One of the biggest reforms announced by the Modi government, the privatisation of public sector companies, seems to be dying a slow death brought on by utter policy confusion. What else can one call it when the government sets ambitious disinvestment targets year after year, but then conducts fewer rounds of disinvestment each year?
Or what do you call it when the government’s policy envisages the shutting down of public sector companies, but more than one-third of the current central public sector enterprises remain active on paper, yet are classified as ‘not operational’.
A short recap before we start. The Modi government used the Atmanirbhar Bharat package of May 2020 to announce a number of sectoral reforms, one of which was the Public Sector Enterprises Policy (PSE policy). Under this policy, the government said it would restrict itself to a minimum presence in key strategic sectors and would entirely exit the non-strategic ones. The exits were to take place through disinvestment and closures.
Now, given the large number of companies across diverse sectors that the government has a presence in, it was expected that such a process would take time. You can’t exit from multiple sectors of the economy overnight. Apart from the economic fallout, there are also the political implications. Privatisation has always been a politically tricky thing to pull off.
However, while nobody is calling for haste in the disinvestment process — although it might be good to see — there’s no reason for the current level of seeming inaction. For example, in 2022-23, the government managed to reach just Rs 35,293.52 crore of its disinvestment target of Rs 65,000 crore for the year. That’s just a little over half.
In the current financial year, the government has managed to disinvest just about Rs 12,500 crore, out of an initial target of Rs 61,000 crore for the year, which has since been revised downwards to a still-optimistic Rs 30,000 crore.
This is the first element of confusion evident in the government’s disinvestment-related policymaking. Perhaps for political reasons, the government can’t be seen to be taking back its PSE policy — it would be seen as admitting defeat.
Instead, what it seems to be doing is setting disinvestment targets for the year that would suggest it intends to plough ahead with the policy, but then go slow on actually doing anything about it. Why else would it set a target of Rs 50,000 crore for FY25, when none of the trends show it will come close to that number?
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Dividends and disinvestment
Compounding the confusion are the repeated statements by the Secretary, Department of Investment and Public Asset Management (DIPAM), saying that the government is going to be relying as much on dividends as it is on proceeds from disinvestment.
Indeed, the numbers in the budget seem to confirm this. In 2022-23, the government received Rs 99,900 crore as dividends from public sector enterprises, the RBI, and the public sector banks. In the current year, it budgeted to receive Rs 91,000 crore and revised this upwards to Rs 1.54 lakh crore. For the next financial year (2024-25), it’s started off with an assumption that it will get Rs 1.5 lakh crore from dividends.
A large part of this dividend income comes from the RBI, but the contributions of the public sector enterprises and banks are significant. The confusion here comes from the fact that, conventionally, the debate of disinvestments versus dividends is usually couched as a zero-sum game — that if more disinvestment is done, then fewer dividends will come, and if more dividends are needed, then less disinvestment can be done.
This would be the case if all public sector companies were profit-making, and therefore capable of paying dividends. The unfortunate truth is that a large number of these companies are simply not operational, and of the ones that are operational, many are loss-making.
Here’s what the latest annual report of the Ministry of Finance has to show. Of the 389 central public sector enterprises, as of March 2022 (the latest period for which there is data), 141 were not operational. Of the 248 that were still operational, 60 were loss-making. So, taken together, that means more than half of the public sector enterprises were either not operational or were loss-making.
Disinvestment and exit need to start with these. The PSE policy is quite clear about the fact that exiting from non-strategic sectors would include the closure of several companies. There’s very little justification for having 141 non-operational companies on the government’s books. And if those 60 loss-making companies can’t be turned around, then they too should be shut down.
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RSS excuse
What this shutting down involves is something worth exploring. If it’s just a matter of paperwork, then that should be fast-tracked. Even if no money is earned from shutting these companies down, they will no longer even be an accounting entry for the government.
What the government will be left with is the profit-making companies, which can pay it dividends. At the same time, it would have substantially reduced its presence in a number of sectors, a stated aim of the PSE policy.
One argument being made about why the government is going slow on disinvestment is that the RSS is not in favour of the policy. However, if the Swadeshi Jagran Manch — the economic policy arm of the RSS — is to be believed, then it’s not true. As Ashwani Mahajan, the national co-convener of the SJM, said in a recent interview with ThePrint, it is only against strategic disinvestment which is where the government’s stake is sold to a single buyer.
The RSS and SJM are in fact totally fine with the government selling its stake in the open market, with general investors picking up small pieces of government companies. This way, the government earns money from disinvestment, and the common citizenry becomes a stakeholder in public sector companies.
The other major hurdle in the disinvestment process is the fact that many of these companies were set up in pre-Independence and so a lot of the paperwork is in physical form, and, unfortunately, lost. For example, many companies have leased land from state governments and now the lease papers are lost, so there’s no way to dispose of that land.
However, here, too, the government has a solution that could work. The details of the PSE policy say that land leased from states be returned to the state government “without insisting on any compensation”. In other words, the land is to be returned, no questions asked.
Whether this can work or not is something the administration has to figure out. My point is that complications arising out of paperwork can easily be dealt with, should the will to do it exist.
The Modi government has a number of policies that exist only on paper. Unfortunately, the PSE policy — one that could have really distinguished the Modi government from its predecessors — is quickly becoming another such example.
The author is Deputy Editor at ThePrint. Views are personal.
(Edited by Theres Sudeep)