Tuesday, 5 July, 2022
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Vajpayee turned around the fortunes of Vizag Steel Plant, so can Modi. Stop privatisation

In 1966, when Indira Gandhi decided against having a steel plant in Vizag, it was seen as an insult to the Telugus.

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Last week, the Union Cabinet approved the privatisation of Rashtriya Ispat Nigam Ltd, the Public Sector Undertaking that runs the Visakhapatnam Steel Plant, VSP or Vizag Steel as it is called. As I write this article, VSP union workers are organising massive protests in front of the plant shouting slogans against the Narendra Modi government. There are other rallies too being organised across the city of Visakhapatnam.

Usually, mobilising so many people against such decisions takes time. So, to the younger generations outside of Uttarandhra, this swift and loud response by the people may seem unusual. There is a unique history behind Vizag Steel, the landmark that gave the city the epithet of Ukkunagaram (Steel City).

Also read: After Modi, Sitharaman bats for private sector, says BJP always believed in Indian businesses

The historic agitation for Vizag Steel Plant

At the outset, the reader must understand something about Telugu identity. The Indianness of Telugu people is mediated through their Telugu identity and pride in all things Telugu. It is the kind of identity that requires that its unique cultural space and agency be respected, as it respects the space of others. It is also characterised by a readiness to defy the establishment. This is exactly what the Telugu Desam Party (TDP) founder N.T. Rama Rao later gave voice to — ‘Telugu atma gouravam’.

So in 1966, when Indira Gandhi decided against having a steel plant in Vizag despite an Anglo-American consortium’s recommendation, it was seen as an insult to the Telugus. Led by freedom fighters T. Amrutha Rao and Tenneti Viswanadham, thousands of students, workers and commoners started an agitation that shook the entire state. The protests turned violent when 12 unarmed persons were killed in police firing, which included minors. Sixty-six MLAs and seven MPs even resigned in support of the demand to have the steel plant in Vizag. In 1970, Indira Gandhi finally gave in and announced the establishment of a steel plant at Visakhapatnam, making it India’s first coastal steel plant.

In all, 32 persons sacrificed their lives, 64 villages were evacuated and 22,000 acres of land was acquired to build this gigantic steel plant. Even today, the people who lost their lives in the agitation and their leaders are remembered as martyrs and tributes paid to them publicly. It is this history of struggle — sacrificing land, villages, and even lives — that makes the privatisation of Vizag Steel an emotional issue for the Telugus.

Also read: Economic ideology is the new binary in Indian politics as Modi swerves Right & Rahul Left

Debunking the privatisation rationale

Vizag Steel’s losses and debts are the most common justifications given for privatisation. However, this is misleading for several important reasons:

a) No captive mines

Being the only steel-manufacturing PSU without captive mines, the Vizag Steel Plant spends significantly higher on raw material than other steel plants in the country. While firms with captive mines spend Rs 1,500 per tonne on iron ore, VSP spends Rs 7,000. Hence, the raw material expenditure of SAIL and Tata Steel, which have captive mines, is 48 per cent and 35 per cent respectively of the total cost. For VSP, it is a whopping 65 per cent (Figure 1). By making VSP operate without captive mines, it is being forced to bleed to make it look like a loss-making company to shareholders.

Graphic by Ramandeep Kaur | ThePrint

b) Forced to borrow

VSP was debt-free in 2011-12, that is before it started its expansion. Today, burgeoning interest payments are eating into its earnings (Figure 2). These payments are made to pay off debts that the VSP took to fund its expansion plan to become the largest single-location plant by 2032. With the Center not providing any funds for expansion, VSP was forced to rely on a 10-year Rs 22,500 crore debt plan for this expansion.

