Crisis has frequently been a feel good factor in India’s political economy and propelled change.
The litany of untenable debt, intractable losses and destruction of value has prompted action. This week the Union Cabinet of the Government of India cleared the disinvestment of Air India. Two decades after being identified as a case fit for disinvestment – after billions were poured into the seemingly bottomless pit, the airline and the Maharaja, it seems, will finally be liberated.
The details and contours of how, what, when are yet to be drawn. They will be mapped out by a Group headed by Finance Minister Arun Jaitley. In a sense, Jaitley must be feeling a sense of déjà vu. Air India first appeared on the disinvestment list in 2000 when Jaitley was the Minister for Disinvestment in the Atal Bihari Vajpayee government.
Good luck to Air India. The decision deserves to be lauded. But what about other public sector enterprises, bleeding away taxpayer crores?
In June 2017 the market capitalisation of 21 listed public sector banks put together is less than that of one bank – HDFC Bank Ltd.
Indeed, the value of the government’s 11.47 percent holding in Axis Bank Ltd. through the Specified Undertaking of the Unit Trust of India (SUUTI) is more than the market capitalisation of 14 nationalised banks. This is the snapshot of just one sector, leave alone the issue of Rs 10 lakh crore non-performing assets and loan waivers for the moment.
The big issue confronting the government is the role of the State in the economy. The government has asked the NITI Aayog to look at the landscape of despair and disrepair. It has recommended that the government close down 26 units, review the revival of 22, carry out strategic disinvestment in 10, transfer ownership to states – thereby only shifting the problem, merge with parent PSUs in three cases and maintain status quo in two. So what is the essence of the recommendations?
Should every decision to offload be propelled by the stench of debt, putrefaction of profit, erosion of market share, shareholder value and preceded by losses?
To appreciate the point, consider the state of affairs in state-owned enterprises.
The Public Enterprises Survey 2015-16, the latest available data, throws up some revealing data on Central Public Sector Enterprises (CPSEs).
- Government of India owns 320 CPSEs, employing 12.3 lakh people.
- Of these (excluding the insurance companies), roughly every third enterprise in operation is notching up losses.
- The gross turnover of CPSEs fell by 7.04 percent despite an acceleration in gross domestic product.
- While profit made by healthy CPSEs went up marginally, losses of sick CPSEs increased to Rs 28,756 crore.
- Between 2007 and 2016, sick CPSEs totalled up losses of Rs 19.68 lakh crore or roughly $30 billion – equivalent to the GDP of Bahrain.
In 2015 The Comptroller and Auditor General of India looked at an expanded universe of government-owned companies. The CAG observed that the “net worth of 64 government companies had been completely eroded by accumulated loss and their net worth was a negative Rs 74,100 crore.”
The CAG also found that “of the 301 CPSEs whose net worth was positive, 24 CPSEs net worth was less than half of their paid capital indicating potential sickness.”
It gets worse in the states. The story of state-level PSEs is a blend of the known-unknown and the unknown-unknown – reporting and performance details are sketchy or unavailable. The last report, known as the National Survey 2008-09 & 2009-10, has some stunning revelations.
- In March 2010, there were 863 state level PSEs, of which details were known for 624 – investment of Rs 5.18 lakh crore, turnover of Rs 3.66 lakh crore.
- Of the 624, 384 were profitable, and roughly one in three made losses.
- The overall net loss (profit adjusted against loss), was Rs 13,227 crore.
Be that as it may, the drive for transformation must necessarily come from Delhi.
The business model erected by PC Mahalanobis and others, expanded during the 1970s and 1980s, cannot sustain in a competitive open market.
If there are enterprises which are profitable, it is an accident of circumstance. Take a look at the ten most profitable enterprises – each of them is a monopoly or a near monopoly in its area of operation.
Then take a look at the list of ten enterprises with the highest losses – each of them has been hammered by competition.
The cohabitation of the private and public sector in segments has led to rent seeking and distortions in the economy.
The Government of India is the largest business house with investments worth over Rs 11.6 lakh crore and gross turnover of around Rs 18.75 lakh crore. The market value of its listed holdings is roughly Rs 13.25 lakh crore.
It is not unknown that the government is scarcely equipped to function with the agility that is required in markets. It is also not a mystery that the nexus of political masters and babudom has worked to the detriment of enterprises – and Air India, Bharat Sanchar Nigam Ltd., Mahanagar Telephone Nigam Ltd., and Steel Authority of India Ltd. are testaments of the phenomenon. Would public sector banks have accumulated such large NPAs if they were professionally managed?
Step Out Of The Muddle
The question is about ownership but more critically it is about political mismanagement of public enterprises.
There are enough examples in the world where government ownership has not resulted in disaster – Singapore and Germany in particular, represent success stories.
For too long India has waddled along the muddled path – from the packet disinvestment of minority holdings in the 1990s post-liberalisation to drip irrigation of the fiscal deficit through the sale of fractional holdings often lumped on financial institutions like the Life Insurance Corporation of India – bar the brief period of decisive action and privatisation during the Vajpayee regime.
The Modi Sarkar, we are informed, does not subscribe to the ideology of privatisation. There are reasons. There is the fear that privatisation has the potential to replace public monopolies with private monopolies. It is also true that creation of large private corporations holds a threat to political stability in resource-scarce political economies. But surely there is little merit in persisting with the model of ministerial management of public enterprises.
The answers to questions of economic security and sanctity of public monies need not be binary – either this or that.
There are enterprises which the government must get out of and for this, it could follow the Maruti Suzuki phased disinvestment model.
There are sectors of the economy – for instance in utilities, strategic infrastructure – where the government can continue to own but professionalise management that is accountable to Parliament.
Why not follow the Temasek model of Singapore – or something akin to the India Investment Trust mooted by GV Ramakrishna who headed the Disinvestment Commission – and get the Sarkar out of management? Why not transfer the ownership of public sector enterprises to a public investment trust – even make public offers, issue exchange traded funds, to raise revenues when needed?
The question the Government needs to ask itself is: Must it own what it owns, must it manage what it owns, and must it manage everything it owns?
Shankkar Aiyar, political-economy analyst, is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.