“Disinvestment” is the buzzword of the day. Touted as a remedy for the various malaises affecting the economy, Budget 2021 proposes the sale of Air India, Pawan Hans, BPCL, SCI, IDBI, BEML and two unnamed public sector banks and one unnamed general insurance company, as also part sale of the Life Insurance Corporation. For good measure, excess land belonging to the Defence Ministry and the Railways would also be put on the block. Additionally, the Government has asked Niti Aayog to identify the next lot of companies for strategic sale. As small change, ministries and Government departments have been asked to sell whatever is readily saleable, for example, the Aviation Ministry has finalised the sale of its residual stake in Delhi, Mumbai, Bengaluru and Hyderabad airports. According to Budget Estimates, a sum of Rs.1.75 lakh crores is proposed to be realised by this asset sale. Smelling an unprecedented business opportunity, big players in India and abroad are eagerly waiting in the wings.

Expectedly, the Staff Unions of the public sector entities slated for sale, supported by Opposition parties, are crying foul, which the Government is pointedly ignoring. With its finances severely strained by the coronavirus pandemic, the Government is banking on the sale of PSUs to contain the rampaging fiscal deficit.

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As on 31 March 2019, the Government’s investment in PSUs stood at Rs 16.41 lakh crore, with a revenue of Rs 25.43 lakh crore during the financial year 2018-19. Net earnings of the Government from PSUs were approximately Rs 40,000 crore, which could have been much more with better management. Some PSUs are sick but many PSUs, like LIC, are efficiently run and able to hold their own against competition from private players.

Despite opening up of the insurance sector, more than two decades ago, LIC controls 66 per cent of the insurance market. LIC has a lakh employees and 29 crore clients. The annual income of LIC is Rs 6.16 lakh crore, most of which it shares with policyholders in the form of bonus and dividends. LIC has assets of Rs.36 lakh crore ~ three times that of Reliance Industries. Valuation and stake sale in LIC would definitely prove tricky, and if experience is a guide, contentious also, because disinvestment has had a somewhat chequered history in India. Soon after assuming office in 1999, the NDA government embarked on a privatisation programme, offering controlling stake in government-owned companies to “strategic partners.” Till the middle of 2002, apart from 19 ITDC hotels, the Government had sold its controlling stake in nine companies at a price of Rs 5,544 crore.

Report No. 17 of 2006 of the CAG points to serious shortcomings in the disinvestment process. The CAG found that valuation of the companies’ assets was done without “due seriousness.” The CAG detected serious lapses in the Government’s contract with its global advisers, finding that in most cases the Government had signed a formal agreement with the global advisers after the company had been sold. There was no “clear accountability regime” which meant that persons responsible for lapses, could not be held accountable. Additionally, in several instances, the CAG found that substantial “surplus land” was sold along with the company, without proper valuation.

Subsequent events confirmed the CAG’s misgivings. Tata Communications Ltd (TCL) sold equity in three global companies ~ Intelsat, Inmarsat, and New Skies Satellite ~ inherited from VSNL, for $226 million (approximately Rs 1,000 crore) within three years of buying VSNL for Rs 1,439 crore. Moreover, TCL also got 1,200 acres of land from VSNL, of which, more than 427 acres were located in prime locations in Mumbai, Delhi, Chennai, Pune and Kolkata. For many years, TCL continued to hold on to the 773 acres of surplus land that was to be hived off into a separate company as part of the disinvestment deal.

Just after purchasing Modern Food Industries Ltd (MFIL), Hindustan Lever sold land belonging to MFIL in prime locations in metros, and soon enough MFIL turned sick. The CAG had found serious discrepancies in the valuation of mines owned by Hindustan Zinc Ltd (HZL), 45 per cent of whose shares were sold for Rs 739 crore in 2003. The current market capitalisation of HZL is approximately Rs 1.27 lakh crore, and the annual profit is around Rs 7,000 crore which can either be attributed to unlocking of value or cheap valuation at the time of sale.

Controversies associated with the first round of disinvestment persist. In September 2020, a CBI court found that Laxmi Vilas Hotel, which was valued at Rs 151 crore, was disinvested for a mere Rs 7.52 crore to Bharat Hotels Ltd. The court ordered that the hotel should be restored to the Union Government and also directed the issue of arrest warrants against the then Union Minister of State for Disinvestment, the then Disinvestment Secretary and several others for criminal conspiracy, cheating and transgression of provisions of the Prevention of Corruption Act. Currently, this judgement has been stayed by the Rajasthan High Court.

Disinvestment by the present Government, has primarily involved the sale of one PSU or part thereof to another PSU. For example, HPCL was sold to ONGC and Rural Electrification Corporation was sold to Power Finance Corporation. The CAG has sharply criticised such sales in its Report No. 18 of 2019. The CAG observed “Such disinvestments only resulted in transfer of resources already with the public sector to the government and did not lead to any change in the stake of the public sector/ Government in the disinvested PSU.”The proponents of privatisation quote a number of advantages that would flow from disinvestment. Firstly, the Government would get money to fund its ambitious infrastructure expansion drive. Secondly, listing of Public Sector Enterprises will foster greater public accountability and unlock the true value of these companies. Yet, the wholescale privatisation proposed in the current Budget raises a basic question: “Should the Government finance its current expenditure by sale of fixed assets, built over a number of years?” because the proceeds of disinvestment, Rs 1.75 lakh crore, is too puny a sum to finance the National Infrastructure Pipeline, in which the Government plans to invest close to Rs 102 lakh crore between 2019 and 2024-25. Looking to the humongous capital requirement, disinvestment proceeds would be a drop in the ocean. More likely, the Government needs the money from disinvestment to finance its revenue expenditure.

Instead of selling PSUs during Covid times when their full value may not be realised, the Government could have gone in for cutting wasteful expenditure. For example, Centrally Sponsored Schemes and Central Sector Schemes that account for Rs 14.32 lakh crore of annual expenditure, urgently call for review, with closure or modification of badly performing schemes. Notably, the Fifteenth Finance Commission has also suggested review and curtailment of Centrally Sponsored Schemes and Central Sector Schemes. Another measure could be making the tax system more efficient and productive, by levying taxes on wealth and inheritance.

The malady affecting PSUs is well-known. Bureaucrats run the show in most PSUs, making the PSU culture closely resemble Government culture ~ acting as a put-off for future clients. Further, ministers and top bureaucrats treat PSUs as milch cows, using PSU assets as their own. Recently, in a speech in the Lok Sabha, the PM roundly condemned the inefficiencies that had crept into PSUs due to (mis)management by bureaucrats. Taking a cue from the PM, before the proposed disinvestment, the Government should try to improve the working of PSUs by inducting professional management and improving work culture.Before embarking on wholescale disinvestment, we would do well to heed the warning of Joseph Stiglitz, Nobel Laureate and former World Bank Chief Economist: “The rhetoric of market fundamentalism asserts that privatisation will reduce what economists call the ‘rent seeking’ activity of government officials who either skim off the profits of government enterprises or award contracts and jobs to their friends. But in contrast to what it was supposed to do, privatisation has made matters so much worse that in many countries today privatisation is jokingly referred to as ‘briberisation….’ In country after country, government officials have realised that privatisation means that they no longer needed to be limited to annual profit skimming.

By selling a government enterprise at below market price, they could get a significant chunk of the asset value for themselves rather than leaving it for subsequent office holders. In effect, they could steal today much of what would have been skimmed off by future politicians.” (Globalisation and Its Discontents, 2002).