Graphic by Ramandeep Kaur | ThePrint

c) High input costs

VSP faces high iron ore costs, high freight costs, industrial power tariffs, high credit costs, import duties and cess on coking coal. These are market conditions that are common to the entire industry — whether private or public companies — and simply not in the control of VSP. Disinvestment will not change these market conditions.

d) Anti-growth move

Hasty disinvestment, especially during an economic slowdown, is counterintuitive. It will reduce net private investment coming into the economy. The private investment that could have gone to creating new enterprises or taking risks would be drawn away to buying “safe” projects having government backing. This affects growth opportunities and new capital formation, which is badly needed to recover from the current ‘recession’.

Also read: Wouldn’t have spoken different language if I were in finance ministry — NK Singh after Budget

What is the solution?

Privatisation must only be considered for government enterprises that report losses for a long time, like Air India. It might seem like the easy way out but a government handling the budget of 1.3 billion people should be able to manage critical PSUs. This is especially the case in steel-making, which was identified as one of India’s strategic sectors by the Narendra Modi government. Vizag Steel is a Navaratna company and one of India’s largest steel-making plants. It is a highly strategic asset for the nation that must not be sold to private interests.

Graphic by Ramandeep Kaur | ThePrint

My father, Yerrannaidu Garu, previously raised his voice against VSP’s privatisation in Parliament in March 2000. Perhaps the approach of the then Central Government under Atal Bihari Vajpayee shows the way forward for VSP today. Instead of privatising VSP, the Vajpayee decided to turn it around and suggested that loans be converted into equity. VSP also developed new products, new niche markets, negotiated an interest rate reduction, waiver of penal interests, pre-payment of scheduled principal amounts, availed lower interest products against working capital and got a Government of India guarantee for working capital loans.

The plant started to perform well to the extent that it became debt-free by repaying all long-term debts in 2003-04. It has had only three loss-making years since the Vajpayee government’s fiscal intervention. The Modi government must not only inject fresh capital but also consider allocating captive mines to VSP. Both VSP and mines come under the Ministry of Steel. We need the kind of political will today that the Chhattisgarh Assembly showed by unanimously passing a resolution to purchase the Nagarnar Steel Plant if the Centre disinvests it.

Vizag Steel Plant is an emotional issue and privatising it would hurt Telugu sentiments. Beyond sentiment or history, it is also about sound economic policy. It made huge profits these past decades, and continues to provide livelihood for thousands of families directly or indirectly. It being in losses and debt recently is a misleading justification for privatisation because the lack of captive mines leads to high raw material costs, and VSP’s debt burden leading to high interest payments is the result of the Centre not providing funds for VSP’s expansion. Note that even private steel companies have been allocated captive mines. Expecting a company to run profitably without a level-playing field is like asking someone to run after tying up their legs. Steel is one of the eight core industries of India. It is critical that Vizag Steel Plant, on its way to being India’s largest single-location, coastal steel producer, remains in the hands of the people.

Rammohan Naidu Kinjarapu is Member of Parliament, Srikakulam, Andhra Pradesh. Views are personal.

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  1. Nobody evaluated that plant is unviable and financially infeasible from inception.Only due do to strife and wash off hands for bloodshed the burden seems to be taken.The article didn’t mention that 43000 crores was written off in national budget .
    Why Vajpayee didn’t allot mines.Best option merge with SAIL

    Confusion creation

    Confusing version

  2. one swallow doesn’t make a summer.

    Moreover for one success (PSU) we can see 100s of failures. It is about a process and not of individual successes.

  3. Who wants to buy loss making PSUs like Air India? Only if they get it cheap and there is no govt. interference

  4. Many readers believe that privatisation of banks will be the panacea that cures the many ills that afflict India’s wobbly, bloated, bureaucratic and nearly bust public sector banks. Alas, there is no such miracle cure going by the history of privatisations in India and elsewhere. But many commenters welcome this step by the Modi government. A sample:

    Mr Kasiviswanathan Krishnan pontificates:

    “.. we have seen enough wealth being destroyed by the public sector .. enough is enough ..”

