s high-cost debt.
Second, a number of PSEs, whose part equity has been divested over the last decade or more, have been witnessing unprecedented and significant valuations of their equity capital thanks to the improved performance of many of these PSEs on one hand, and rising investment sentiment and confidence in the Indian stock market on the other. Such opportunities of excellent valuations, based on the actual performance of many profit-making PSEs, now need to be exploited optimally. We are witnessing that capital-raising activities of the private corporate sector are on the rise, and in the coming year there are expectations that major private companies together will raise something like Rs. 1,00,000 crores from the domestic capital markets. Why should profit-making PSEs shy away or be denied the opportunity of raising new equity, and in the process also divest a part of the existing equity capital, is a moot question.
Third, and related to the previous observation, is the issue of expanding the equity base of the economy on a continuous basis, given the fact that we now have a robust capital market infrastructure and the urgency of making available increased quantity of good-quality equity to investors. In fact, reactivation of PSEs’ disinvestment programmes will act as a powerful initiative in furthering the cause of expanding the equity culture of investors, and strengthening the capital market infrastructure of the economy.
Finally, after a decade and half of economic reforms, there is a fundamental issue that needs to be decisively resolved: Is it the business of the State to be in business in the first place? With the success of the market-driven economic system, it is imperative for the Planning Commission to redefine the role of the State while finalising the Approach Paper on the 11th Plan. Equally importantly, the Government must mediate a consultative process (cutting across party lines) to review the policy positions outlined in the National Common Minimum Programme with respect to the disinvestment of PSEs and strive for a new, more pragmatic consensus on this issue. Already, the Indian private corporate sector has convincingly proved its mettle in managing liberalisation, competition and globalisation over the last decade. Hence, it is the opportune time to prepare a road map for the eventual exit of the State from manufacturing, commercial and other business activities, and instead establish its focus on some of the critical areas of physical and social infrastructure, and more importantly, on providing good governance.
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It is evident that since the beginning of the disinvestment policy in 1991-92 till March 2006, the proceeds from this source amounted to Rs. 49,241 crores, the best performance being in 2003-04, when as much as Rs. 15,547 crores were raised, and when many came to believe that this policy strategy had finally arrived. But it was not to be, and the entire process has since been virtually disrupted. Interestingly, the market capitalisation of 41 listed Central PSEs was of the order of Rs. 6,46,645 crores, and has probably scaled up further by at least 35% since then. The valuation of the remaining profit-making PSEs cannot be gauged in the absence of any disinvestment and consequential listing of their shares.
Against this backdrop, we suggest the following course of action. First, given the current mood of stock markets; in the light of the appetite and capacity of investors to participate in equity ownership, and the improved performance of the PSEs in general, Government can target to raise at least Rs. 25,000 crores from the disinvestment and strategic sales of PSEs in 2007-08 and aim at progressively reaching towards higher targets in the subsequent years. Second, such proceeds necessarily need to be placed in an exclusive escrow account and not in the general budgetary receipts.
Third, and the most important, the allocation of the proceeds must be one-third each for specific purposes, namely, (a) building up social safety net and social sector programmes; (b) repayment of high-cost debts of the Central government; and (c) funding of infrastructure projects that are languishing for want of financial support. As a matter of fact, one-third of the disinvestment proceeds could be deployed in strengthening the PPP (public-private partnership) mechanism through SPVs (special purpose vehicles) and VGF (viability gap funding) for the infrastructure projects.
In substance, the Central Budget 2007-08 must send clear signals about the government’s intentions to reactivate PSEs’ disinvestment and privatisation policy. Such initiative is not only desirable from the viewpoint of mobilising resources for various critical functions of the Government, but more importantly in accelerating the momentum of growth, and in enthusing the climate of investment on a sustained basis. Let the opportunity not be lost once again at the altar of the obsolete ideological stance of “Left” allies!
This essay is part of a series from the Indian Liberals archive, a project of the Centre for Civil Society. This piece is excerpted from the booklet Freedom First, titled “The Business of the State is Government, Not Business”, published in February 2007. The original version can be accessed here.