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Will PSUs be Privatised?

Finance minister Nirmala Sitharaman on the 17th of May, 2020 announced that the Government plans to reduce the role of the public sector companies across the economy. Barring a few strategic sectors where the Government may own up to a maximum of four PSUs, it shall privatize PSUs in all other sectors. The sectors identified as strategic have not yet been announced by the Government at the time of writing this article. However, the media is speculating that the Government shall consider defence manufacturing, atomic energy and space exploration to be some of the key strategic sectors. Some feel that banking shall also be a strategic sector and at the end of the privatization drive we may be left with a few but large conglomerate banks.

Thus, we arrive at the backdrop for this article. – “Potential privatization of Indian PSUs.” Keeping this as a backdrop we will analyse the scenario and try to shed some light on how India Inc. may evolve in the near future. We will try to break our analysis into specific parts for your ease. We will try to highlight upon the history of Privatization – Will it actually happen or is it just “all talk and no play.” And what you could do that might help you.

History of Privatization.

For nearly half a century after independence, the country was pursuing a path of development in which the public sector was expected to be the engine of growth. However, by 1990 India faced a severe balance of payment crisis. (In simpler terms, as a country we were importing more than we were exporting or spending more than we were earning. Thus, India was facing a situation where she might have defaulted on her debts. The foreign exchange reserves (dollars) we had to pay-off the import bill, would last us for only three weeks’ worth of imports like oil and other essentials. As a country we were about to go bankrupt !!!)

So, India took a bailout package from the IMF and as a part of the package, agreed to open up its economy. Controls started to be dismantled, tariffs, duties, and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced.

It was the ex-prime minister Dr. Manmohan Singh who, then the finance minister, had ushered in the era of change, saving India’s face and preventing what Greece faced in 2015.

Here are a few excerpts from his budget speech of 1991-92.

“……After four decades of planning for industrialisation, we have now reached a stage of development where we should welcome, rather than fear, foreign investment. Our entrepreneurs are second to none. Our industry has come of age. Direct foreign investment would provide access to capital, technology and markets. It would expose our industrial sector to competition from abroad in a phased manner. Cost, efficiency, and quality would begin to receive the attention they deserve…….”

“…….For the founding fathers of our Republic, a public sector that would be vibrant, modern, competitive and capable of generating large surpluses was a vital element in the strategy of development. The public sector has made an important contribution to the diversification of our industrial economy. But there have been a number of shortcomings. In particular, the public sector has not been able to generate internal surpluses on a large enough scale. At this critical juncture, it has therefore, become necessary to take effective measures so as to make the public sector an engine of growth rather than an absorber of national savings without adequate return. This has been widely accepted, but thought and action in this regard are still far apart……”

“….Over centralisation and excessive bureaucratisation of economic processes have proved to be counterproductive. We need to expand the scope and the area for the operation of market forces….”

If you find the excerpts interesting and wish to read his full budget speech of 1991-92, you can find it here.

Thus, it was after the 1990-91 crisis that the concept of opening the Indian economy was embraced and privatization of industries allowed. The domestic economy, where PSUs had served as engines of growth, had started welcoming private players. After 1991, only eight industries were reserved for the public sector, including defence production, atomic energy, coal and lignite, mineral oils, iron ore, manganese, gold and diamond, atomic minerals and railways. Per Capita GDP grew at a rate of 3.1 percent before the reforms and at an annual average of 4.1 percent afterward (1991 through 2004); in other words, the growth rate of per capita GDP rose an average of 1 percentage point in the post-reform period. See the graph below to understand how GDP per Capita of India (deep blue worm) shot up after the 1990s.

The graph also compares the GDP per capita of three countries. India, China & South Korea from 1950 to 2017.

The South Korean worm shows the fastest growth. The country gained independence on the 15th of August, 1948 (If you are an Indian reader, I hope you have taken note of the date) and quickly transitioned from a developing nation to a developed nation. This period of growth is referred to as “the miracle on the Han river.” The country was able to do so as it followed a mixed economy system where it let private enterprise fuel growth. Large family owned conglomerates referred to as Chaebol in Korean where the prime drivers of growth. Hyundai Kia Automotive Group, Samsung group & LG Corporation are some of the prominent ones. You can think of them as the Tatas, Birlas & Ambanis of South Korea.

The red worm indicates the GDP per Capita of China (the colour wasn’t chosen deliberately) which somewhat liberalized its economy in 1978. Private businesses were allowed to operate for the first time, and they gradually began to make up a greater percentage of industrial output. in December 1978, China announced a new policy, “the Open-Door Policy”, to allow foreign businesses to operate in China. A series of special economic zones for foreign investment were set up, these were relatively free of the bureaucratic regulations and interventions that hampered economic growth. One such SEZ is Shenzhen and it has become one of the top innovations and economic centres of the world in a period of just forty years.

We hope that this comparison will help you understand the positive effects of liberalization and privatization of the economy. The earlier a country liberalized its economy by allowing private enterprise to participate in its economy, the faster its economy has grown.

This brings us to the current situation of India. Even though the Government had identified the need to privatize the economy, the process has been sluggish at best. Several factors have hampered the process. Some of them are

  1. Unfavourable market conditions
  2. Offers made by the government were not attractive for   private sector investors
  3. Lot of opposition on the valuation process
  4. No clear-cut policy on disinvestment
  5. Strong opposition from employee and trade unions
  6. Lack of transparency in the process
  7. Lack of political will

The Government over the decade and half has chosen the disinvestment route where it has sold shares of the entities it owned to meet its fiscal deficit. the BSE CPSE Index which is designed to measure the performance of Central Public Sector Enterprises (CPSEs) listed at BSE has underperformed by the benchmark BSE Sensex by a whopping 269 per cent over since 2000. Obviously, selling small chunks of equity to the public (and other PSUs) has not resulted in any great efficiency/governance gains for the companies.

Thus, having learnt its lessons, hopefully, the Government this time has decided to go forward with the privatization path. The only difference is that this Government has a majority in both houses and probably will be able to go ahead with its decisions with more convictions than previous Governments. Another aspect is that the pandemic of COVID-19 has created a crisis that might force the Government to fast-track the privatization process. The 1990-91 crisis forced the Governments hand and it was able to garner support from the opposition to liberalize the economy. The COVID crisis will definitely increase the fiscal deficits the Government racks up and privatization is one of the ways the Government shall try to meet the deficit. This time privatization might just happen.

If you are a PSU employee reading this, we hope you shall by now see the path the global economy has and is taking over the long term. If we summarize quickly, we can say that allowing private participation brings economic growth in most cases. If India has to compete in the global markets, it will have to allow privatization to foster innovation and economic growth. The Government has no other alternative available as of now. With time, the Government shall keep reducing its share of the enterprise you work in.

As the private ownership of enterprise increase, individuals working in them shall have to thrive in a competitive environment. An MBA equips one with the knowledge and knowhow to operate companies efficiently and profitably. Even if you wish not to change you company and remain a faithful employee of the PSU you serve, getting an MBA might be helpful for you in the long run. You may choose a distance learning program or other options that are feasible for you. For the more adventurous ones among you who hope to further their career on a faster track, a one-year full time MBA may be a better option. If you are such and individual, we are here to help you along the way.

We hope you have found our study to be helpful. We have tried to keep the terminology as lucid as possible for ease of understanding. Please comment below if you have any suggestions for us. Register for a free session with us if you have any queries.


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