    Mr Sam talks like Margaret Thatcher:

    ” .. Govt got NO business running a business. Privatize everything. A small Govt is an efficient Govt ..”

    Mr Sagar Apshankar peers into his astrological cahrts and predicts:

    ” .. Why should the government run a steel plant? .. Under private management, it could flourish even more with fast decision making. ..”

    Whilst economic theory might posit that “competiveness, quality and discipline” will result from privatisation, there is absolutely no guarantee that these benefits will materialise in practice.

    One important determinant of the success of privatisation is the quality of the regulatory regime that is put into place to regulate the privatised banks. As well as the efficacy in the implementation of the regulatory regime. Sadly, history shows that in India, “regulatory capture”, lack of independence of the regulator from political interference and good old-fashioned corruption will corrode the regulator too.

    The much ballyhooed privatisation waves that one saw in the Thatcher and Reagan years did not generally give the expected benefits to the consumer that they were touted to yield. And in many sectors – railways for instance – the UK government is now slowly re-nationalising, tacitly accepting the failure of privatisation. And acknowledging the rent-seeking behaviour of firms the difficulties and overheads in regulating them.

    Yes, there are other sectors like airlines where competition has yielded lower prices and these have been transferred to the consumer. But even in the airline sector, concerned voices are being raised about the lower safety standards that airlines are forced to stoop to in order to keep prices low. For instance, European budget airline RyanAir was in the news for carrying very limited quantities of reserve fuel and endangering the lives of passengers. Since carrying fuel adds to the weight of the plane, pilots were rewarded for their fuel efficiency management even though this was in violation of EU regulatory policies.

    In the US, the highly unregulated financial sector plunged the entire economy of not only the US but most of the world not once but twice. When hedge fund Long Term Capital Management (LTCM) collapsed in 1998, it was regarded as “too big to fail” and had to be bailed out by the taxpayer. Lessons from that bail-out were certainly not learnt as once again, an utterly unregulated financial sector and its speculative lending practices led to the sub-prime crisis in 2008. That crisis led banks teetering on the edge of collapse, taking with them the hard-earned savings of ordinary consumers. Once again, the US government had to intervene and during the Obama Presidency in 2010, the Dodd Frank Reforms and the Consumer Protection Acts were signed. And predictably, heeding to the demands of the bank lobby which wanted no regulatory oversight, Donald Trump rolled back several provisions of the Dodd Frank Reforms weakening consumer protections. Essentially recreating the conditions for yet another financial collapse.

    In the Indian context, private sector operators, especially politically well-connected ones like the Ambanis, Adanis and the many other crony capitalists that fund the BJP will surely be running the regulators and not the other way around. And every Tom, Dick and Hariharan knows that the Ambanis & Adanis are joined at the hips with Modi & Shah.

    Additionally, as in the US, profits gets credited to the crony capitalists while the taxpayer bears all the losses that these gangsters make. And nobody can change that – and certainly not Narendra Modi who is indebted to these cronies

    BOTTOMLINE: The very real risk of regulatory capture, combined with the realities of crony capitalism in India will ensure that the much touted benefits of privatisation will NOT be passed on to citizens. Financial risk will fall on the shoulders of the citizen and once again, he will bear the brunt of the risky moves of privatised PSUs. But then, the average middle-class Indian voter has a masochistic streak in him – he does not mind getting taken for a ride as long as Modi does it to him. Just ask the millions of bhakths who lauded demonetisation even as they lost their shirts.

    As former President Ronald Reagan said:

    “Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first”.

    Indian politicians validate that.

