Context

In the biggest privatization drive, the Union Cabinet has approved sale of the government’s stake to cut shareholding in select public sector firms below 51% to boost revenue collections that have been hit by slowing economy.
These CPSE’s include blue-chip oil firm Bharat Petroleum Corporation Limited (BPCL), Shipping Corporation of India (SCI) and on-land cargo mover Container Corporation of India (Concor).

Central Public Sector Enterprises (CPSEs)

A state-owned enterprise in India is called a public sector undertaking (PSU) or a public sector enterprise.
These companies are owned by the union government of India or one of the many state or territorial governments or both.
The company stock needs to be majority-owned by the government to be a PSU.
PSUs strictly may be classified as central public sector enterprises (CPSEs) or state level public enterprises (SLPEs).
CPSEs are companies in which the direct holding of the Central Government or other CPSEs is 51% or more.
They are administered by the Ministry of Heavy Industries and Public Enterprises.

What is Disinvestment?

Privatization involves transforming the ownership of a public sector business to the private sector known as strategic buyer.
Disinvestment is also a transformation process that happens while retaining 26% or, in some contexts, 51% percent of share right (i.e. the voting power) with the public sector organization.
Strategic disinvestment implies the sale of portion of the Government share holding of a central public sector enterprise (CPSE) of upto 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.

Objectives of strategic disinvestment

The following main objectives of disinvestment were outlined:

To reduce the financial burden on the Government.
To improve public finances.
To introduce, competition and market discipline.
To fund growth.
To encourage wider share of ownership.
To depoliticize non-essential services.

When did the disinvestment process begin in India?

The disinvestment process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crore.
In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs.

Immediate causes

The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed.
Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets.
In relation to the capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important:

Price policy of public sector undertakings
Under–utilization of capacity
Problems related to planning and construction of projects
Problems of labour, personnel and management
Lack of autonomy

Criterion for disinvestment

The Union Government has mandated the NITI Aayog to identify the CPSEs that require disinvestment. The NITI Aayog identifies such CPSEs based on the certain criteria laid down by the Central Government itself. The criteria are mentioned below:

National Security
Sovereign function at arm’s length
Market Imperfections and Public Purpose
Profitability or loss of the CPSEs is not considered as a relevant criterion.

Issues with PSUs through years

Inherent flaws in PSU’s

Public sector undertakings were established in India as a part of mixed economy with the objective of providing necessary infrastructure for the fast growth of economy & to safeguard against monopoly of industrialist community.
However, the entire mechanism did not turn out as efficient as it ought to be, all thanks to the prevailing hierarchy and bureaucracy.
Inefficient PSU’s were largely responsible for the macro-economic crisis faced by India during 1980’s.

Lack of autonomy

Lack of autonomy, political interference, nepotism & corruption has further deteriorated the situation.
For instance, the head of a PSU is appointed by the Government, who in turn appoints all employees who play major roles in the organization.
So directly or indirectly the Government itself controls the appointment of all manpower in these organizations.

Revenue losses

Due to the expenditure on items such as interest payments, wages and salaries of PSU employees and subsidies, the Government is left with hardly any surplus for capital expenditure on social and physical infrastructure.
Additionally, the continued existence of the PSEs is forcing the Government to commit further resources for the sustenance of many non-viable PSEs.
All this makes Disinvestment of the Government stake in the PSEs absolutely imperative.

Lack of Competitiveness

In an era of LPG industrial competitiveness has especially assumed an important role, necessitating privatization or disinvestment of PSUs.
Though it is claimed by many that ownership isn’t all that an important indicator of an organization’s functioning as is its management, it has been proven by an ample number of examples that private controls of an organization bring about drastic changes in its effectiveness.
This is especially true today when competitiveness is essential not only for leading the industry but for mere survival.

Poor performance

Despite the huge injection of funds in the past decades, the functioning of many public sector units (PSUs) has traditionally been characterized by poor management, slow decision-making procedures, lack of accountability, low productivity, unsatisfactory quality of goods, excessive manpower utilization etc.
However, with increasing privatization, disinvestment or change of control into the hands of professional managers, many organizations have seen the tables turn.
Some examples are IRCTC and CRIS to facilitate the functioning of Indian Railways etc.

Importance of Disinvestment

Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably.
This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realize a high value.
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs.
Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in the utilization of funds for:

Financing the increasing fiscal deficit
Financing large-scale infrastructure development
For investing in the economy to encourage spending
For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public
debt/interest
For social programs like health and education

Implications on Economy

If India wants a continuous increased growth, it has to scale to the next level of performance. This is not an option but a necessity and disinvestment is a tool to get there.
Increased population, unemployment, and poverty levels are the main reasons why India needs to scale.
It needs a 10% rate of growth every year in its GDP to continue to be competitive with China and potential emergent nations in South East Asia.

Successful examples

In the context of macroeconomics, time has shown us how countries like Chile, the UK, China, New Zealand, Poland successfully used disinvestment to achieve new economic heights.
Many countries used disinvestment as a sure means of restoring budgetary balance & to revive growth on a sustainable basis after facing an economic crisis in the 80s.
Analysis of these countries before & after disinvestment shows that market-driven economies are more efficient than the state-planned economies

Attracting foreign investments

Disinvestment shows that govt means business which will attract FDI, FII to finance projects in India.
It will allow PSU to raise capital to fund their expansion plans and improve resource allocation in the economy. It will allow the government to stimulate the economy while resorting to less debt market borrowing.
Private borrowers won’t be crowded out of the markets by the government and will have to pay less to borrow from the open market.

Democratization of industries

Disinvestment will be extremely positive for the Indian equity markets and the economy.
It will also draw a lot of domestic money into the markets.
Thus it would encourage citizens’ participation in the management of public enterprises and improve the capitalization of stock markets.

Concerns over Disinvestment in India:

Process of disinvestment is not favoured socially as it is against the interest of socially disadvantageous people.
Political pressure from left and opposition.
Loss-making units don’t attract investment so easily.
Over the years, the policy of divestment has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
Sometimes the emergence of private monopolies, consumer welfare will be reduced.
It is argued that mere change of ownership, from public to private, does not ensure higher efficiency and productivity.
It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
Private sector, governed as they are by the profit motive, has a tendency to use capital-intensive techniques which will worsen the unemployment problem in India.
Fiscal 2016-17 is the seventh year in a row where the government is not meeting the disinvestment target fixed in the Budget.

Why criticism over the recent move of disinvestment?

BPCL is a profitable refiner and oil marketing company that has consistently paid a healthy dividend.
It has also made investments in upstream energy resources and holds interests in overseas hydrocarbon blocks.

Way Forward

With the dismal track record of several PSUs, the Centre cannot be blamed for the decision to divest.
Times have changed and the economy now has other engines of growth. But it should not be hastily inferred that all PSUs have failed us.
Let not the ideological blinkers like ‘public sector is bad’ and ‘privatization is the panacea’ unintelligible reality.
But when a sterling company like BPCL is also being offered for ‘strategic disinvestment’ the nation naturally expects to know the strategy behind it.

The Way Ahead: What should be the Objectives of Public Sector Enterprises Disinvestment and Restructuring?

The means of achieving these objectives involve considerations such as the injection of greater competition into the industrial economy in order to foster a healthier market structure.

Conclusion

Confronted with an unprecedented fiscal deficit and worried by an economy in crisis, the government has to find resources.
Disinvestment is a preferred option for ideological and practical reasons.
Short-term financial exigencies should not be the Centre’s sole reason for disinvestment in core sectors like petroleum.
The government could utilize the money gained by selling off PSUs to improve services in public goods like infrastructure, health and education.