    • Your response is filled with half truths, while US/UK and a few European countries are recognizing that supply side economics dont work, and regulation is important, their economies are far far far more deregulated than ours, you’re comparing apples to donkeys when comparing India to US/UK. If you start with communal economics, and then decentralize/privatize, you cannot compare that with a country like the US/UK who started with decentralized economics and are regulating. Thats point 1. Point 2, we are not even close to the services economies of Europe or North America, we are also not close to the Industrial economy of China…we are an agrarian economy that is trying industrialize and modernize in parallel. Again…apples to donkeys. What you have described are cherry picked events from a 150 year history of capitalism in the West…and while you can certainly blame colonialism for European prosperity, that argument falls flat when you talk about the success of the Japan, Germany…who were in the same boat as us at the end of WW2, but chose the free market instead of snuggling up to the insanity of Stalinism.

      Its fine to be a cynic when its not your man in the big chair, but at least don’t be disingenuous, it is cheap. While using terms like “crony capitalists” will earn you plaudits amongst your left leaning comrades, it is an argument as hollow as the political will and strategy that inhabits the opposition that could have made the last 7 years into spirited debate regarding the direction of India political culture. But I suppose when you lot have thought for so long that you hold the keys to wisdom and egalitarianism in India, that it is now a sudden shock when you wake up to the fact that perhaps, the people who you belittle and neighbors you curse behind their backs as “uncouth” or “unintellectual” have recognized that your Emperor has no clothes. And while you are eager to get on your knees for the champagne socialist’s and their ideology which has ensured the ruin of this country, I certainly will not miss any of them. If you don’t like it, get out, leave, we certainly wont miss you.

      • Mr Arjun Mohoni: Thanks for the “response”. Better described as a rambling, confusing rant where you make a spectacularly egregious display of your ignorance of basic economics, political economy and for that matter even history. And make assumptions about my “Emperor” whatever the hell that is supposed to mean.

        Anyway, let me stick to university economics for now – tempting though it is to debate about the economics curriculum you had in your RSS shaka.

        Basic economics will teach you that regardless of the country where a firm or an individual is located, the urge to maximise self-interest is the universal force that drives economic actors. Left unregulated, firms do tend to engage in monopolistic and oligopolistic behaviours, thwart the emergence of competitors, prioritise profits above consumer safety, degrade the environment, exploit workers, violate contracts and so on. At least that is what a worse case scenario might look like. Which is where the role of government as an impartial and empowered regulatory authority becomes vital. The need for governments to regulate markets, create a level playing field, enforce contracts and be a watchdog is a fact that applies whether you are in Japan, Germany, India, Switzerland or Mongolia. And as you surely know, in countries where the government is weak to non-existent or in failing states such as Somalia, Liberia, Yemen, Libya etc. warlords and gangs control society.

        My original article was more about not only regulatory failures but “regulatory capture” that is slowly eroding the efficacy of the free market capitalism you refer to. And that insidious trend of regulatory capture is proliferating even in relatively mature democracies in the West with independent institutions such as a free press, judiciary, civil society etc. etc. Want to make any guesses about the quality of these institutions in India? Particularly under the Godse worshipping fascists in power now?

        In countries which have democratic facades but in reality are authoritarian states run by strongmen such as Russia, India, Hungary, Turkey etc. governments are seldom answerable to the people – regular elections notwithstanding. These governments have almost always done the bidding of crony capitalists or people who are close to the demagogue and finance said demagogue. The regulatory authority of the government is weak to non-existent or is in essence answerable to the crony capitalist or oligarch. Privatisation under conditions of weak, ineffective or corrupt governments is a recipe for regulatory capture and the emergence of Russia style oligarchs in India.

        Confining myself to India, the Congress regimes of the past had their Tatas, Birlas, Manoj Jaiswals, Dhirendra Brahmacharis and so on who functioned as financiers to the party in return for favours. That trend has not only not changed under the Gujaratis, but it has also worsened. The current RSS/BJP/Bajrang Dal outfit and its Gujarati Messiah have their Ambanis, Adanis, Baba Ramdevs and so on who tell the government what to do. But under the Gujarati Messiah, things have been taken a notch higher with the restrictions on press freedoms, the loss of independence of the judiciary, the dilution of citizen’s rights, the lynch mobs targeting minorities, the dilution – nay destruction – of the RBI’s autonomy.

        BOTTOM LINE: Privatisation in India with its weak, corrupt institutions and crony capitalist infrastructure will only lead to asset stripping, privatisation of profits and nationalisation of losses. Whilst that will happen regardless of regime in power, under the current regime, wherein the separation of executive, legislative and judicial authority is non-existent, there is the very real danger of the privatised tail wagging the regulatory dog. More so when one factors in the lack of a free press in India. Expect the following:

        1: Profits from privatised firms will go to the crony capitalist
        2: Losses from privatised firms will be paid by the taxpayer
        3: Welfare losses to the country will accrue.

        As former US Rutherford Hayes (1822-1893) said:

        “The unrestricted competition so commonly advocated does not leave us the survival of the fittest. The unscrupulous succeed best in accumulating wealth”

  5. What does it matter whether the plant is privately-run or govt-run? What matters is that the plant continues to function efficiently and profitably, and continue to employ people, for the general benefit of all.

  6. it is not about one company being turned around decades back.
    first of it is the ideology behind privatisation that govt. should not be in business.
    secondly, the beaurocracy will never ever have the same interest as an entreprenuer.
    we have seen enough wealth being destroyed by the public sector.
    enough is enough.

    • Then the Govt. should stop writing of private sector loans in public sector banks, merging junk banks in to public sector banks. Why the govt. should do that and dole out taxes to private sector junk loan write offs. There is lot of unused land associated with this Vizag steel plant. Will they privatize only factory or the land too ? The land was given to the factory for free by the people and should go back to state government instead of a private company. Know your facts.

      • Brilliant comment Mr Sudheer Kishan !

        Privatisation is merely a synonym for Ambanification or Adanification of government assets, i.e. the transfer of assets from the people of India to Modi’s financiers.

        Even in the relatively less corrupt West, privatisation has generally delivered much less than what its proponents claimed in the early 1980s. In India, where regardless of government in power, a small club of crony capitalists has essentially run economic and financial policy. These crony capitalists have prioritised their bottomlines rather than the needs of the citzenry per se. When they make a profit, they retain the profits; when they make losses, the tax payer foots the bill. Privatisation in a nutshell.

        But then, don’t expect blinkered, undying Modi bhakths like Mr Kasiviswanathan Krishnan to hold the government accountable. If Modi says that 2+2 = 4, well then you can be sure that Mr Kasiviswanathan Krishnan and hils ilk will actually shoot those who say 2+2 = 4. That is the sordid state of affairs in india.

    • Nonsense Mr Kasiviswanathan Krishnan ! You do not understand the distinction between economic theory and economic realities. The rent seeking behaviour of privatised firms everywhere in the world, particularly in a place like India where every government has danced to the tune of crony capitalists will not necessarily translate to wealth.

      Privatisation as a panacea for all ills is an outdated ideology that Thatcher and Reagan touted in the 1980s. Economic theory surely posits that private firms are entrepreneurial and their profit seeking focus will create value. But the key question is: Value for whom? The crony capitalists who back governments ? The people of India? After all, every regime has it share of crony capitalists – Birlas, Tatas, Mallyas, Ambanis, Adanis, Mittals and so on who know how to retain profits when the firm is profitable and how to transmit losses to the taxpayer.

      In the UK, privatisation of many industries by Thatcher has been a disaster seen from the perspective of the consumer. Indeed, many enterprises that were split up and privatised are now being re-nationalised. The sorry state of the UK’s rail networks is a case study in privatisation creating economic harm for the consumer.

      The key thing in any successful privatisation venture is the establishment of an independent regulatory regime with teeth. Such a body would oversee the proper functioning of markets, discourage the emergence of monopolies, protect consumer safety, ensure that firms comply with environmental standards, thwart rent seeking behaviour, prevent price gouging and so on. Alas, even in the well run countries of Western Europe, there is often a tendency for “regulatory capture” to occur. Accordingly, the regulator is de facto regulated by the firms he is supposed to regulate. The recent crashes of the Boeing 737 Max revealed precisely that. The US government regulator FAA (Federal Aviation Administration) was in reality captive to Boeing and did what Boeing dictated, not the other way around. Thus, the regulator did not flag the serious safety shortcomings of the aircraft, in particular the MCAS software that would override the pilot and was not even documented.

      I am pretty sure that in India, every regulator would do the bidding of large, powerful crony capitalists. And then you can be certain that wealth accumulate in the pockets – or rather the offshore accounts – of the crony capitalists. And naïve citizens you will get a nice tax bill and pay for the party. Ask Vijay Mallya. Or Anil Ambani’s failed forays into defence.

  7. Why should the government run a steel plant? Why not a private company? What is the risk of selling this ‘strategic’ asset? As a PSU, the company will be vulnerable to vested interests. Under private management, it could flourish even more with fast decision making. Maybe industrialists will finally get it the captive mines that babus and politicians couldn’t until now.

  8. The govt must privatise jails, use private guards instead of police this reducing public expenditure on selection, training, jobs and retirement benefits. There will be no influence of politicians on private guards as they work according to laid down rules, bo custodial deaths or torture.

  9. Govt got NO business running a business. Privatize everything. A small Govt is an efficient Govt.

    No more socialist empty-headedness!

  10. Since Vizqg Steel Plant (VSP) is an emotional issue only for the Telugus and not others, the Andhra Assembly following the precedent set by Chattidgarh Assembly, should buy the plant from the Centre in case of disinvestment.
    That way all losses and debts get transferred to the accounts of the Andhra state govt – the custodian of Telugu pride. While the Centre can go about its business in a normal manner.
    The Andhra govt must not ask the Centre to bear the financial cost for upholding Telugu “pride”. Its absolutely absurd.

    • In that case what ever tax money being looted from southern stateslgus and given to lazy north states who are good for nothing should be reverted back to southern states, and what ever land framers gave to that plant should be returned to them.

  11. How badly BJP misses Arun Jaitley ji. He was termed incompetent by a megalomaniac Swamy. But he never showed excuses or poor leadership in the time of crisis. And he always always handled crisis better in relation to public relations than everybody. Even if he was not part of the decision making process for demonetization. He handled the media out-roar superbly even when it was an abject failure. There is no one in the current cabinet, nor Sitharaman, nor Anurag Thakur, nor Rajnath Singh, nor Smriti Iranis. They all have been found out. To remain in power they need to find their new Jaitley. They can’t even answer properly in the Parliament to Mahua Moitra or Supriya Sule both of whom are very articulate. Yogi is scared for his fortunes now and will not open his mouth. In terms of setting a narrative they are losing. For a Govt to be stable it needs all the cogs functioning properly. While Amit Shah has been campaigning in Bengal, BJP has lost unprecedented ground in the Capital. They have been most cornered recently and it is not a coincident that Jaitley is not there. And the polarization rhetoric they have chosen is clearly backfiring. They need to sort it quickly otherwise even if they remain in power they would be a dysfunctional Govt. I am not a supporter or an opponent of BJP. I am just commenting. I would love to have a healthy discussion if people have something to say or add.

  12. Even if we count this as a success story, there are dozens of others that are rank failures.

    Let’s stop being emotional about PSUs and extract some value while we still can.

    • Stop writing off private loans at banks and stop merging junk private banks in to public banks. Logic goes both ways not one way.

  13. Nonsense at its best. What’s linguistic identity got to do with government running a business. Funnily there seems to be no affront to one’s identity and loss of pride in living in poverty, malnutrition, high mortality, exploitation, lawlessness, poor human development indices etc. Telugus form amongst the largest proportion of those who wish to move permanently abroad because they are unable to make a decent living in their state. No loss of pride in that. Even hypocrisy died a thousand deaths in this article.

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